CHAPTER 11
Finding the Best Lender
After you’ve determined which loan you want, then you should begin shopping for lenders. Lenders can come in all different shapes and sizes. Certain lenders specialize in certain types of loans, while other lenders try to offer every program imaginable.
11.1 I’VE DECIDED ON MY LOAN. NOW WHAT?
You now find the lender that offers your chosen loan. If your mortgage is more commonplace, such as a conventional Fannie or Freddie loan, then most everyone can help. But sometimes small changes in the loan type can throw some lenders for a loop. What changes? When you switch from a conventional loan to a government loan, such as FHA or VA.
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Government loans, while still automated, have their own guidelines, paperwork, and verbiage. That takes some getting used to. Granted, it’s not a big deal, but if a mortgage company only does conventional loans, then you can bet they won’t handle your deal as efficiently (if at all) as a company that specializes in government loans. The FHA allows certain mortgage bankers to underwrite and approve FHA loans, granting them a special status that is called direct endorsement (DE). If you determine that you need an FHA loan, the very first thing you need to ask the lender is if they have DE approval from HUD. If they don’t, go elsewhere. If they have no idea what you’re talking about, go elsewhere. FHA lending is just a tad different from conventional lending; not a lot, but enough to slow things down when you don’t need them slowed down. Want an FHA loan? Get an FHA lender.
Are you a veteran or do you otherwise qualify for a VA loan? Just as HUD grants special DE status to certain FHA lenders, the VA grants special status for VA loans. If a lender is VA approved, then the process is streamlined. All approvals are done in-house. For example, having a lenders appraisal processing program (LAPP) allows the lender to do the appraisal without all the paperwork involved when ordering one through the Department of Veterans Affairs. If you want a VA loan, ask your lender if they’re LAPP approved. If not, again, move on.
Once you’ve decided which type of loan you’re going to get, stand firm in your decision. Sometimes, if a banker or broker can’t offer the loan you’ve decided on, they’ll try to talk you into switching to something they prefer. For example, say you call a lender and ask for a 3-percent-down FHA loan and they try and talk you into a conventional 3-percent-down loan instead. They’ll run the numbers, quote some rates, and try to convince you to go conventional instead of government. If this happens, simply ask them if they’ve got their DE approval from HUD. If they don’t, I’d be a little suspicious as to why they’re trying to talk you out of a government loan.
If you see that a lender or broker specializes in your type of loan request, then certainly include them on your list of prospective lenders. Lenders who specialize in government loans tend to do a lot of them, which will mean an easier approval process for you. Be careful, though. Make sure that the lender who claims to specialize in VA loans also doesn’t claim to specialize in FHA, conventional, jumbo, first-time buyer, construction, bad credit, excellent credit, and so on. It removes some of the credibility in the claim when the lender specializes in every single loan on the planet. Specializes in everything? Please. I’m not saying they’re not any good at a VA loan, but wouldn’t you feel better about a lender who can say, “We specialize in VA loans,” without also claiming to specialize in everything else? Makes some sense, doesn’t it?
11.2 HOW DO I FIND THE BEST LENDER?
If you only looked at newspapers, television ads, or websites, it would seem that all lenders are your best lender. No one’s bad. In fact, many tout themselves as not only being the best lender, but also guaranteeing the best rate with the best closing costs and the best service, blah, blah, blah. Your best lender will be the one that offers the loan program you’ve chosen, at a competitive rate, and can deliver your loan when you need it. You begin your search with referrals. One of the keys to finding your best lender is to identify the various mortgage sources.
11.3 BUT WHERE DO I GET THE NAMES OF ALL THESE LENDERS IN THE FIRST PLACE?
If you’re using a real estate agent, get referrals from him first. Most real estate companies get solicited all day long from lenders wanting referrals. So that would be a great place to start. Then ask some friends or acquaintances who they would recommend. Personal referrals can always help narrow the field, so talk to your agent and your buddies as well. You can also look in the newspaper or online for a list of lenders in your area, and certainly feel free to call a few. We’ll talk about finding the best loan officer in the next chapter, but just remember that “dialing for dollars” can be a dangerous thing.
So make a plan to start with your current bank or credit union, then get referrals from real estate agents and from friends, family, and coworkers.
11.4 HOW DO I KNOW IF I CAN TRUST THESE LENDERS?
Begin by using the Better Business Bureau to check for any record of consumer complaints. In addition, check with the state agencies that regulate lenders, and see if your potential lender has any violations or records of misbehavior.
There are many reasons to do business with any particular mortgage company. One of the best ones is “trust.” Who cares if the loan company “guarantees” the absolute lowest rate if you can’t trust them? That’s why many people do business with people they know and who care a lot about who gets their loan. XYZ Bank might be 1/8 percent higher than what’s advertised, but it might also be the bank that issued your credit card and where you have your checking and savings and retirement accounts.
Why go somewhere else if there’s a doubt in your mind about any new lender? Different people have different reasons for choosing any product, and loyalty and trust are certainly solid reasons to choose your mortgage loan. If you feel comfortable with the lender you’re with, then what’s the point of shopping around, right?
11.5 SHOULD I USE MY REAL ESTATE AGENT’S MORTGAGE COMPANY?
You can certainly start there, but you may not end up there. A growing trend in the real estate industry is for real estate brokers to either own their own mortgage company or establish a “preferred” relationship with a mortgage operation. Get quotes from the real estate agent’s mortgage company just like anyone else.
Be a bit cautious, though. Sometimes these relationships get a little too cozy. Just because your agent referred you to her lender by no means gives that agent the right to know about your credit or your income or anything else personal you’d rather not share. In fact, unless you give express consent to a third party that’s not your lender and is not involved in your loan approval, it is against the law to divulge anything about you or your credit or your job.
An agent might call her affiliated lender and say something like, “So, tell me about David Reed. What are his credit scores?” Some people might not want this information shared with others. If the agent found out you had bad credit she might decide not to work with you, or she may try to steer you in a direction you may not want to go when, in fact, it could just be that the loan officer at the agent’s office wasn’t any good. Many loan officers who work in agent offices don’t get the best commissions splits, because the business is brought to them by the agents instead of the loan officer going out on his own to find new loan business.
11.6 I THOUGHT ALL MORTGAGE MONEY CAME FROM THE BANK. DOESN’T IT?
Eventually mortgage money comes from a bank. Or at least from a banker. But getting a mortgage now is very different from what happened in the movie It’s a Wonderful Life, where home loans were made directly from other people’s deposit accounts. The two main sources of mortgage money these days are mortgage bankers and mortgage brokers.
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Mortgage bankers lend their own money. Mortgage brokers do not. Actually, mortgage bankers don’t use their own money; they borrow from a line of credit to place mortgage loans, but even if a mortgage banker borrows money to lend to someone else, then the money still comes from the mortgage banker. Mortgage bankers are direct lenders. They lend money directly to the borrower. Mortgage bankers can be a retail bank, a mortgage banker (exclusively), a credit union, a correspondent banker, or a “net” branch.
Retail Banks
Retail banks are surely the most common. They’re where you keep your checking or savings account, deposit your paycheck, cash checks, and maybe get an auto loan. They’re on every street corner, it seems. And they offer mortgages as part of their business, along with credit cards, student loans, ATM cards, personal loans, and a bevy of financial services. Yet retail mortgage lending by banks is fading with some national brands getting out of the mortgage business altogether.
Mortgage Bankers
Mortgage bankers do one thing: make mortgages. They do not issue credit cards, nor do they offer other consumer services such as checking accounts or debit cards. Mortgage bankers might “sell” your loan to someone else or they may “service” the loan themselves.
Credit Unions
Credit unions are similar to a retail bank, except that one has to be a member of the credit union in order to receive its benefits. Credit unions offer checking accounts, savings accounts, auto loans, and more, just as many retail banks do. Smaller credit unions act more like a mortgage banker or broker by originating a mortgage loan, collecting the documentation from the borrower, and then forwarding the loan to the lender. National credit unions operate with a line of credit.
Correspondent Bankers
This is a special type of mortgage banker that operates much like a broker. They are sometimes smaller mortgage bankers and are referred to as correspondent bankers because they may have a regional presence but not a national one. They can shop various rates from other correspondent mortgage lenders that have set up an established relationship to buy and sell loans from one another. The benefit to the consumer is that they don’t set their own interest rates per se; instead, they’re able to shop around for you just as a mortgage broker would. These bankers don’t advertise themselves as lenders who can “shop for the best rate”—which they attempt—but simply as “mortgage bankers.” Usually they are small in scale and never service their own mortgage loans.
When you work with a regional mortgage banker that works with correspondent lenders, you’re really getting the best of what a broker can offer and what a banker can provide. They control the process as to who gets approved and when papers can be drawn. They can offer special programs but are also able to shop mortgage rates.
“Net” Branches
A net branch is a mortgage banker, too, but typically a very small operation consisting of perhaps three or four loan officers, a manager, and a loan processor. A net branch is so called because it receives all the net income from originating a mortgage loan. Net income is income after overhead on an individual mortgage loan is deducted.
Net branches are dedicated to their parent mortgage banking company and sign an agreement that the branch will only fund loans from that parent company’s credit line and not broker to other mortgage lenders. The trade-off is that the parent company provides a credit line that individual mortgage brokers couldn’t afford, and offers in-house loan approvals and low fees for doing so.
Net branches keep most of the profit in the transaction and require a certain level of experience, personal net worth, and solid credit profile. Mortgage loan officers who typically split the income with their employers find that net branches pay them more. Good mortgage brokers can find or establish their own net branch with national and regional mortgage bankers that cater to this line of work.
There aren’t many differences among any of these types of mortgage bankers. In fact, you’ll be hard-pressed to find a retail bank that doesn’t offer the same types of mortgages that a mortgage banker does, or a credit union that issues home loans that are specific to that particular credit union. Most mortgages are alike; it’s just the businesses that offer them and how they operate that are different.
11.7 WHAT IS A MORTGAGE BROKER?
Mortgage brokers find mortgage money for the borrower from other mortgage bankers. Brokers don’t make the loans themselves, but arrange mortgage financing at the request of the borrower.
11.8 ARE MORTGAGE BROKERS MORE EXPENSIVE?
No, not at all. Brokers get interest rates at discounts not available to the general public. As with most businesses in the United States that offer a product for sale, there is a wholesale side as well as a retail side to the mortgage business. Mortgage brokers get their loans on a wholesale basis, mark them up to retail, and get paid the difference. Brokers get their mortgage money from wholesale divisions of mortgage bankers. Mortgage bankers that work with mortgage brokers have operations within their company, called “wholesale” divisions, that offer reduced mortgage rates to mortgage brokers.
11.9 WHY DO MORTGAGE COMPANIES USE MORTGAGE BROKERS?
Most mortgage brokers are smaller operations than mortgage bankers. Mortgage bankers use brokers to be able to make more loans with less overhead. Instead of opening up a retail operation and hiring loan processors and loan officers and paying rent, utilities, insurance, and all the associated costs of running a mortgage operation, wholesale mortgage bankers use brokers to market their loans for them. In this case, the brokers use their own overhead, hire and manage their own staff, pay their own bills, and in turn get reduced mortgage pricing. There shouldn’t be any higher rates or fees just because you choose a broker instead of a banker. In fact, mortgage brokers have helped keep mortgage rates low by adding increased competition in the mortgage industry.
11.10 HOW DO MORTGAGE BROKERS GET PAID?
You can pay them, or their wholesale lender will pay them, or some combination of the two. There is no rule requiring that mortgage brokers must make a certain percent of the transaction; they will try to make what they can make, but they must also stay competitive while doing so. When you pay the broker, usually it’s in the form of an origination fee, junk fees, or mortgage broker fees. When the wholesale lender pays the broker, it’s usually in the form of a yield spread premium (YSP). A YSP is expressed as a percentage of the loan amount and is also a function of prevailing interest rates. The higher the interest rate, the more the YSP. The lower the interest rate, the lower the YSP, and sometimes there is no YSP at all.
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Just as you can decide to pay more discount points to get a lower rate, you can also decide not to pay discount points and end up getting a slightly higher rate.
For example, on a $100,000 loan your broker quotes you 4 percent with one point and one origination fee, 4.25 percent with no points and one origination fee, or 4.5 percent with no points and no origination fee. Now remember that the lender gets the points and the broker gets the fee. If the broker wants to make $1,000 regardless of which rate you choose, at 4 percent and 4.25 percent it’s you who’s paying the broker’s origination fee. At 4.5 percent you pay no discount points and no origination fee. Because you are taking a higher rate, the wholesale lender, in exchange, pays the $1,000 fee directly to the broker. There can be a combination of payment, where you pay an origination fee and the wholesale lender also pays $1,000. These options are almost always allowed, and it’s up to you to decide which one to take. Brokers, however, are required to disclose to you how much money they’re going to make on the transaction and who’s going to be paying them.
11.11 HOW MANY LENDERS DO MORTGAGE BROKERS USE?
You’ll hear advertisements from brokers bragging about how many lenders they do business with, some claiming to work with a hundred or more. That may be true, but in reality they probably only work with a select few, say, two or three, on a regular basis. Think about that for a moment. If you apply at a mortgage brokerage company, do you really expect them to sit down and compare over 100 different companies? Of course not. Instead, the broker will most likely go with lenders they know and have done business with.
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What determines where a broker will send your loan? Most often that determining factor is price, or whoever can get them the lowest interest rate. If wholesale lender A offers a 30-year fixed rate at 5 percent, and lender B offers 5.25 percent, whom do you think the broker will send your loan to? Usually it’s the lender with the best interest rate. If brokers advertise that they have access to over 100 lenders, then their prime motivation for having so many is to discover the best interest rate offering possible. In actuality, you’ll never find a lender that offers the exact same loan at 1/2 percent less than anyone else. Lenders price their loans the same way others do, so don’t expect a broker to find a mortgage rate that’s too good to be true, because it most likely is.
Another reason brokers select certain wholesale lenders is to get good customer service. After all, if the wholesale lender treats the broker responsibly, then there’s less chance of your loan being handled incorrectly. Brokers don’t want to look bad any more than anyone else. In fact, brokers may need to rely on their reputation more than some of the larger lending institutions in town. What’s losing a deal here or there to a megabank? Not much. What’s losing a deal to a small mortgage shop? It could mean the difference between being successful or closing their doors. Good customer service is essential to being a good broker. I’ll give you a true story that happens over and over again.
At a wholesale division of a major mortgage banker, the mortgage production was down. Way down. They decided to “buy” the market by offering mortgage brokers better interest rates by nearly 1/4 percent. That’s a lot of money to a broker. It’s a lot of money to anyone, for that matter. On a $200,000 loan, that 1/4 percent means another $500 in profit to the mortgage broker. So the lender printed up some new rate sheets offering the ultra-low rates and armed the sales force with lots of slick advertising, directing them to get as much business as they possibly could. They got their wish. Soon, mortgage applications came pouring through the lender’s door and they were happy. For about two weeks. Then they realized that they had so much volume they couldn’t get to the loans fast enough. Closing dates were not met. Rate guarantees were expiring. People were getting mad. The mortgage applicants weren’t mad at the lender—they were mad at their mortgage brokers. So yeah, the brokers might have made an extra $500 on each deal, but because the lender couldn’t approve their loan on time they didn’t make anything at all.
To make matters worse for the lender, their reputation in the brokers’ community was shot. Word spread: “Don’t send your deals to XYZ Mortgage, they’ll screw it up.” Both good customer service and balance of competitive mortgage rates make for a good wholesale lender.
Another reason to use a broker is that while most of their lenders offer the same exact product, sometimes one of those lenders actually has a loan program that no one else can offer. And unless that same mortgage banker can offer the same product to retail customers, the broker might be the only efficient avenue to get the special loan program. For instance, you need a special mortgage that lets you qualify using unverified income. Your bank may not offer it, but a broker might have a lender who does. This is another job of the wholesale lender’s account executive—to market new loan programs to the mortgage broker community.
One reminder: You’re not getting a mortgage from a broker; you’re getting a mortgage through a broker. You may not know who the lender will be, because the broker may not have decided. You don’t have a choice when you go to a broker; the broker does. Oh sure, if you’ve had bad experiences with a particular mortgage banker you can tell the broker that “whatever you do, don’t take me to them,” and the broker will comply.
11.12 WILL THE BROKER KEEP MY LENDER A SECRET?
No. In fact, you’ll know almost immediately when you submit a completed loan application. The broker puts your loan package together, sends it to the lender, and the lender takes it from there. Some wholesale lenders prefer to deal directly with the borrower once an application is submitted while others want the broker to continue to do the legwork while the loan is being processed. And once again, when your loan is transferred to the ultimate lender, you can expect another round of loan disclosures and authorization forms.
11.13 IS A MORTGAGE BROKER MY BEST CHOICE?
A broker might be your best choice, but then again, a mortgage banker may be able to help you more. There are advantages that mortgage bankers have that brokers do not.
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One distinct advantage is that your banker is in fact the lender. The mortgage banker takes your application, approves the loan, and issues your mortgage funds. Due to the efficiencies in working with a mortgage banker, you can sometimes cut significant time out of the process. If you’re looking to close quickly, say, within a couple of weeks, you might be able to save some time in the process by going directly to a mortgage banker. Working directly with a banker also helps to cut through some of the red tape in applying for a mortgage loan. When brokers get their approvals from lenders, they have a list of things, called loan conditions, that the lender wants before they’ll close the loan. The broker gets information from the lender, relays it to you, and you give it to the broker, who then gives it back to the lender. This may seem like such a small difference that it’s hardly worth mentioning, but in the mortgage process it’s the details that matter most.
What if you are at your closing and discover there’s a problem with your note? When working with a mortgage banker, the banker corrects the mistake and redraws the closing papers. If you use a broker, the broker has to contact the lender to make the corrections, redraw the papers, and send them back to the closing. I’ve been both a banker and a broker, and I can say that the number-one advantage the banker has is control over the process.
A banker can also be a better choice if the banker has a loan program that isn’t offered to mortgage brokers and is only available directly from the mortgage lender. A few years ago, a major national mortgage company offered a valuable and unique mortgage program previously unheard of. The program was geared toward doctors who had just graduated from medical school and were about to start practicing. This particular loan program for physicians offered zero money down, with very competitive mortgage rates and no mortgage insurance requirements. No competitor could touch those terms. Further still, no mortgage broker had access to that loan program, even when the mortgage broker was an approved broker. So just as brokers may have access to some loans that bankers don’t have, sometimes the reverse is true. Just not nearly as often.
11.14 SHOULD I CHOOSE A BROKER OR A BANKER?
Perhaps neither one at first. The mortgage process can be confusing, especially if it’s your first home. For starters, I would begin with the people at wherever you have your checking or savings account. One of the easiest ways to slide into the mortgage process is to speak with someone you know and trust. That means you start at your retail bank or credit union. You may not find your best interest rate there (but again, you just might), but it will give you a yardstick by which to judge other lenders. Make an appointment and sit down with your lender and let them explain the process to you. Some retail operations give certain discounts or waive certain fees to checking account customers. After you feel comfortable with the process and have a good idea of where you’re going and how you’ll get there, then you should begin considering other choices.
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A banker offers certain advantages over a broker, and vice versa. It’s up to you to determine which one is right for you. I began my career as a mortgage broker and certainly closed my fair share of loans. We got all of our loan programs from wholesale divisions of mortgage companies. I forget how many lenders we were authorized to market for, but it was probably in the range of 50 or 60. I know that sounds like a lot, but let me explain a brokerage operation in a little more detail.
Wholesale lenders hire account executives whose sole job is to find mortgage brokers that will be willing to start sending loans to them. Brokers, while not approving the loans themselves, do most of the work up front before the wholesale lender ever gets to see the loan file. Brokers meet with customers and take the loan application with them. They help select the proper mortgage program, prequalify the customer, pull their credit, document the file, order the appraisal and title work, and essentially do whatever is needed to get the loan to an approval stage. It might take a couple of weeks before a loan is documented enough to send to a wholesale lender.
After a loan is submitted for approval, either electronically or manually, the broker helps with any loan conditions that might be outstanding, assists in arranging the closing, and makes certain the loan closes when it’s supposed to close.
I’ve heard the banker vs. broker battle for years, and the bottom line is that there really is little difference. Bankers and brokers offer the same group of products, the rates are almost exactly the same, and the difference may only be in the fees.
Remember the example of the lender who had such good rates that it drove volume up and almost shut the business down? This shows that price shouldn’t be your only concern. You need to gauge the lender’s anticipated performance over the course of your loan application. Yeah, your rate might be great, but what good is it if you never can close your deal? Perhaps the most important reason to choose a lender is simply because you feel it’s the right move.
After you’ve done your homework and compared different lenders, then perhaps your choice is the company that “just feels right.” If you’re at some sort of a crossroads about which lender to pick after you’ve done all you need to do to compare them, then you might ask yourself, “Do I feel comfortable with these people?” Have you ever stopped some big project or purchase for no other good reason than the feeling that “something’s not right here”? Of course. Everyone has. And at this stage, if you’re splitting hairs over lender A vs. lender B, then perhaps both are so close that it doesn’t matter which one you choose.
11.15 WHAT HAPPENS IF I WANT TO CHANGE LENDERS IN THE MIDDLE OF MY LOAN PROCESS?
You need to be careful how and when you do this. If you’re buying a home, closing within 30 days, and it’s day 28, you won’t have time to change. There’s a lot that’s happened since you signed your sales contract, and if you change lenders now you’ll have to start some of those things all over again. Even though you can use the same documents or copies of those documents, you’ll still have to get approved at another lender. Just because you got an approval with one company doesn’t mean another company will accept that approval and just scratch out the old lender’s name. Nope, you have to make a brand-new application and get your new approval.
But if you’re only a week or two into the process and you want to change lenders, you certainly can. Note that if you’ve paid any application fees up front you might not get those back, but if you’ve paid for your appraisal, you can get that transferred to your new lender with the new lender’s name on it. Sometimes there’s a fee for this service, maybe $50, but if you transfer an appraisal from one lender to the next, you should anticipate this charge. Your title company, settlement agent, attorney, or whoever else has their hands on your file may also have to make some changes. Your new lender will be part of this legal transaction; the old lender’s name must be erased from the old file and replaced with the new lender’s name.