Choosing a Lender
A lender is critical to the cost and success of your home purchase. For one thing, he holds the purse strings. For another, this level of service can make the difference between a happy new homeowner and a disappointed would-be buyer who missed out on a home.
Beyond finding a good interest rate, you are relying on a lender to lock in your rate fast: if you want that 6 percent rate, he needs to jump on it because rates can change like the wind. You are also relying on him to close on the loan on time; you could lose a house if there is a hang-up for some reason beyond your control. And many fees are determined by the lender, fees that can be negotiable if you know what to ask.
It is helpful if you gather all of the required documentation in a neat package before you start talking to lenders.
Shopping for a lender requires a homework assignment:
- Know thyself. Before you even pick up the phone or turn on the computer, figure out what mortgage type you are looking for. Not all lenders handle all loans. You can be more selective if you know what you're looking for.
- Know thy prevailing mortgage rates. It's easy to compare rates online, and many sites allow you to see the rates from local lenders for various types of loans. Use the sites that show points as well. One caution: many of the lenders listed are paid advertisers, so you aren't getting the total picture. However, lenders have to be competitive to stay in business, so what you see will most likely be a good benchmark for comparison.
- Understand the players. Study the types of lenders and their advantages and disadvantages for your situation. Some lend their own money, and others find the money for you.
- Understand the fees. Beyond the interest rates, there are closing fees and points, and occasionally commissions that you don't see. You will want to compare these for all the lenders on your list.
But Where Are They?
As you can tell from the homework assignment, you are going to make this decision based on your individual needs and the costs. You are also going to base it on professionalism, and one time-tested way to do that is through referrals. Most people find their lender or broker through friends or real estate agents. After all, you only have so much time. As one buyer put it, "If you figure someone you trust has done some shopping, it's easy to just get lazy and leverage their work." But in some cases, the seller of the property might provide your mortgage, too.
Often the choice starts with pre-approval. Remember, you should get a pre-approved loan before you shop for a house. You are free to shop around for a different lender after you get it, but buyers usually end up with the first lender.
Here are some sources for lenders:
- Agent referrals. Agents want to have the pre-approval in hand before they spend time finding a house. It ensures that you are a qualified buyer, which will help them when they present your offer to a seller. Often they can refer you to some lenders they've worked with before. This is fine if you have an experienced agent who can vouch for the lenders. Good agents have several lenders they can refer you to, and you should ask the same questions you'd ask if you were finding the lender on your own. In case the relationship sounds too close for comfort, the Real Estate Settlement Procedures Act (RESPA) prevents agents from taking kickbacks or referral fees from service providers. But remember the agent's incentive in finding you a good lender is to ensure the transaction closes on time without any hiccups. That's in their best interest as well as yours.
- Friend referrals. Friends who have bought or refinanced a house recently make great referrers. Ask them if the lender described the different types of loans available in easily understood language; if he locked in the rate he promised; and how similar closing costs were to the lender's Good Faith Estimate. If your friends were happy with the process, you probably will be too.
- Online sources. You can find plenty of sites, such as LendingTree.com, where you can get estimates from lending companies without ever talking to them. And others where you can have someone call you. There's no risk, until you sign a contract. Decide up front if you need to have in-person service; that will narrow your choices.
- Mortgage brokerage. If you don't have time to find a lender yourself, a broker can do it for you. Sometimes you pay him upfront, but usually the bank pays him. Of course, you pay in the end: it's just wrapped up in the interest rate. However, when you go through a mortgage broker to shop for your rates, he/she can most likely get a lower rate than you could: it's called shopping wholesale. Unfortunately, only the licensed mortgage professionals have access to the wholesale rates.
- Your bank or credit union. You have your money there, so you probably trust it. The loan officer usually controls the loan (even if they resell it eventually) and has authority to make decisions on his own. That can be nice when time is short.
One more thing. Don't discount your parents or other family members as a source of mortgage financing. A properly structured and documented intra-family mortgage loan is as official as any loan from a bank. The interest you pay is still tax-deductible but you can keep that money in the family.
Compare three or more lenders before making a decision. You'll want to compare rates, fees, and points, but you will also want to know a slew of other things. Don't be afraid to ask: Lenders know you have options, so being forthright should not be a problem.
When you ask the questions below, listen carefully to see if the lender is answering in a straightforward way, without using jargon you don't understand. When you ask about fees, do they include them all voluntarily? If you think they are trying too hard to push you in a certain direction, go elsewhere. And be sure to get a Good Faith Estimate that defines settlement costs. That, together with the Truth in Lending document will give you a picture of the total amount you are borrowing and the annual percentage rate.
Questions to ask potential lenders
- What are your loan programs? Do you offer VA loans (for example)?
- What is the par rate for a 30-yr. fixed loan? (He should have the answer at the tip of his tongue.)
- Could you estimate closing costs for my loan?
- Can you estimate and explain your fees?
- Explain an APR and what is it for this loan?
- What is your income from this loan?
- Would you get approval for my loan locally?
- Here's my timeline. Are you certain you can get this done in time for closing?
- Can I see a Good Faith Estimate?
Additional questions for online lenders
- Is there someone I can talk to whenever I need to?
- How are you keeping my info secure?
Additional questions for mortgage brokers
- How do you get paid, in points or commission?
- How much will you make on this loan from the lender?
- Name some of your top lenders.
Next article: Types of Lenders
Previous article: Understanding Mortgage Types
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