By Amy Miller, AFC®
We mentioned last week that every lender is different so when you are ready to purchase a home, doing your homework first is key. Your choice of lender profoundly impacts the buying process and not shopping around could cost you in the long run.
To close out June and National Homeownership Month, this week I’ve put together a few things you need to know before making this big, important decision.
Type of Mortgage Lenders
There are several types of lenders and again, each is different.
Direct lenders are banks, credit unions, and online companies that offer mortgages directly to borrowers. They will grant a mortgage and then service it or outsource the servicing to a separate company or third party. The rates and terms offered will differ with each.
Mortgage brokers are licensed individuals that serve as the “middleman” between lenders and borrowers. They are typically independent and work with several lenders. They do not set the rates or terms, nor do they make lending decisions or service the loans they originate.
Correspondent lenders will originate the loan but then sell it to a larger institution after the loan closes. (and pretty quickly – almost always before your first payment is due)
Wholesale lenders usually work directly with mortgage brokers to offer their loans.
Portfolio lenders offer loans that are funded by their institution’s client deposits. They typically do not sell these loans but will hold on to the loan for servicing. These mainly include community banks and credit unions.
Hard Money lenders are groups of investors that provide real estate loans, typically on a short-term basis with higher interest rates. (Popular with house-flippers)
Choosing the mortgage & lender that is right for you
Being acquainted with the correct industry terms and standards will help set you up for success, long-term savings, and better financial health. We touched on some of those terms and questions you should be asking last week. This week, I’ve decided to touch on them again in a little more detail.
*Types of Loans Offered – institutions will typically offer a variety of loan programs and the one you need will depend on your individual situation. Making that decision is a complicated process that needs to include the interest rates offered along with some other factors like the term of the loan, (especially since you will be paying this back for up to 30 years) down payment requirements, and any fees associated. It’s important to choose a loan that best fits your overall plans and budget. Knowing what is offered by a lender and which is best for you is imperative.
*Lending Representative – Who will you be working with? What is their expertise? An experienced and highly trained mortgage rep will analyze your situation and help determine the best loan for you.
The representative’s experience with the type of loan that you have chosen is also an important factor and should be considered. I recently worked with a couple that was going through the pre-approval process for a VA loan that chose a lender in an area that does not have a military presence. During the process, they found that their representative, although seasoned, had never originated a VA loan. This ended up being a learning process for both parties and added a couple of delays.
Another consideration is whether your representative sits at a local branch where you can go in and meet in person or if they are located remotely and only available virtually. In general, our attitudes toward remote work and meetings have recently changed due to the Covid 19 Pandemic – making this a more common practice. Before then, I would have probably never opted for anything other than working with a representative at a local branch. Now, I am happy to work with a representative virtually. Consider the pros and cons of both scenarios and decide what you are most comfortable with.
You want someone that will be able to walk you through the process – hold your hand – and help you make the best decision for you and your wallet.
*Rates – Different lenders offer different rates. According to Freddie Mac, getting one extra quote saves an average of around $1500.00 over the life of the loan, and getting more than five quotes could save around $3000.00.
Rates are mainly based upon your credit rating and down payment but additional factors including the individual lender’s own risk tolerance and the institutions’ overhead cost weigh in as well. (Higher risk loans are typically priced higher – meaning higher rates and fees charged to the buyer).
Another important consideration is how long the lender will “lock” in the rate. This is a term that means the interest rate won’t change between the time it is set and the loan closes if the loan is closed within the specified time frame and no changes are made to the original application.
So again, shopping around is imperative to your long-term financial health. It is also important to try your best to compare lenders on the same day because mortgage rates change frequently.
*Timeframe – how long will the process take? I have worked with one lender that guaranteed a 30-day close, another that consistently closed at the 45-day mark, and another that was closer to 90+ days. Those are significant differences that need to be taken into consideration.
*Fees – There are upfront charges associated with a mortgage that must be paid by the buyer (unless negotiated with the seller). These fees are typically either financed into the loan or due upon closing.
Lenders will charge different fees including origination fees, application fees, processing fees, underwriting fees, administrative fees, and so on for making the loan. Some choose to charge one lump sum; others may itemize them.
Other fees associated with a new mortgage come from third parties that are required to get the loan done. These include appraisals (US Average is $300-$450), home inspection ($300-500.00), title insurance (protects the lender against loss – averages $500-$1500 but can be more), taxes (local, state, and federal), attorney fees and HOA fees if applicable.
There is also the option to buy points, which is considered a fee. Also known as “discount points”. They are a way of lowering your interest rate by basically pre-paying. If you can afford to do this, each point purchased typically lowers the rate by 0.25% and will then affect your monthly payment and the overall interest you pay back over the life of the loan. I typically advise individuals considering buying points to do the math and calculate their break-even point; how long it will take you to re-coop what you spend against what you are saving.
When it comes to fees, it’s important to know exactly what is being charged and how you plan on paying them.
Bottom Line – Shop Around
As we’ve stated before, getting a mortgage is one of the biggest and most expensive decisions most make in their lifetime. Shopping around and knowing the right questions to ask is so important – I always say, unlike shopping for other items – one size does not fit all. Do your homework.
I hope these tips help you in your journey. In addition to these, I always recommend asking family and friends about their experience and possibly for a referral to a mortgage representative they’ve worked with in the past.
We also encourage you to check out the many AMBA member banks. You can find the membership directory by using this link: https://ambahq.org/banks/