What kind of lender is best?
If you ask a loan officer, “What kind of lender is best?” the answer will be whatever kind of company he works for, and he will give you a list of reasons why. If you meet the same loan officer years later and he works for a different lender, he will provide you with a list of reasons why that type of lender is better.
REALTORS® will also have differing opinions, and those opinions have and will continue to change over time. In the past, it seemed like most would recommend portfolio lenders. Now, they usually recommend mortgage bankers and mortgage brokers. They often direct you to a specific loan officer who has demonstrated a track record of service and reliability.
This article discusses the advantages and disadvantages of different institutions, not individual loan officers. However, it is often more important to choose the correct loan officer, not the institution. The loan officer has many responsibilities: to act as your representative and advocate for the lender he works for or the institutions he brokers loans to. You want someone who has proven dependable and ethical in the past.
Regarding the institutions, the truth is that each type of lender has strengths and weaknesses. This does not even consider the variety of other factors influencing whether a lender is good or bad. Quality can vary depending on the loan officer, the support staff, which branch or office you are obtaining your loan from, and various other factors.
Savings & Loans are quite often portfolio lenders, as are some banks. Portfolio lenders generally promote their portfolio loans, usually adjustable-rate loans. They will often pay more compensation to their loan officers for originating a portfolio product than a fixed-rate loan. You may also find that they are not as competitive as mortgage bankers and brokers in the fixed-rate loan market.
However, it is often easier to qualify for a portfolio loan, so borrowers who may not be eligible for a fixed-rate loan may be able to obtain a loan from a portfolio lender. A borrower may be able to qualify for a larger loan from a portfolio lender than he could obtain from a fixed rate lender.
Portfolio lenders can also serve as niche lenders because certain things are more important than meeting a mortgage banker's more standardized underwriting guidelines. An example would be a savings & loan, which is more concerned with an individual’s savings history than being able to fully document income and other things.
If you apply for a loan with a portfolio lender and you are declined, you usually have to start the process with a new company.
If we talk about the more prominent mortgage bankers, you can count on them to have several strengths. For the biggest ones, you will recognize the brand name.
Usually, they are much better at promoting special first-time buyer programs offered by states and local governments, with lower interest rates and costs than the current market rate. These programs are often available to buyers who have not owned a home in three years and fall within specific income guidelines.
Mortgage bankers may incur problems because they are too big to manage or operate like well-oiled machines.
If you buy a home and need a VA or FHA loan, and the development you are buying in has not yet been approved, they will be better at getting it approved than other lenders.
If your home loan is declined for some reason, many mortgage bankers allow their loan officers to broker the loan to another institution. However, because your loan officer is so used to promoting the company’s product, he may not be familiar with which institution may be the best one to submit your loan to. Another reason is that wholesale lenders do not expect to get many loans from direct mortgage bankers, so they do not expend much marketing effort on them.
BANKS and SAVINGS & LOANS
Their major strength is that you will recognize their name. In addition, they will usually be operating as a mortgage banker, a portfolio lender, or both and have the same weaknesses and strengths.
The major strength of mortgage brokers is that they can shop the wholesale lenders for the best rate much easier than a borrower. They also learn the “hot points” of specific wholesale lenders and can handpick the lender for a borrower that may be unique in some way. He will be able to advise you whether your loan should be submitted to a portfolio lender or a mortgage banker. Another advantage is that they can repackage the loan and submit it to another wholesale lender if a loan gets declined.
One additional advantage is that mortgage brokers tend to attract many of the most qualified loan officers. This is not universal because mortgage brokers also serve as the training ground for those entering the business. Suppose you have a new loan officer, and there is something unique about you or the property you are buying. There could be a problem on the horizon that an experienced loan officer would have anticipated.
A disadvantage is that mortgage brokers sometimes attract the greediest loan officers. They may charge you more on your loan, which would nullify the mortgage broker's ability to shop for the lowest rate.
Borrowers cannot access the wholesale divisions of mortgage bankers and portfolio lenders without going through a broker.
When REALTORS® or Builders Recommend a Lender
If your REALTOR® or builder suggests a lender, talk to that lender. One reason REALTORS® and builders make suggestions is that they have regular dealings with this lender and have come to expect a certain amount of reliability. Reliability is critical to all parties involved in a real estate transaction.
On the other hand, a recent trend in mortgage lending has been for real estate companies and builders to own their own mortgage companies or create “controlled business arrangements” (CBA’s) to increase their profitability. These mortgage brokers sometimes become used to having what is essentially a captured market and may not necessarily offer you the lowest rates or costs.
Some real estate companies also offer different types of incentives to their REALTORS® in exchange for recommending their company-owned mortgage and escrow companies or lenders with whom they have CBA’s. However, dealing with one of these lenders is not necessarily bad. The builder or real estate company often feels they have more ability to expedite matters when they own the company or have a controlled business relationship. They cannot usually influence the underwriting decision, but they can sometimes cut through red tape to handle problems or speed up the process. Builders are especially forceful in having you use their lender. One reason is that there are certain intricacies in dealing with new homes. If you use a loan officer who usually deals with refinances or resale home loans, he may not even be aware of how different it is to close a mortgage on a new home, leading to problems or delays.
It is in your interest to know if there is any ownership relationship or controlled business arrangement between the real estate or builder and the lender, so be sure to ask. Do not automatically disqualify such a lender, but be more vigilant in getting the best interest rate and the lowest costs.
Make sure to do a little shopping. By knowing the interest rates in your market and making sure your loan officer knows you are looking at rates from other institutions, you can use that as leverage to obtain the best combination of service and the lowest rates.