When shopping for a mortgage, many of us assume the best thing to do is call a list of lenders, ask them for their interest rates, compare the results, and go with the cheapest option. I know this because I witnessed it all too often during my experience in the industry. Unfortunately, if you’ve been through the process before, you’ve probably realized this doesn’t work out the way you’d expect when looking for the best mortgage lenders.
Not only is it challenging to pry information out of a lender, but there are far more factors to consider than the mere interest rate, closing costs, or APR. For instance, many people ask, How much down payment for a house, when starting the process? Others ask about the different types of mortgage loans. For example, A conventional loan vs. FHA vs government-backed mortgages. Others want to know what credit score is required for a home loan. Or, what credit score is needed to refinance a house?
Furthermore, companies that offer cheap interest rates right off the rip are worthy of our skepticism. It’s important not to let an alluring price lead you to make a decision that will cost you time, money, and headaches down the road. Just as it’s equally important not to let a big brand name trick you into thinking they provide a reliable product or service.
To assist with this dilemma, and to avoid biffing up the financing on what is perhaps the largest single investment you will make, here are a few items to help you discern a good mortgage company from a bad one.
Types of Mortgage Lenders
Choosing the right lender for your home loan means first understanding the types of mortgage lenders out there.
- Correspondent lenders: Correspondent lenders are mortgage lenders who originate and fund their loans but then sell them to larger financial institutions or investors. They act as intermediaries between the borrower and the ultimate lender. Correspondent lenders typically have the ability to underwrite and approve loans based on their own guidelines, but they must adhere to the purchasing guidelines of the larger institutions or investors to whom they sell the loans.
- Direct lenders: Direct lenders are mortgage lenders that fund loans directly to borrowers without the need for intermediaries. They have their own funds or access to capital, allowing them to lend money directly to borrowers. Direct lenders often have more flexibility in terms of loan products and underwriting criteria, as they are not bound by the guidelines of larger institutions.
- Hard money lenders: Hard money lenders are typically private individuals or companies that provide short-term loans, often with higher interest rates, to borrowers who may not qualify for traditional financing. They primarily focus on the value of the property being used as collateral rather than the borrower's creditworthiness. Hard money lenders are commonly used for real estate investment projects or when borrowers need quick access to funding.
- Mortgage brokers: Mortgage brokers act as intermediaries between borrowers and multiple lenders. They work with borrowers to understand their needs and financial situation, and then shop around on their behalf to find the best loan options from various lenders. Mortgage brokers earn a commission from the lender when a loan is closed. They can offer borrowers a wider range of loan options and often have access to wholesale rates from lenders.
- Portfolio lenders: Portfolio lenders are financial institutions, such as banks or credit unions, that originate and hold mortgage loans in their own portfolio rather than selling them to other investors. They have the ability to set their own underwriting guidelines and may have more flexibility in terms of loan products and approval criteria. Portfolio lenders often have a vested interest in building long-term relationships with borrowers.
- Wholesale lenders: Wholesale lenders are financial institutions that work exclusively with mortgage brokers and not directly with borrowers. They offer mortgage products at wholesale rates to brokers, who then sell these loans to borrowers. Wholesale lenders typically have a wide range of loan options and competitive rates, which mortgage brokers can offer to their clients. They rely on mortgage brokers to originate and process loan applications.
Things to Consider When Choosing a Mortgage Lender
With so many options available for mortgage lenders, it can be difficult and confusing to feel confident that you're working with the right lender. Here are key areas to consider with mortgage lenders.
Many companies rely heavily on massive marketing campaigns to acquire new clients but once you’re signed on they could care less about you. Other companies focus more energy on achieving positive reviews and customer feedback in the hopes that they will attract clientele organically. For instance, those companies may offer a free FHA loan calculator.
Though there is no definitive answer to which is more profitable, as a consumer, the latter is undoubtedly more beneficial.
The worst possible scenario is finding out, after the fact, that you chose poorly.
In the mortgage industry, it can be very hard to recognize the difference. You might assume it’s as simple as reading a handful of reviews on Yelp; however, for a process heavily regulated and precarious as home financing, almost every company is going to have a litany of poor reviews, and it's not easy to determine who has a greater average of positive outcomes this way.
For better information, I suggest looking for reviews based on survey data. Here is a list of my favorite mortgage company reviews...
One easy way to find out if a lender is trustworthy is to ensure they are not being sued or under investigation for crimes, scandals, or other malicious behavior. This is unfortunately quite common in financial services, so a simple Google search of the institution is a good place to start. Remember that this is just a piece of the puzzle, though. Just because a company might appear clean, it doesn’t automatically make them trustworthy.
Prepayment penalties are a charge levied by the lender to discourage you from refinancing or paying your principal down faster. These are bad, and my advice is to avoid them. Companies that accept prepayment penalties do so for a reason.
Whether it’s to keep you in a particular interest rate or program or to keep you from refinancing with another lender. Though they are generally applied only for a short period of time to protect a lender from losing money, there is rarely, if ever, a scenario where a prepayment penalty is good for a borrower. Additionally, in an ever-changing economic environment, it’s always good to keep your options open.
The good news is, it’s really easy to avoid prepayment penalties. As of now, lenders are required to offer borrowers a Loan Estimate (LE) before any agreements are signed. The LE is a standard format document designed to make it much harder for institutions to deceive borrowers by hiding things, like miscellaneous fees, balloon payments, or prepayment penalties.
Note that the first page of the loan estimate tells you whether your loan includes a prepayment penalty.
Pro-Tip: When shopping for a mortgage, always ask for a “Loan Estimate” from every lender you work with. “Good faith estimates,” loan worksheets, or word of mouth are not Loan Estimates and are therefore not legally binding.
This is a relatively new concept, and it comes with many different labels. As a result of the highly competitive nature of the lending industry, some companies are not only seeking to acquire new clients but are also taking new measures to retain their current ones. The idea of loan tracking is to retain clients when interest rates fall.
By tracking the market and the loans they service, companies can inform clients when it makes sense to refinance into a new rate, program, or term. In the end, it’s a win-win. You save money and your lender retains your business.
As an added bonus, you don’t have to keep one eye glued on the market. With that said, always make sure you verify with other lenders that you are getting a good deal before agreeing to refinance with your current one.
How is “servicing” different than “service,” you ask?
“Servicing” has a very specific meaning in the mortgage industry. The company that services your loan is the company that handles your monthly payments, deals with your phone calls, operates your escrow accounts, and basically handles everything from the closing table onward. One thing many homeowners don’t realize, however, is that servicing rights are often transferred from one company to another.
This means that even if you worked with Joe’s Mortgage Shack to close your loan, you will most likely end up paying your monthly bills to an entirely different institution. This transfer of servicing rights can happen multiple times over the life of a loan. The implication is, even though you did hours of research to find the perfect lender, your loan could be sold off to Spirit Airlines for mortgage servicing, and nobody wants that.
The good news is, there are companies out there that will commit to servicing your loan instead of transferring it. Finding these companies is always a priority for me, but they tend to carry a higher ticket price, so be sure to leverage other offers.
Start the Mortgage Process Today With Benzinga's Top Morgage Lenders
Choosing the Right Mortgage Broker for You
When you call around, get a pre-approval, or are shopping loan options be sure not only to ask about the items above but also to do a little research beforehand so that you aren't susceptible to sleazy sales tactics. A little due diligence can save a mountain of money and headaches down the line.
Assuming you’ve done your due diligence, and have found a few companies that offer you the value you’re looking for. Great! But remember that this means nothing unless it comes with a nice price tag.
Ideally, you want to find three companies you can trust and leverage them against each other to get the best deal. Learn more on How to Shop for a Mortgage (Like an Insider) here.
Frequently Asked Questions
How do I get pre-approved?
First, you need to fill out an application and submit it to the lender of your choice. For the application you need 2 previous years of tax returns including your W-2’s, your pay stub for past month, 2 months worth of bank statements and the lender will run your credit report. Once the application is submitted and processed it takes anywhere from 2-7 days to be approved or denied. Check out our top lenders and lock in your rate today!
How much interest will I pay?
Interest that you will pay is based on the interest rate that you received at the time of loan origination, how much you borrowed and the term of the loan. If you borrow $208,800 at 3.62% then over the course of a 30-year loan you will pay $133,793.14 in interest, assuming you make the monthly payment of $951.65. For a purchase mortgage rate get a quote here. If you are looking to refinance you can get started quickly here.
How much should I save for a down payment?
Most lenders will recommend that you save at least 20% of the cost of the home for a down payment. It is wise to save at least 20% because the more you put down, the lower your monthly payment will be and ultimately you will save on interest costs as well. In the event that you are unable to save 20% there are several home buyer programs and assistance, especially for first time buyers. Check out the lenders that specialize in making the home buying experience a breeze.
Get Ready for Take Off
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