Finding Your Best Lender

Going with a Mortgage Broker or Direct Lender?

Yes, thousands of mortgage lenders are out there. However, not anywhere near that many mortgage lenders are good lenders or the best lenders for you. Although we encourage you to find the lowest-cost lenders, we must first issue a caution: If someone offers you a deal that’s much better than any other lender’s, be skeptical. Such a lender may be baiting you with a loan that doesn’t currently exist, one that has hidden charges or other onerous terms, or one for which you can’t qualify.

Also, if you think back to other services or products you’ve bought, you know the wisdom of considering the features and services you receive in addition to cost. Even if you find a low-cost loan from a lender with a reputation for great service, if the loan doesn’t meet your needs and personal situation, it’s not the best loan for you.

One of the first decisions you face in the loan-shopping process is deciding whether to shop on your own or to hire a mortgage broker to do the mortgage shopping for you. The following sections help you make that decision.

Considerations when using brokers

Mortgage brokers are intermediaries, independent of banks or other financial institutions that have money to lend. Mortgage brokers don’t have money to lend nor can they say yay or nay to your loan application. They do, however, originate, that is, process loan applications.

Mortgage brokers will tell you that they can get you the best loan deal by shopping among many lenders. They may further argue that another benefit of using their services is that they can explain the multitude of loan choices, help you select a loan, and help you wade through the morass of paperwork required to get a loan. Some of the time, these assertions are accurate; but you need to know at what cost and how well these services are provided.

If your credit history and ability to qualify for a mortgage are marginal, a good mortgage broker can help polish your application and steer you to the few lenders that may offer you a loan. Brokers can also help if lenders don’t want to make loans on unusual properties that you’re interested in buying. For example, many lenders don’t like dealing with shared-ownership housing options such as mixed-use properties (residential/commercial), co-ops, and tenancies-in-common (see Chapter 6 ).

How brokers are paid

So how much do you pay a mortgage broker to get you a loan that meets your needs? Mortgage brokers typically receive a slice of the amount that you borrow — usually about 1 percent, although it may be as low as 0.5 percent on big loans and as much as 2 percent on small loans. (You may actually make an out-of-pocket payment directly to the broker.)

Thus, if you’re going to use a mortgage broker, you must keep in mind that conflicts of interest are inherent, because such brokers are paid a commission just like stockbrokers and salespeople at car dealerships. For example, the more you borrow, the more the mortgage broker makes. Furthermore, some lenders pay higher commissions on certain loans (their more profitable ones, not surprisingly) to encourage mortgage brokers to push them. The actual lender may also pay the broker an additional fee if you pay a higher interest rate.

If you use a broker, make sure that all commissions, fees, and lender rebates are disclosed to you in writing before you commit to go forward with a specific loan.

Do brokers add to your costs?

Although mortgage brokers earn their living from commissions, that doesn’t necessarily mean that using a mortgage broker always adds to your costs of obtaining a loan. The interest rate and points for most mortgages obtained through a broker may well be the same as you’d pay if you had gotten the same loan from the same lender directly. Lenders reason that they can afford to share their normal fees with an outside mortgage broker who isn’t employed by the bank, because if you had gotten the loan directly from the bank, you would have had to work with and take up the time of one of the bank’s own mortgage employees.

Some lenders, including those with the lowest rates, don’t market through mortgage brokers. And sometimes a loan obtained through a mortgage broker can end up costing you more than if you had gotten it directly from the lender; for example, if the mortgage broker is taking a big commission or extra fees for himself.

If you’re on the fence about using a mortgage broker, take this simple test: If you’re the type of person who dreads shopping and waits until the last minute to buy a gift, a good mortgage broker can probably help you and save you money. A competent mortgage broker can be of greatest value to people who don’t bother shopping around for a good deal or folks who may be shunned, due to credit blemishes, by most lenders.

Even if you plan to shop on your own, talking to a mortgage broker may be worthwhile. At the very least, you can compare the mortgages you find with the deals the brokers say they can get for you. Be aware, though, that some brokers tell you only what you want to hear — that they can beat your best find. Later, you may discover that the broker isn’t able to deliver when the time comes. If you find a good deal on your own and want to check with a mortgage broker to see what he or she has to offer, you may be wise not to tell the broker the terms of the best deal you’ve found. If you do, more than a few brokers always come up with a mortgage that they say can beat it.

Coauthor Robert firmly believes that you will get your best terms only if each potential lender or mortgage broker knows that she has to give you the best combination of interest rate and points, without you telling her what loan terms her competitors offered you. If you tell the lender or mortgage broker what your best deal is, not surprisingly many will just barely beat that offer. Remember that one potential loan can outshine another in other ways — for example, maybe one lender is willing to give you a loan rate lock for 60 days at no cost. As discussed in Chapter 9 , interest rate locks can be valuable because they avoid the all too common problem of your interest rate rising during your loan escrow.

Developing a list of brokers and lenders

Whether you choose to work with a mortgage broker or go to lenders directly, develop a short list of the best candidates for comparison purposes. The following sections offer our time-tested methods for making that short list as strong as possible, thus maximizing your chances of ending up with the cream of the crop.

Collecting referrals

You can find plenty of mortgage lenders and brokers in most communities. Although having a large number of choices means competition, you may have a hard time deciding where to turn.

Of the various major institutional players in the mortgage marketplace — banks, savings and loan associations, credit unions, and mortgage bankers — only mortgage bankers focus exclusively on mortgages, and the best mortgage bankers offer quite competitive rates. Smaller banks, credit unions, and savings and loans can have good deals as well. The bigger banks and online lenders, whose names you’re likely to recognize from the millions they spend on advertising, may not offer the best rates, but don’t eliminate them without at least a phone call or online quote.

Real estate agents and others in the real estate trade, as well as other borrowers you know, can serve as useful references for steering you toward the top-notch mortgage lenders and away from the losers. If you do a good job selecting a real estate agent (a process described in detail in Ray Brown and coauthor Eric’s bestselling books Home Buying For Dummies and House Selling For Dummies, published by Wiley), your agent should help. Also consult people you know who can recommend the best people in real estate and related fields — this list could include tax advisors, attorneys, financial advisors, property managers, property inspectors, contractors, real estate investors, title insurance companies, escrow companies, and so on.

Never blindly accept someone’s lender recommendation as gospel. Some people in the real estate trade — or any other trade for that matter — may simply refer you to others who’ve sent them business and may not offer the best mortgage loans. For example, Mike the mortgage lender may always refer people needing tax advice to his buddy Tom the tax advisor. So when one of Tom’s clients is looking for a mortgage lender, Tom returns the favor, even though he hasn’t the slightest clue about the mortgage rates and types of loans his buddy Mike offers.

Likewise, be aware that some real estate agents may refer you to lenders that don’t have the best mortgage rates and programs in town. These real estate agents may not be up-to-date with who has the best loans, may not be into shopping around, or may have become comfortable doing business with certain lenders. Some real estate sales firms may have a mortgage company owned by the same parent company. Be cautious if you’re directed to its in-house lender. You get the idea.

In addition to asking people in real estate–related fields for mortgage lender or broker referrals, also ask your friends and colleagues who don’t work in real estate and related fields. You may get some excellent ideas for whom to contact, especially if your friends have recently shopped for a mortgage loan in your area.

Just as we caution you about forging ahead with mortgage lenders recommended by real estate folks, we also urge some skepticism about referrals from your aunt Martha and coworker Charlie. When it comes to mortgages, Martha and Charlie may be complete nitwits. They may not know the difference between an adjustable-rate mortgage and an aardvark!

Whenever somebody recommends a specific mortgage lender or mortgage broker, always ask why. The answers often prove enlightening. A world of difference stands between someone saying that she chose a given lender because it’s the same bank where she has her checking account and she did no shopping around versus someone who chose a lender from among ten she considered because that lender provided lower rates and better service.

Finding lender lists

Another method for adding names to your menu of prospective lenders is to peruse the various lists of lenders you may find in print or by using your computer:

Bankrate and HSH Associates: These companies provide lists of lenders’ rate quotes for most areas. Visit their websites, www.bankrate.com and www.hsh.com (which we discuss in Chapter 8 ). Note that both of these sites receive compensation from lenders on their websites.
The Internet: Numerous websites hawk mortgage loans these days. Although you may find a good deal, you may also end up in the hands of a not-so-hot lender or worse. Please be sure to read Chapter 8 , in which we discuss how to use (and not be abused by) mortgage Internet sites.
Newspaper real estate sections: Most larger newspaper real estate sections carry tables of selected lenders’ mortgage loans (look in the weekend or Sunday edition). Don’t assume, however, that such tables contain the best mortgage loans available. Many of these tables are sent to newspapers for free by publicity-seeking firms that distribute information to mortgage brokers. With that in mind, go ahead and peruse these tables for lenders offering the most competitive rates.

Interviewing and working with mortgage brokers

In this section, we explain how you can find your way to good mortgage brokers. Be sure to get answers to the following questions when choosing a mortgage broker to work with (also, see the next section is “Figuring out how to interview lenders .”):

How many lenders does the broker do business with, and how does the broker stay up-to-date with new lenders and loans that may be better? Some mortgage brokers, either out of habit or laziness, or for higher commissions, send all their business to just a few lenders instead of shopping around to get you the best deals. Ask brokers which lenders have approved them to represent them. Some mortgage brokers represent only one or two inconsequential lenders — not the kind of broad representation you need to find the best mortgage.
How knowledgeable is the broker about the loan programs, and does the broker have the patience to explain all of a loan’s important features? The more lenders a mortgage broker represents, the less likely the broker is to know the nuances of every loan. Ask how long the broker has been in business. Be especially wary of a salesperson who aggressively pushes certain loan programs and glosses over or ignores the important points we discuss in this book for evaluating particular mortgages.

Head for cover if a prospective mortgage broker pushes you toward balloon loans (see Chapter 6 ) and negative amortization loans (see Chapter 5 ), which thankfully have been going away in recent years. Balloon loans, which become fully due and payable a few years after you get them, are dangerous, because you may not be able to get new financing and could be forced to sell your property. Negative amortization occurs when your outstanding loan balance increases every month, even though you keep making your regular monthly mortgage payments — double ouch!
What’s the mortgage broker’s commission? As we mention in the last section, mortgage brokers typically get a commission in the range of 0.5 to 2 percent of the amount borrowed. The commission a mortgage broker receives from the lender isn’t set in stone and is negotiable, especially on larger loans. On a $75,000 loan, a 1 percent commission comes to $750. The same commission percentage on a $300,000 loan (four times bigger) amounts to a $3,000 cut for the broker. A four-times-larger loan doesn’t take four times as much of the mortgage broker’s time. You have every right to ask the mortgage broker what her take is. Ask for this information in writing. Remember, it’s your money. You should negotiate with mortgage brokers, especially on larger loan amounts. Remember that some brokers have been known to push programs with super-high interest rates and points, which provide fatter commissions for the broker. This problem occurs most frequently with borrowers who have questionable credit or other qualification problems.

Figuring out how to interview lenders

In Chapter 9 , we provide some handy-dandy worksheets that allow you to compare various lenders’ mortgage programs. Our goal in this section is to help you narrow the list of candidates you’re considering. As you’re screening lenders you may work with, you can also begin finding out about loan programs, interest rates, and other loan terms. We strongly recommend that you read Chapter 9 before you start calling lenders or mortgage brokers.

Whether you’re shopping for a mortgage broker or a lender, the following questions should come in handy:

What types of loans does the mortgage lender or broker specialize in? The right lender for you is one that understands and has lots of experience with the type of real estate property that you want to finance. For example, if you’re buying a co-op in a big city, a lender that focuses on lending to single-family home and condo owners in the surrounding suburbs likely won’t have the best programs and be able to deliver the mortgage you need on time. This is a concern whether you’re talking with a mortgage lender or mortgage broker but comes up more often with brokers. In the quest to find the loan with the lowest possible interest rate, an inexperienced mortgage broker may end up trying to place your loan with a lender that doesn’t offer mortgages for the type of property you want to buy.
How does the lender’s loan approval process work? Specifically, who’s involved in the approval, and where are these people located? The best lenders approve loans locally and don’t send your loan application to a mammoth, out-of-state, corporate headquarters where some faceless committee (or computer program) decides on the fate of your loan application. Good lenders should roll up their sleeves to help you get loan approval, warn you in advance of possible problems, and suggest solutions that will help you get the best loan and terms possible. Robert has found that mortgage brokers with many years of experience are often your best option. For example, if you find a mortgage broker who was in the mortgage business in the early 2000s and was able to survive continuously through the economic challenges of the late 2000s through until today, consider using that broker.
How competitive are the lender’s rates? You won’t be able to answer this question well until you talk with various lenders and comparison shop. As we say earlier in this chapter, just because lenders boast about low rates doesn’t mean that they can deliver on their promises or that their lower rates will make up for shoddy service. If you narrow your selections down to a couple of lenders or brokers, don’t hesitate to ask the lender that you like best to match the rate of the lowest-priced lender you find. Loan rates and charges are negotiable. You have nothing to lose by asking.

Be sure to ask the lender for a written estimate of all loan costs and fees prior to signing your loan application. Getting such estimates from all lenders you’re considering enables you to cut through the inevitable sales pitch you hear from lenders about how competitive their rates are. See Chapter 9 for more information on comparing various lenders’ mortgage offerings.
Does the lender speak your language and candidly answer your questions? Good, ethical mortgage lenders and brokers can clearly explain their loan programs without using jargon or verbal obfuscation. They’ll candidly disclose all fees and answer all reasonable questions. A major red flag is if you ask a question and don’t get a follow-up response, which either indicates that you’re dealing with someone evasive or who lacks follow-up. Good lenders meet deadlines, which is especially critical if your loan is for a home purchase. Missed deadlines can sabotage your purchase. If you’re refinancing to lower your loan rate, delays cost you money and could cause you to miss out on capturing low rates if rates rise during a lender’s delays.

In addition to questioning lenders and mortgage brokers you’re considering working with, after you narrow down your search to the two or three strongest candidates, ask for customer references. Use the same questions in the preceding list to select the winner.

Seller Financing: The Trials and Tribulations

In addition to borrowing through traditional mortgage lenders and brokers, you may find some house sellers offering to lend you money if you agree to buy their home. Why? Because the sellers may believe that the loan will help sell their house faster and at a higher price and provide a better return on their investment dollars.

And therein lies the reason you should be highly cautious about seller financing. Generally speaking, sellers offering houses for sale with financing tend to be selling problematic houses with major flaws. It’s also possible that the property may be priced well above its fair market value. Alternatively, however, the sellers may be offering financing because the local real estate market is sluggish or because they can’t think of better ways to invest the proceeds of sale. Or they may be facing a large income tax bill because they have a very low tax (cost) basis in the property and want to sell by using an installment sale to spread their gain over several tax years. These latter reasons can work to your advantage.

Considering/soliciting seller financing

Some house sellers who aren’t offering to provide financing may consider it; you won’t know until you ask.

We advocate considering seller financing under the following conditions:

The property doesn’t have fatal flaws. As explained in Eric and Ray Brown’s Home Buying For Dummies book, avoid buying a house with incurable defects. Always have an independent, qualified, credentialed professional conduct a thorough inspection before you sign the Purchase and Sale Agreement and heed their advice.
You can buy the property at its fair market value or less. Seller financing is often offered on properties that aren’t selling. Property that’s gathering cobwebs is generally overpriced. Saving 1 percent on a seller-financed loan won’t mean much if you grossly overpay for the house. Here, if the professional independent appraisal can’t support the agreed-upon purchase price, then you know you’re not getting a deal.
The cost of the seller-financed loan is as low as or lower than you can get through a traditional mortgage lender. Why borrow from the seller if it doesn’t save you money? Of course, if you have credit problems that make borrowing from traditional lenders prohibitively costly or impossible, you have another good reason to borrow from a seller.

Overcoming borrower problems

You may be tempted to consider borrowing from a seller because of problems with your credit or financial situation. Smart house sellers will pull a copy of your credit report. If they discover blemishes, they won’t grant you a loan or will charge you a much higher interest rate. Be sure the warts on your report are correct. Credit reporting agencies and creditors who report information to the agencies have been known to make mistakes.

Because you followed our advice in Chapter 3 and obtained copies of your current credit report from all three major credit reporting agencies, be sure to provide a written and detailed explanation of any credit report problems at the time you apply to the sellers for a loan if you know that they’re going to pull a credit report. Another way to address a seller’s concerns is to get a cosigner, such as a relative, for the loan.

If your income is low, you can try to accumulate a larger down payment to placate the lender or get a relative with sufficient income to cosign the loan. You may also be able to get a cash gift toward your down payment from a friend, employer, or family member, but the lender will require a “gift letter” indicating that the money isn’t a loan and no repayment or other future services is expected or implied. You can also consider an FHA loan or, if you’re a veteran, a VA loan. In Chapter 2 , we provide comprehensive coverage of ways to overcome these problems.

Negotiating loan terms

Call several local lenders to find out the rate they’re charging for the size and type of loan that you’re contemplating (for example, 15- or 30-year fixed-rate mortgage; first or second mortgage; or owner-occupied or investment/rental property). Be sure to ask about all the fees — application, processing, appraisal, credit report, points, title policy, recording, and so on.

If you’re in good financial health and can easily qualify to borrow from a traditional lender, you should expect better terms through seller financing than the traditional mortgage lenders are offering you. How much better depends in large part on how good at negotiating you are! Aim for a 1 percent reduction in the ongoing interest rate as well as on the upfront fees. For example, if traditional lenders are charging 6 percent plus 1.5 points (percent) upfront, aim to pay no more than 5 percent with 0.5 points.

Deciding whether to provide seller financing

When the time comes for you to sell your house, offering seller financing may broaden the pool of potential buyers for your property. Traditional mortgage lenders are subject to many rules and regulations that force them to deny some mortgage applications. However, making loans to borrowers rejected by banks can be risky business.

To even consider making a loan against the house you are selling, all the following conditions should apply to your situation:

Without the cash you’re lending to the buyer, you should still be financially able to purchase the next home or property you desire. Most house sellers need the proceeds from the sale of their current property to be able to buy their next one.
You’re willing to do the necessary work to assess the creditworthiness of a borrower. A smart mortgage lender would do the same before risking his money on a loan, so why wouldn’t you?
If the borrower defaults, you’re in a financial position where you can afford to lose much or even all of this money. If the borrower does stop making monthly payments to you, you may have to initiate the costly process of foreclosure. You’ll get the home back, but it may not be in the same pristine condition as it was when you sold it.
You desire income-oriented investments and are in a low tax bracket. The interest income on a mortgage loan is taxable, so if you’re in a higher tax bracket and you want interest income, you’re probably better off investing in tax-free municipal bonds.

Only if all these conditions apply should you consider extending a financing offer to a prospective buyer of your house. If you’re going to do that, you should then do what every smart mortgage lender would do: Thoroughly review a prospective borrower’s creditworthiness. In Chapters 2 and 3 , we explain how lenders do that.