We hear it all the time, “you need to be pre-approved for a home loan before making an offer on a house.” In any market, and especially in our current market, this is true. It is nearly impossible to get your offer considered, not to mention accepted, if you can’t show that you have the means to follow through with the purchase. While this is true, there isn’t much information about where to go to get the best rate and terms. Most real estate agents will tell you that they have a lender that they work with, but is this someone you can trust? Are you making the wisest decision by not doing some research?
So, I’ve done some research for you and I’d like to share what I’ve found out.
There are typically three places you can go to get financing to purchase a home; the bank, a mortgage broker or a direct lender. I’m going to go through each one and explain the benefits and costs to each. My hope is that this will help you decide which one is best for you.
First of all, the bank. When you walk into any bank, you will no doubt see advertisements for mortgage products. The rate is advertised somewhere in the bank and there is usually a mortgage specialist on hand to talk to should you have questions. The upside to obtaining a loan from your bank is trust. Let’s face it, you give your money to the bank every month. They know everything about you; where you spend, how much you make, what kind of car you drive, etc. The rates they offer are disclosed right up front, although these rates may changed based on your particular credit score, debt ratio, etc.
In 2008, when we had the housing crisis, the Housing and Economic Recovery Act (HERA) was signed into law. A key component of this act was the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) and it was designed to enhance protection for the consumer. However, since it was the banks that pushed this legislation, they exempted themselves from it. So, in other words, they do not have to have the education that is required by other mortgage lenders. Banks do, on the other hand, provide their own money to fund your loan and therefore, you will make your payments directly back to the bank without your mortgage being sold to a mortgage servicer after you sign.
Secondly, you have the mortgage brokers. As you can assume, a broker is a intermediary who shops around for the best loan package to fit your situation, acting on your behalf. Brokers get paid outside of the loan so you will be charged fees. The benefit to a broker is that he or she will shop around for a loan with the best terms. The broker doesn’t possess the funds to loan to you, but finds the lender for you, which could be a bank as mentioned above. A broker hires a processor that handles the loan process and deals with the end lender, so there tends to be more people involved in the process which can impede communication. When you obtain a loan through a broker, the lender that you ultimately get may sell the loan or may keep it, it just depends upon who did the final lending. Unlike obtaining a loan at a bank, where you “buy” a loan at the retail price, the broker shops around in the wholesale market, and you will get the lowest rate the broker can find for you.
Lastly, we have the direct lender, often referred to as a mortgage bank or a correspondent lender. They lend their own funds, and may have all their processors and underwriters in house. However, they do not usually service the loan, and they will sell it to a servicing company shortly after they fund your loan. These types of lenders are flexible and have options that many prospective buyers need. The direct lenders are generally able to close a loan in a shorter period of time than a bank. This is a great option if you don’t mind not knowing to whom you will ultimately be make your payments.
My advise to you? Well, it depends on your unique situation. It is best to talk to all three types, find out what type of package is best for you and then decide on the level of service for which you are looking. Some direct lenders and brokers tend to have a more personal service and are worth the few hundred dollars it takes for them to walk you through the process. If you’ve purchased homes in the past, and you are more experienced then perhaps don’t need the additional service. The most important thing is that you find someone you feel comfortable with, that provides you with a full disclosure of the fees and costs to borrow, and one that offers a comparable market rate.