Choosing a Lender

Choosing a Mortgage Lender

A lender is critical to the cost and success of your home purchase. For one thing, he holds the purse strings. For another, his 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 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.

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, but beware that you might need to enter your name and address to see rates.
• 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 clsing 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, or via customer reviews online. 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.”

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. Get your referrals before you head for the pre-approval.

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. Many sites offer estimates from lending companies. Sometimes you need to give personal information (such as your Social Security number), but usually you can get a quote without having to talk to anyone. Other sites will 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.
• 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.

Borrower Beware

Many states have a requirement that loan originators be licensed, a process that often includes testing, as well as information on criminal history and bad credit on the part of the applicant. Check on your state government Web site to see if the state requires licenses and has a list of brokers who are licensed.

What to Ask Mortgage Lenders

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.

About the Lender

• Are you licensed by the state?
• Whom do you represent (e.g., a bank, broker, finance company)?
• What are your loan programs? Do you offer VA loans (for example)?
• What is the par rate (the actual rate for a particular loan) for a 30-yr. fixed loan? (He should have the answer at the tip of his tongue.)
• Can you estimate and explain your fees?
• Would you get approval for my loan locally?
• Are you going to hold this loan or sell it?
• 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?
• Do you sell my information?

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.

About the Loan

• What is the interest rate you are offering, and how did you arrive at it?
• How do I know this is the best rate?
• How will the rate change over the life of the loan?
• If an ARM, what is the worst case scenario I could face when the rate resets?
• Are you locking in my rate? For how long? What does the lock cost me?
• Could you estimate closing costs for my loan?
• I need to see what I will pay in addition to the principal. Explain an APR and what is it for this loan?
• What is your income from this loan?
• What am I paying in points?
• What is a Yield Spread Premium and am I paying it as part of this loan? If so, please explain why.
• What are my monthly payments?
• Do I need to pay PMI?
• Are there any prepayment penalties on this loan?
• What index is this loan based on, and how does it work for this loan?
• For a Reverse Mortgage, who will I be working with after closing?
• Here’s my timeline. Are you certain you can get this done in time for closing?

Mortgage Fears, Mortgage Rates

#1

Q. Save me! I am 80 years old and running out of money. I want to get a reverse mortgage on my mansion so I don’t have to go to a retirement home, but I’m afraid my greedy kids will kill me so I don’t tap into the equity of my house.

A. A retirement home might be preferable to being murdered, don’t you think? But a reverse mortgage might help you pay your monthly bills, including a security system to keep out your dysfunctional family. You still have to pay for mansion maintenance, however, so make sure you can afford that.

#2

Q. I have credit card debt coming out my ears. (Okay, so I shouldn’t have bought that third plasma TV.) Can I use the equity in my house to borrow money to pay off my cards?

A. Ah, the joys of consumerism. Well, you can most likely get a Home Equity Line of Credit to pay them off, but you are using your house as collateral, so be sure you swear off the cards in the future, or you could end up losing the house. A HELOC seems easy — you have a checkbook to use up to the cap on your loan — and in fact it can almost be too easy if you are a spendthrift.

#3

Q. I thought ARMs are something you hold your sweetie with, and indexes are found in the back of books. I hate acronyms; how can I ever understand mortgages?

A. Time to grow up. ARMs are not necessarily loving, and indexes are found in big stone buildings in D.C. and London. Unfortunately, you need to learn about mortgage types, and how they are structured if you want to get a good mortgage with the lowest rate possible. A good lender should be able to fill you in.

Mortgage Fears, Mortgage Rate Tips and Answers

#1

Q. I am scared of those ARMs and their fluctuating rates. I know that they are cheaper than a fixed mortgage, but … Should I be more brave and go for an ARM?

A. Not necessarily. If security is important to you, then shop for the best fixed-rate mortgage out there. Pay attention to the interest rates and how they are fluctuating, and be sure to get your lender to lock-in, or guarantee the interest rate if the loan is closed within a specific time.

#2

Q. Eek! My lender says I have to pay Private Mortgage Insurance on my mortgage. How much is it going to be anyway?

A. Does your lender wear a helmet when he skis? It’s the same thing, he wants to protect himself in case you default on your loan. You can expect to pay 1-5 percent of the total mortgage with the initial premium, and possibly a monthly fee on top of that. Be sure to ask that cautious lender why he is requiring PMI.

#3

Q. I’m a coward and I know it. My lender showed me an amortization schedule that scared me to death. Almost everything I pay at the beginning of my loan goes to the bank. What’s up?

A. Looking at an amortization schedule can make the best of us squirm, but there’s no way to avoid the truth: Your loan payments are spread evenly over a period of time (amortized), and the interest takes up a bigger chunk of the payment at the beginning. Things look up toward the end of the life of the loan: Your payments go mainly toward the principal then.