Consultative Selling For Low Down Payment Borrowers

by Aidan Paringer

You get a new lead for a first time home buyer, Sarah Phillips. She is put down 10% on a house in upstate New York that’s selling for $250,000. She wants a thirty year fixed and asks you for the rate.

Check out our full article on consultative selling techniques for mortgages.

Before you quote her the rate, you adopt a consultative sales approach and ask her a series of questions, including:

How long does she plan to be in the home? Does she think she’s getting a good deal on the house and it might appraise for more than it’s worth? Does she anticipate any windfall that might enable her to pay the loan down in the near future? Is the seller willing to offer her a seller’s concession to cover some of the closing costs? Is her income sufficient to qualify? Or is she tight on ratios?

She says she plans to be in the house at least five years but no more than eight or nine. Says she’s got a good deal because she’s buying from an estate and the house needs a lot of work. She thinks she might get paid out on a slip and fall lawsuit that’s been dragging on forever but once it’s settled, she stands to get at least $30,000 after legal fees. And yes, she thinks the seller would cover some or all of the closing costs for her. For the last question, she tells you how much she makes, the taxes on the house, and her other debt. She easily qualifies for the loan she is seeking.

She asks you again for the rate.

You tell her you can quote it to her, but since she is putting down less than 20%, she will need private mortgage insurance, and you want to make sure she knows all her options.

She tells you she’s gotten quotes for PMI from other loan officers. She’s just interested in your rate.

You ask what she’s been quoted for PMI. The best deal she found so far is a quote for $97.50 per month. You tell her it sounds like a quote for “zero monthly PMI” which has pluses and minuses. You ask if that was refundable or non-refundable PMI, and if they quoted her single premium MI or a piggyback loan to avoid PMI altogether. She shakes her head. She listens to you because you sound like you know what you’re talking about and you’re not just throwing out a quote for a rate.

You explain how PMI works.

It protects the lender against the risk of default. “Zero monthly” PMI is the most common type that borrowers get (or that lenders get for them, since the borrower can’t get PMI on their own). Sarah would pay zero premiums at closing, but the PMI would stay on for a minimum of two years and can be lifted once your loan is at 78% loan to value or less. 

Since Sarah anticipates to get the insurance money, she might be in a position to pay down her loan to $195,000 (78% of the purchase price), or, since she is getting a good deal on the house to begin with, she might be able to get the house reappraised after she closes and have the PMI lifted by her servicer.

The other tip you can give her…

Is that in New York, if the house appraises for a value that makes her loan 80% or less, she is not required to have PMI. That’s right – instead of using the lower of purchase price or appraised value, in New York State lenders must use the appraised value to determine if a borrower has to have PMI.

She thinks it’s unlikely the house will appraise for $281,000 (which is what it would take for PMI to not be required), but she is interested in other ways to avoid it.

Based on what you’ve learned

You think she is an excellent candidate for single premium MI, where she (or the seller through a seller’s concession) pays a single lump sum amount at closing in lieu of paying private mortgage insurance every month. For her loan of $225,000, she would have to pay $3,330 at closing. She thinks she could get the seller to agree to cover that through a seller’s concession. She asks if there is a downside to single premium MI, and you explain that the biggest hurdle for most people is the high upfront cost. Otherwise, if the seller is willing to cover it, it’s like free MI.

She tells you she’ll ask the seller about the concession, but if he says no, what are her other options? By her asking you that question, you can tell she now trusts you as an adviser. You explain she could opt for 

lender paid MI, where the lender charges a higher rate to cover the cost of private mortgage insurance. Her ratios are good, so she could qualify at a higher rate (typically about ½% higher for a 90% loan). Use your consultative sales approach, tell her about the pros and cons of this program. The benefit is that she can deduct the PMI through the interest payments. The downside is that the PMI never goes away (like it does with zero monthly MI).

She asks you if there are any other creative ways to pay PMI

You tell her about a piggyback loan. Instead of taking one loan with PMI, she would take two loans that add up to 90%, thus avoiding PMI because her first loan is at 80% loan to value. She asks if the second mortgage would be at the same rate, and you explain that the second loan is usually a HELOC (Home Equity Line of Credit) based on Prime plus a margin. The downside is it’s not fixed, thus exposing her to interest rate risk. However, the HELOC only requires interest only payments, so her payments are low, and a big plus: if she makes a pay down to principal (perhaps due to the insurance settlement), her payments will adjust right away. She likes this idea. It gives her the flexibility to pay down her loan when she wants, and she doesn’t have PMI included in her monthly payment.

She decides to submit a loan application. You have used a consultative sales approach that relied on asking questions, listening to the answers, and coming up with an array of innovative loan programs that might suit her needs. The key to this approach is the clear, accurate portrayal of pros and cons, which solidifies your status as a trusted adviser.

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