A self-sustaining business model delivers greater success for clients and organizations

Mike Loftin, Chief Executive Officer, Homewise, Inc.

Challenge: Low-income residents throughout New Mexico face challenges that can prevent them from buying a home that will ensure affordability and stability. When long-term financial security is the goal, it is critical to buy an affordable home with low-cost financing and have solid financial habits and a good understanding about the process.



When purchasing a home, homebuyers must have the resources and information to make the process a success. In New Mexico, many low-income residents may not have the tools necessary to ensure long-term financial security. Solid financial habits and a good understanding about homebuying and owning are both key to affordability and stability.
 
Homewise, a nonprofit based in Santa Fe, NM, creates successful homeowners with a purchase model that integrates all of the services necessary to buy a home. The process begins with assessing the client’s capacity to purchase a home. We then offer financial education and coaching to help clients find a home within their purchasing power and obtain affordable mortgage financing. To ensure alignment with the best interests of the client, Homewise employees do not earn a commission at any step of the process.
 
By offering their clients a single point of entry and a step-by-step process, Homewise removes the overwhelming confusion that can often be a barrier to homeownership. By offering the right services, tools and guidance at the right time, Homewise ensures that their clients are better prepared and more confident throughout the entire process.
 
The Homewise target market includes low-income households throughout New Mexico, where the average median income is $38,950 for a low-income household of three. Clients in this market often face financial challenges to homeownership, including downpayment, affordability and credit. Homewise addresses all three challenges through a home purchase program as well as a self-sufficient business model to support the organization’s long-term growth and success.
 
Downpayment: Based on the national savings rate, a family earning $35,000 annually would take over 20 years to save a 20 percent downpayment for a $175,000 home, According to the Center for Responsible Lending. For families without those funds, the main option is an FHA loan, which still requires at least $9,625 for downpayment and closing costs. The Homewise mortgage requires only a 2 percent upfront cash contribution for downpayment and closing costs or about $3,500.

Affordability: Median home prices remain out of reach for many in Homewise’s target market, particularly in Santa Fe, where the median sales price is $304,000. The cost of mortgage insurance exacerbates this problem by reducing the amount a client can borrow and their ultimate purchasing power. The Homewise Mortgage eliminates mortgage insurance, thereby increasing purchasing power and making it more likely for their clients to find a house they can afford.

Credit: Qualifying for a mortgage is a major barrier for families in their target market. Though Homewise’s down payment requirements are low, their credit standards are not. Through their financial education and coaching services, Homewise helps clients improve their credit profiles to meet strict underwriting standards and qualify for a Homewise Mortgage.

The Homewise model captures fee revenue that helps offset the costs of services, such as free financial counseling and homebuyer education which are critical to the buyer’s success. They leverage equity to borrow additional capital to fund the Homewise mortgage, which generates revenue through origination and servicing fees and interest income. By selling the first mortgage on the secondary market and holding the second mortgage in their portfolio, they are able to help many more clients. By retaining the servicing of their loans, they stay engaged with the client which contributes to their high-quality loan portfolio. Their 30-day delinquency rate is less than half the national rate for prime conventional loans. This strong portfolio builds their balance sheet and financial stability. The combination of revenue and assets makes them sustainable in the short and long-term.

Another important outcome of the Homewise model is organizational self-sufficiency, achieved through the revenue they capture from lending, loan servicing, and real estate sales fees. The income earned from real estate sales commisions, loan originations and servicing generates additional revenue and ensures long-term supportive and high-touch relationship with the clients.

The self-sustaining revenue also allows Homewise to offer homebuyer education and financial fitness classes for free, unlike many non-profits that charge for such classes. In addition, the leverage and revenue model means there is no artificial limit to the volume they can sustain, which would be the case if they relied on grants and donations to subsidize each transaction. As production grows, so does the revenue generated to support that growth.
 
Since Homewise’s founding in 1986, over 12,800 households have attended the homebuyer classes. During that time, 3,500 of them have purchased homes. The strength of the Homewise business model has fueled growth, leading the organization to become the number one mortgage lender in Santa Fe.
 
The lessons learned through this project are: 1) the key to restoring the promise of homeownership is a smart home purchase process that aligns every step with the long-term financial interests of the homebuyers, 2) the process has a clear entry point that is followed by a direct, orderly progression of services – including help with the down payment, affordability and credit – that maximizes benefits to the potential homebuyer, 3) it is important to have self-sustaining revenue to ensure the financial stability of the organization and their loans and programs.