If you are ready to buy a home, there’s something you need to do before shopping for a home, and that’s shop for a mortgage lender. Choosing the right lender can help you get the best possible loan for your needs, and reduce your interest, down payment, loan term, and fees associated with buying a home. Choosing wrong can mean a long and frustrating process dealing with unprofessional or inexperienced staff.
What Is a Mortgage Lender?
Any financial institution or mortgage bank that makes its prime business offering and underwriting home loans is called a mortgage lender. They will look at your credit, your income, your assets, and your debt, and determine if you can be trusted to fulfill your obligations.
Your mortgage lender is responsible for setting the terms of your loan, offering you an interest rate, negotiating your down payment, creating an amortization (repayment) schedule, and funding your loan.
Once you’ve completed your home purchase, your loan will still need to be serviced, meaning your payments will be accepted, tracked, and credited, and any other obligations you have under your loan agreement such as insurance are being met.
There are several different types of mortgage lenders, and each has their own pros and cons.
Big Brand Name Banks
Big banks are well known, have built up some level of trust simply by being so recognizable, and have plenty of money to spend on advertising. Once you’ve contacted one of the big banks (or been put in contact with one through an online prequalification process) they will be relentless in bombarding you with sales materials to try and gain your business. However, big banks aren’t for everyone, and may not even be right for the majority of home buyers in the market today.
Pros:
- Big banks often advertise competitive rates, and if you meet the following criterion, they could be an excellent deal:
- Have a very high credit score and net worth
- Have easily documented income
- Big banks usually service their loan in-house, meaning they don’t sell them off to another loan servicer. This means you get to keep dealing with the same entity.
- Big banks are highly regulated by the federal government. They can get in trouble if they falsely advertise a rate or attempt a bait and switch.
Cons:
- Due to the massive volume of applications, getting your approval can be an extremely slow process.
- Preapprovals are often not very solid, simply because employees assigned to complete them arte inexperienced and low-level. This can mean your pre approval letter is looked on with suspicion by a real estate agent or home seller.
- Extremely strict lending requirements meant to minimize risk can leave a lot of borrowers out in the cold.
- Lack of modern technology and a poor communications process can lead to repeated delays.
- Big banks who hire fresh graduates or work with the minimum number of humans possible to take advantage of cheaper labor options may route you to inexperienced Loan Officers (LOs) or call center staff who won’t have a clue how to structure your loan to your best benefit.
Local Banks or Credit Unions
Smaller, regional banks and credit unions may appeal to those who value their personal connection with their banker. However, just because you’ve banked at the same branch for 10 years doesn’t mean your small town financial institution can or will offer you the most competitive rate.
Pros:
- Your local bank may be able to offer niche portfolio programs not available through big banks
- A smaller bank or credit union can still give competitive rates on standard loans
- If you’re already a customer, you may have options for a home equity line of credit (HELOC) or 2nd lien mortgage
- Small banks usually have communication and service that is superior to that offered by big banks
- Local banks will often advertise that they “service their own loans” (although this is usually a white labeling scheme, using a mega sub-servicer, you can usually still get help from your personal banker)
Cons:
- LOs usually write a few loans a month, and wear a bunch of other hats, meaning they are overworked and not as experienced as you may need your LO to be
- The loan process can take a very long time, due in part to the inexperience and in part to lack of technology to streamline loan steps
- Typically, you won’t have a direct line to your LO, and will have to deal with a general call in number and slow call routing
- Smaller banks and credit unions will typically make up for the hassle of dealing with home loans by charging a higher interest rate or tacking on fees
Online Lenders
Online lenders seem to be everywhere, but these are really more like advertisers who market leads to actual lenders. You’ll apply with an online “lending site” which will collect information about you and then sell it to actual lenders, who will contact you (and hound you).
If you choose to apply online, make sure it’s an actual online application for a real lender, and not one of these lead sellers. However, be aware that your choices will be limited, and some lenders you may never have heard of before.
Pros:
- Lenders who operate online generally have better technology
- Online lenders don’t usually have high-commissioned LO’s
- Sometimes you can find a real deal on a rate if you’re a highly qualified borrower
- Online rate quote tools can provide you with transparency around rates and fees
- You might be able to take advantage of automated processes for your application
Cons:
- Customer service is usually limited to call centers staffed with inexperienced LO’s who won’t be able to give you targeted advice based on your situation
- Rigid processes will exclude borrowers who deviate from expected norms in any way
- Preapproval letters from online lenders may be viewed with a side eye by sellers or real estate agents in a competitive listing situation
- Poor communication and lack of due diligence can lead to nasty surprises and delay later on in the loan process
- Online lending is traditionally more focused on refinancing, and can be ill suited to the more complex task of navigating purchase financing
Retail Mortgage Banks
A retail mortgage bank is only a bank in that it is a financial institution. These banks don’t offer savings or checking accounts, and are dedicated to mortgage lending. Independently run branches and independent LOs mean rates and fees can vary a lot. It’s luck of the draw who you end up with and how they structure fees.
Pros:
- You will likely be working with an experienced LO
- Service is usually good, since the bank wants referral business
- New home financing can usually be processed quickly
- You’ll be presented with a wide range of home loan options
- Your preapproval will be solid, and may even be signed off on by an LO who has existing relationships with real estate agents in the field
- Newer technology can make home loan applications, preapprovals, and approvals a snap
- LOs are more likely to have the experience and qualifications needed to provide information on specific loan structuring
Cons:
- The LOs’ commissions are likely to be very high compared to other lending options
- Each LO will have their own process, experience and methods, and LOs tend to switch banks often, meaning you may have to transition form one LO to another midway through your loan process
- LO’s may work hard to evade specific answers to questions about the higher rates and fees, delaying discussions until late in the loan process hoping you won’t back out when you find out the facts
Mortgage Brokers
A mortgage broker takes on the role of middleman. They don’t have any real control over most parts of the process, but can be convenient if you are testing the waters and want to get a broad idea of your options.
Pros:
- Brokers can give you access to the wholesale market and a wide variety of lenders
- Brokerages are often owned by someone local to the community
- A good brokers can give you solid advice on how to best structure your loan
- You can typically look up brokerages online and see how well regarded they and their LOs are
Cons:
- When wholesale lenders handle most of the loan process, you can get a very inconsistent experience
- Since your broker lacks control of the underwriting process, you can be left waiting for days or weeks for approval when markets are hot (springtime or anytimes there are low rates)
- Brokers can’t provide you with credits for lock extensions or higher than expected costs because of specific government restrictions
- Waiting on a wholesale lender to send official loan disclosure for an appraisal can waste days
- If the wholesale lender delays underwriting and funding close to closing, you can end up in hot water with a seller
- Some brokers may choose to operate in “gray areas” due to lack of oversight, which can put your loan at risk
Call Center/Direct Mail Lenders
A lender who depends on cold calling or sending direct mailers without a previous lending relationship is unlikely to be worth your time, and may be a scammer..
Pros:
- Can’t think of any pros at all
Cons:
- Most of these offers are related to purchased data about you. It can come from “online lenders”, credit bureaus, county records, or other data sellers
- Since they have to pay to get your information, they’ll bombard you with repeated contacts, and focus on hard sell tactics without giving you much real information
- These lenders can be expensive, since they are trying to recoup their costs of data buying. Low interest rates are usually offset by exorbitant fees.
- Many of these lenders only care about closing the sale for the commission, and their reputation comes a far second
Frequently Asked Questions:
Use this FAQ when talking to lenders. If your LO seems uncertain on how to answer, they are at best inexperienced and at worst deliberately trying to evade.
How do I get the best rate?
A favorable interest rate on your mortgage can mean paying tens of thousands of dollars less over the life of your loan. As a rule of thumb, your credit score will be the final determining factor for determining your interest rate. Score under 700? Think hard about the pros and cons of homebuying, and whether or not you might be able to raise your score over the next year if you delay buying.
With a high interest rate, the lender makes back a lot more over the first half of your loan term. All of your early loan payments will consist of mostly interest. However, getting into a home when you are steadily employed and likely to stay that way, even if your credit isn’t stellar, may be worth more than continuing to pay rent with nothing in return.
What Is APR and Why Does It Matter?
Usually you will see an Annual Percentage Rate (APR) advertised for home mortgage loans. Ask your Loan Officer what the actual interest rates, with and without taking APR into account. The APR is mandated by law, because it can help show you what you actually end up paying in extra fees and costs in addition to your interest rate over the life of the loan.
Many lenders require costs and financing fees such as:
- Loan origination and processing fees
- Document preparation fees
- Underwriting fees
- Escrow fees
- Wire transfer fees
- Discount points
- Private mortgage insurance (PMI)
Fees can greatly increase the amount that you are paying for your home loan, taking your base interest rate up several points because of the thousands of dollars you are having to lay out on the front end, whether it is loan origination and processing fees or discount points that were included in the “quoted rate”.
The Truth In Lending Act (TILA) says that your lender has to give you an APR calculated as a real interest rate, showing you a total of what you’re really paying over the life of your loan over and above the borrowed amount. This can help you understand the difference between loan options when shopping around.
Am I Required to Use the Lender Who Preapproved Me?
Absolutely not! No-one can make you use a specific lender. You can always walk away, at any point. Of course, if you are nearing closing, you need to consider your options and whether or not switching horses midstream will still allow you to get through a new loan application, underwriting, and approval process.
If so, switching to a new lender won’t usually be an issue. You may even be able to use your current appraisal. However, your locked rate won’t apply, and you can’t switch loan types without significant changes to your loan contract. If you were hoping to change from a standard to an FHA loan, you might run into issues.
If you’re less than two weeks from closing, and try to change lenders, you may end up losing your escrowed funds, or having the deal fall through completely because you had to appraise and the numbers came in differently (lower) or delays meant you miss closing.
That’s why it is so important to shop carefully for a mortgage lender and find one you feel confident with before starting the loan application and approval process
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