When you decide to shop for a home loan, there are a lot of choices out there. Whether you want to refinance or purchase a home, you may want to consider the various sources of home loans.
Most people are not aware of how the back end of the mortgage lending business works. They get a home loan every several years, so there is no pressing need to really understand the business.
However, considering that every single day, your mortgage is having an impact on your life in some form or another, it may be a good idea to know what the different types of lenders do. What makes them different from each other? Ultimately, where can you get the best mortgage?
Let’s have a detailed look at each of the most common mortgage lending entities so you have some insight into how they function.
This is where you typically have your checking and savings accounts. They also offer other services such as investments of various types, consumer loans, credit cards etc. They also happen to offer mortgage loans.
If you are considering your bank for a mortgage, observe this: Oftentimes, they don’t have the best rates on all loans. There are two reasons for this. First, banks have a built-in client base with whom they have affinity; their depositors. They are already customers who have a certain amount of trust in the bank.
The bank doesn’t have to try very hard to get your business. Most people will just trust that the bank is their best option often quoting “we are already customers, they already know us”. While that is true, that does not mean they are out to get you the best rate or loan. They are in the business of making money. The same as any other business operating for profit.
The built-in relationship gives them an advantage in having enough of their current base just do a home loan with them. This is aided in part by the constant marketing usually through the mail with your bank or credit card statements. They also capitalize on your online presence when you log in to check your account online. They make it clear that they offer home loans. Marketing to a built-in customer base works great for them.
Consider also the fact that when you apply for a home loan with a bank, they only have the loan products the bank offers. If you are declined for any reason, you are done with them.
Another point to consider is the bank representative that you work with is an employee of the bank. Make no mistake about it, their fiduciary duty is 100 % to the bank, not you. The interests of the bank come 1st if they want to keep their job. This may seem contrarian to the popular belief but these are facts.
Credit unions are institutions that exist to serve their members. They also, like banks, accept deposits and offer checking and savings accounts. They also offer many financial services similar to banks. And they do also offer home loans.
An important distinction that differentiates Credit Unions from Banks is their not-for-profit status. They are member-owned cooperative institutions that provide a safe place to borrow money at reasonable rates.
Credit unions also tend to have more community-oriented loan programs for their borrowers. Many have special financing for first-time home buyers offering down payment assistance.
Credit unions specific to a certain demographic are particularly attractive. Teachers Credit Unions in different states actually do provide excellent rates to their borrowers. Fees also tend to be lower with credit unions.
Big Box Lenders
You see them on TV, the newspaper and anywhere you look. They usually advertise super low rates with long disclaimers. They have their marketing dialed in to attract as many calls as possible to their call centers.
In many cases, callers find that the rate they saw on the billboard or other advert, does not really apply to them. The criteria are quite narrow and they just don’t fit the box. No problem though, they have you on the phone, time to offer you something that will fit your needs. And the sale begins.
These lenders usually make their money on volume which may be a good thing for you. Their Direct To Consumer channels have very thin profit margins to undercut the competition. You may come out ahead with them.
Do consider that the model is based primarily on massive numbers of loans processed in a sort of assembly line. You are not going to get a whole lot of hand-holding through the process. They do however cater mostly to customers who don’t need handholding. It works out rather well most of the time.
This group is usually portrayed as the big scary wolf out to get you with high fees and rates. That may have been the case a hundred years ago. Today, a mortgage broker could be a borrower’s best friend in the loan business.
Brokers have many advantages. For one, they have access to hundreds of different loan programs through wholesale lenders. Although most work with a dozen or so wholesalers, it is good to know that they can shop your loan to the best rate/terms.
Additionally, if your loan gets declined by one lender, they can resubmit to another lender and many times get it approved. Mortgage underwriting is not an exact science, and not all underwriters have the same skill level. It is common for one underwriter to decline a loan and another one approves it, under the same program guidelines.
One big advantage you have with brokers is that they will shop the loan for you. In less than it takes you to go through the 12 prompts of the phone system at the bank, a broker can price your loan with dozens of lenders. In fact, one of those lenders could very well be your bank’s wholesale channel. Something many people are not aware of.
As for broker fees, you need not fear. The many different laws and regulations enacted during the last twenty years have finally forced ALL lenders to offer full transparency on their fees. There are no “hidden fees” anymore, no matter what your grandparents told you.
All lenders nowadays have to issue a Loan Estimate when you submit a loan application to them. In that Loan Estimate, they essentially make a commitment on fees. The broker fees may not change unless your loan application parameters change. (That’s a topic for another time.) Suffice it to say that obtaining a mortgage from a reputable lender is a very attractive proposition many times.
Lastly, you want to keep in mind that a loan broker does not have a fiduciary duty to the lender they submit your loan application to. They have more of an obligation to work for you, to look out for your best interest. After all, if you don’t transact with them, they don’t get paid.
How Do You Decide?
Where you get your home loan will depend on a few factors. You may not have the credit union option if you don’t belong to one. They usually only lend to their members.
If you have the perfect borrower profile in terms of credit score and income, you could go anywhere you want. You may want to do a little shopping before you decide. If white-glove service is important to you, the bank may be the place to go. You may not get the best rate, but you will be treated well, especially if you have a respectable size bank account with them.
If you are “credit challenged” or have any other “life circumstances” to deal with, a broker will be your best bet. Banks don’t usually do well with this borrower profile. A broker will coach you through credit repair and other issues that need to be resolved until you are “mortgage ready”
Credit union members, it is more than likely that your credit union will be your best option for your mortgage.
You are now armed with more information on home loans than most people gather in the course of their home ownership. Make good use of it to get the best home loan possible.