Mortgage lending is an uber-competitive business. From the big banks like Bank of America to your local credit union they are all lining up ready to help you get into your dream. How does one pick who to go with? First, let’s start with the different kinds of lenders
Different types of mortgage companies
Banks – These are the Bank of America, Wells Fargo of the world. This is great if you prefer to have all your finances in one place. The trade off however, because of the size of these companies it may take longer to process the loan and they may not offer special or government-backed loans such as FHA and VA.
Credit Unions – Credit unions are similar to banks but they might might lower costs and interest rates. In order to take advantage of that typically you have to be a member.
Mortgage Lenders – These guys do only real estate loans and they do the underwriting in house so the process is usually quicker.
Online Mortgage Lenders – With the evolution of technology online mortgage lenders like Rocket Mortgage or Sofi are able to carve out market shares with their lower interest rates and faster application. However, they lack local knowledge and the customer services is sometimes non-existence. Because of this you’re also more likely to make a mistake on your applications forms and come back to bite you later. You should also be on the watch out for hidden fees and just general scams online.
Portfolio Lenders – Most lenders will resale the loans on the secondary market to keep turning the capital over. Portfolio lenders tend to originate and keep the loans in their own portfolio. Because of this, they can be more flexible on the loan criteria since they don’t have to adhere to Fannie Mae and Freddie Mac’s guideline, who are the two biggest buyers of loans on the secondary market. You can think of them as a lender of second resort or better suited to serve more niche markets and products.
Mortgage Brokers – Mortgage brokers actually do not lend money directly. They have access to many different lenders and loan programs and give you access to more option in just one stop. They might save you time, but they might not set you up with the best lender but instead the one where they get paid the most in commission.
BEfore you start
Similar to your health, do a quick check up on your credit score. Start compiling some documents to help the lender assess your debt-to-income ratio. How much student loan or car loan do you have currently? Do you have a copy of your latest W-2 or tax return? Listing of bank and retirement savings account statements will be helpful as well.
If your credit score is lower than you’d like, say below 620, that might limit your options and finding competitive rates. It’ll take you some time to improve your credit score such as bringing past due credit card bills to date. Lenders will be more willing to work with you or be flexible if you have a higher credit score.
How to vet lenders
Start with referrals. Your friends, financial advisor, CPA, lawyer, and certainly your real estate agent should be able to recommend a few folks to you. These folks have relationships and reputations on the line instead of just someone that happened to be pretty good with Google AdWords.
Ask the lender about their experience, especially if you have unique or specific loan you’d like to use. Check their reviews online. Do you feel you have good rapport with the lender? Do they promptly return your calls or emails?
Look beyond just the rates
Rates are certainly important, but it’s not the only thing to fixate on. Be sure to look at the big picture and all the terms when comparing lenders.
Rates – Ask if the rates are fixed or adjustable. Also ask about the annual percentage rate (APR). This is more accurate when comparing mortgage offers because it includes points and fees. Confirm with the lender as well how good the quote is for esp in a rising interest rate environment.
Points – These are fees you pay at closing in order to secure a lower interest rate. It’s a trade-off. The more fees you pay up front can save you money over the long term.
Fees – This always kind of stings. There can be a lot of fees such as loan origination fee, processing fee, underwriting fee, and closing fee for the work lenders have to do. There could also be non-lender fees like for the appraisal.
Customer service – Loans are complicated and a big financial commitment. You want to have someone there to help you. It’s also nice to have someone that will pick up the phone letting you know how things are going especially if you’re coming towards the end of your financing contingency period instead of getting routed to a call center. Don’t over look this and end up losing your dream home or shaved years off of your life.
Don’t be afraid to negotiate with the lenders to lower rates, points, or waive certain fees. Make sure when they lower one item they’re not raising the fees or rates of another term.
Did you like the tips in this post? Subscribe and you will never miss out on other great nuggets like this!
