Having a great lender on your side makes you entire experience so much easier. Your most important people in your real estate transaction are your agent and your loan broker. Make sure that both of them are AWESOME!
If I came to the realization today that it was time for me to buy a home, the first thing I would do is find a lender I could trust. Any time I talk with new clients or referrals, one of the first couple of questions I ask is whether they have been prequalified or preapproved by a lender.
There’s a difference between prequalification and preapproval. These terms get thrown around a lot, and they are not the same. Between the two, preapproval is better. Prequalification is like telling a loan officer about your financial situation over the phone to see whether things jive with what you are trying to accomplish. Preapproval is a full-blown credit check with verification of your assets and income. Because people always embellish their personal situation, a prequalification may not be accurate or offer much insight. It’s like asking a lender, “If I make about this much, and I have this credit score, and I am looking to get a loan for so many dollars, do you think I can get the loan?” This is kind of ridiculous: there’s no reason for the lender not to say “Of course!” just to get you in the office! For these reasons and more, preapproval is the way to go; the numbers never lie when they look at your financials and check your credit, and when you are preapproved by a trustworthy lender, you can be confident that you will be able to get a loan.
The best lenders are the ones that you are referred to. TV commercials and lenders you find on the web are NOT COOL! These are shady lenders that may sell your information to other sources, or “get” you with a teaser rate that’s only available for perfect borrowers with spotless credit, who make way more money than you. On the other hand, your brother’s friend’s uncle that does loans part-time from his home office doesn’t fit the optimal description of a good loan officer either! It all comes down to who you know, or who you can get connected with.
When looking for a good loan officer, there are a couple sources to consider. You could ask your Realtor for referrals. In fact, a professional agent that works with lenders every day is the BEST person to ask for a referral to a lender. We Realtors know which lenders do their job the best, and which to avoid. If one of your friends or family members just closed a transaction and had a positive experience with a lender or loan officer, this would also be a terrific place to start.
Banks vs. Brokers
There are two very different kinds of loan officers: mortgage bankers and mortgage brokers. Put simply, a mortgage banker works at a bank that offers loans, while a mortgage broker finds a loan from one of several banks. There are benefits to each, and neither way is clearly better than the other: it all comes down to personal preference.
To go with a mortgage banker, walk into the bank and say to the banker, “Hey Mr. Banker, I would like to apply for a home loan!” The banker will sit you down, and offer whatever loans that particular bank is offering at that particular time. The Banker might say, “Do you want Loan A, Loan B or Loan C?” By contrast, a brokerage has dozens and dozens of relationships with banks, putting a lot of options at its disposal. After all, every borrower is different, and every bank offers different guidelines for lending. If you are self-employed, certain banks might not offer you a good loan. Similarly, maybe you are a teacher or government worker or in the military; some mortgage brokers specialize in these professions and would do a much better job than a typical big bank loan. A good mortgage broker will be able to find a solution (a good loan that fits) for most borrower types.
Other issues that would cause a borrower to need to look elsewhere than the largest banks are if you have a smaller than average down payment, less than stellar credit, or the need for a larger allowance for closing costs, or if you are financing a condo that has issues with the HOA, among many, many others. The list of things that lenders scrutinize changes weekly. This really emphasizes the point that, no matter whether you use a bank or a broker, the person you actually deal with must KNOW HIS OR HER STUFF INSIDE AND OUT. Research, ask questions, test them, and pick the best person. May the best and most experienced loan person win your business!
Is there a difference in costs between a mortgage bank and mortgage broker? Yes. For the most part, using a mortgage broker tends to be a bit more expensive in terms of the closing costs for your loan. Why? When you go with a brokerage as opposed to a big bank, your loan officer has a greater need to make a good impression and establish a relationship with you. He (or she) wants to do a job deserving of any referrals you may send over after a successful transaction. Your loan officer can be contacted directly, and you will establish a personal rapport and business relationship together. He will hold your hand the entire way throughout the transaction. Contrast this with a bigger bank, where you will still have a loan officer, but where the personal touch can sometimes erode. Of course, there are wonderful loan officers at the larger banks, but you should expect to get a bit more “hand holding” when you work with a broker. This being the case, they typically get compensated more for dealing with you on a more frequent basis.
Sometimes the big banks offer deals and incentives a broker just can’t match. In order to get more loans closed, a big bank can give better deals, perhaps waiving the closing costs or offering rates that are not profitable to a smaller mortgage broker. Be savvy, ask a lot of questions, and do your homework! I love to talk, and I love it when my clients call me with questions about these sorts of offers!
Banks and brokers both have loan officers working for them. Your job is to make sure you get the warm and fuzzy feeling with your loan officer when you meet initially, and at the same time stay clear-headed and focused. Your loan officer can literally make you or break you, so make the right decision as to who will get your business.
There’s one more factor, and you can take this one to the bank (pun intended). Sometimes it’s not the best rate, but the best fit that you should be looking for. Some lenders just listen and take your order, without offering any alternatives. For example, some people go into the bank dead-set on a 30-year mortgage even if they’re just planning on being in the home for four or five years, as if 30-year fixed rate mortgages were the ONLY way to finance a property. This is certainly not the case. As I write this book, 30-year rates are hovering around 5%, but the 5/1 Adjustable Rate Mortgages are in the 3.75% range! This can be a lot of savings for a loan that is a better fit for the borrower. Ask questions, and be a savvy borrower. At the end of the day, you have a lot of people who are there to help, but you are responsible for making sure you get a beneficial outcome.
I had one client who categorically refused to use a mortgage broker. He swore it would cost too much! He went into a big national bank and spoke to someone who seemed to be the “loan guy” at the bank. It turns out the fellow he talked to was some banking specialist, not a loan professional in any way. When the time came for my client to “lock in” his loan rate, I asked the banking specialist what the rates were for that day, and he said he did not know!
When you trust your business to a bank, you expect to work with someone who at least knows something so rudimentary as the going mortgage rate for the day. Worse, this poor fellow’s file was sent all over the country in the bank’s computer system, from Florida to Los Angeles, at various points in the process. About a dozen people touched his file, and he had very little ability to call and ask questions of any one person familiar with his file. This was frustrating and stressful, and it could have been avoided had my client made sure to work with a loan officer or mortgage professional from start to finish. So no matter where you go or who you work with, make sure that the one person who will be handling your file from beginning to end is a genuine loan officer. This way you have one person to call the entire time.
FYI: What Is an Adjustable Rate Mortgage?
When you see “5/1 ARM” in reference to a loan, this means that the loan is fixed at an initial interest rate for five years; then, one time each year after that, it readjusts to a benchmark index rate (usually the US Treasury or the LIBOR rate), plus perhaps a margin of profit for the lender, always spelled out clearly in the paperwork. A 10/2 ARM is fixed for ten years and adjusts two times each year thereafter.
My father took out a 5/1 ARM loan on his second home, fixed at 5.2%. After five years, it adjusted to an index where the rate was (then) 1.25%! The lender had a 2.25% margin, so the benchmark (adjusted) rate of 1.25% plus the margin of 2.25% gives us his new mortgage rate, a lovely 3.5%. Adjustable rate mortgages aren’t always so bad! When rates go down, they can make a good rate even better. Check out the resource guide at the back of the book for more on this and for current rates on the most typical loan types.
Shopping Around
Do all your shopping for your loan before you spend any time looking for homes! Don’t waste precious time in escrow trying to figure out who will give you the best rate and terms: you should have this all figured out before you look at your first house. This is because when your offer on a home gets accepted, you have a concise timeline to make sure you get approved for a loan. If you run past your deadline and find out that you can’t qualify, you may lose your initial deposit for the property.
What’s more, your loan officer will need one hundred percent of your focus and attention, and as much time as possible, to build your file, get the necessary financial information and application paperwork, and submit to the underwriter (the god of the lending world) for approval. If you are speaking to multiple loan officers under this timeline (called the contingency period, or due diligence period), you may not be able to get the approval on time. Worse, as I said, you can lose your deposit if things go sour.
Also, loan officers may not want to deal with you if you are still shopping around during your contingency period. After all, they know you are setting yourself up for potential disaster, not to mention affirming your lack of faith in the process. Avoid this situation. Do the shopping around at the beginning, and choose a loan and loan officer that fit your needs before you go any farther.
The best start to the process might be to find three good mortgage referrals. I usually give my clients three or four business cards from the loan officers I use most. I give referrals to both mortgage brokers and banks so my clients have options. When you shop around, do ask each loan officer for a Good Faith Estimate (GFE), which should be provided free of cost. This allows you to compare lenders on an apples-to-apples basis. A note of caution: a lot of charges (closing costs) need to be estimated in the GFE, so they make an educated guess on these fees. An example of this is escrow and title charges, which are not specific lender charges. Some lenders estimate high or low with these costs, and some lenders don’t estimate at all, which would bring down their total cost to make your loan. Just be aware of what they are estimating and compare it to the others. Don’t hesitate to ask your Realtor about any questions pertaining to this: a good Realtor can help with most general questions about this process for your loan.
Closing Costs
Closing costs are all of the costs paid by the buyer for the home purchase over and above the purchase price. A lot of ancillary services go into a home purchase; most people just don’t realize this until the transaction has closed. There are loan, escrow, title, courier, notary, insurance, appraisal, credit check, and several other fees that accumulate throughout the transaction. The lender’s portion of the total closing cost amount is almost always the biggest chunk.
Closing costs tend to range from about ,000 to ,000 and depending on the circumstance they could go higher. This means if you are putting down 20% on that 0,000 house (that’s ,000, for the mathematically impaired), the total you need to come up with at the close of escrow is the ,000, plus the closing costs. For this reason, a lot of buyers opt to include a closing cost credit in their offer to offset the additional amount of monies needed at the close of escrow. More on this later.
At the end of every transaction, the escrow company handling your transaction will send you what is known as a HUD-1 Settlement Statement. This will show you where all the money went, and will specify all the final closing costs.
Be Prepared. Get Preapproved.
When I am dealing with a client who has already spoken to a lender, I know the client already has an idea of the home price or monthly payment desired. This takes a lot of guesswork out of the equation, and puts the buyer way ahead of the game in terms of preparation and focus. Furthermore, many buyers find mistakes on their credit reports during this process. Getting preapproved before beginning the home search will give you the time to address any problems and fix your report so your credit score goes higher. When clients come into my office for the first time with the preapproval in hand, and they know what they are looking for in a home, it eases the process for everyone involved. Simply put, being prepared goes a long way. Taking the time to get the right information together will make everything easier in the end.
The Wrong Way: Getting a Loan After Finding the House
Let’s take an opposite approach – what’s the worst that can happen? Let’s say you come into my office, ask to see some homes, and refuse to get preapproved. Usually I would just turn you away, but for example’s sake, let’s say I take you on. We go and look for homes, and you find the perfect place after months of searching. We make an offer, it gets accepted, and we open escrow.
Now you have a very tight timeframe to make sure this is the home for you and get approved for a loan. You have 17 days to determine that this house is all good or cancel the deal, and you don’t have a clue which lender or loan program you’ll end up with. You don’t know exactly what your down payment is, and you aren’t sure of your credit. Against my advice to call the lenders I have recommended, you decide to go through lendingtree.com because they are offering a 4% fixed rate loan. After several days, you find out that you are not qualified for their program and end up going with my lender.
Now, seven days into the escrow, you are getting documentation to the lender and are finally making headway. By day 10, the lender gives you a “conditional thumbs-up,” but you are wary and still think you can get a better interest rate. You are considering calling in on the Ditech 800 number because they are offing a fantastic rate as well, but you aren’t telling me or the lender about this. My recommended lender pulls your credit and finds that your credit score is 607; without some repair, you won’t be able to get a loan. The worst part is that your score is so low because of a correctable error that just needs time. This stinks: there is no way to do everything we need to do to get you approved for the loan in time!
In this scenario, you would be forced to back out of the agreement; otherwise, the seller would get the drift and cancel at the first opportunity! This is what happens when you do not go in prepared. Even if your credit were good, you would still be in a bad position were your loan not approved during the contingency period for any of a million reasons. You should not look at homes without being fully vetted for the loan you need. No good agent would show you any homes until you show them that you are approved, and thus worth their time.
So, if you are hot and heavy about finding a new home, then go get preapproved.
Typically, any lender will need the following minimum documentation when you are meeting up to get preapproved. Collect this data and contact us if you need a good referral for a lender to get started.
• Your driver’s license;
• Your most recent two years’ tax returns and/or W-2s;
• Your most recent two months’ bank statements (all pages, all accounts);
• Your most recent two months’ statements for all asset (stock, 401K, IRA, etc) accounts;
• Your most recent two months’ pay stubs;
• Authorization to pull your credit.
Getting Your Credit Score Higher
There are a lot of myths concerning credit reports and what goes into determining your score. Google “FICO” if you don’t believe me. Everybody has heard something from someone, and most of the time the info is false. So be skeptical, and do your homework. That said, here are a few pointers on maintaining and possibly improving your score before you get preapproved. For some, nothing short of professional credit
FYI: When it comes to boosting your score, consider the following steps:
• Keep credit card balances below 30% of the total credit limit. This will help boost your score, especially if you are consistent about it. This goes for all of your credit cards. If you are unable to pay the balance down below 30%, try calling your credit card company and get a credit limit increase so that your balance is proportionally lower, relative to the limit.
• Do not make any large consumer expenditures on credit before a home purchase. This sounds obvious, but you would be surprised how many people buy a car, a luxury, or a big appliance on credit, pushing up their debt and reducing their ability to borrow prior to buying their home. (PS: Buy the stainless steel appliances after you close escrow!)
• Maintain credit lines, even ones with zero balances. If you really want to cancel a card, it’s not going to make that big of a deal (I did for a department store card that I opened to save on one large purchase), but for the most part keep your credit lines open.
• Don’t be late. Late payments kill, especially those that are past due for 60 and 90+ days. Pay your bills on time all the time. You will not get a loan with more than 1 late payment within the past year! Get in line, pay on time, and call the professional credit repair referral found in the resource guide in the back of the book if you need help fast.
• If you see a discrepancy on your report that you think you can fix yourself, go to the big three credit bureaus’ websites (Transunion, Equifax, and Experian) and look for the links to reporting an error on your credit report. Depending on the circumstance, they are usually pretty good at addressing errors within a few weeks. For anything more serious, a professional credit repair company is generally worth the cost.
FYI: Questions to Ask a Lender
When interviewing a lender, these are some of the must-ask questions. Make sure the lender understands that you are trying to find the most competitive rate, but that you are also looking for the professional that can provide the best service, advice, and fit for the loan program of choice.
• “Can you provide a good-faith estimate?”
• “Do you work with first-time homebuyers a lot?”
• “How long have you been in this field?” (A minimum of two years is a must!)
• If you’re addressing a mortgage broker, “How many banks do you work with or have access to?” Anything close to 30 is fairly decent, and over 50 is super.
• If you’re talking to a banker, ask “Why should I choose a large direct lender over a mortgage broker?” Also, “Do you have any special promotions or incentives for home loans right now?”
Michael Wolf is a Realtor, GRI and author and currently practices in the San Diego area. His company is Ascent Real Estate, and his business partner and fianc�e Jessica
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