In my time in real estate, I have had the privilege of working with some fabulous lenders. Also, some not-so-fabulous lenders. Your lender can make or break your home purchase, so it’s important to take your time choosing a lender.
Your lender will work hand-in-hand with you and your real estate agent to purchase your new home. Generally, you are not required to use any particular lender.
The caveat is certain programs (for example, the MSHDA program) may require you choose from their list of approved lenders or you may wish to use a certain program offered only with one lender (e.g. Bank of America). Other than those specific scenarios you have free reign to choose a lender.
So, what should you consider when choosing a mortgage lender?
1. Location
Listing agents, and by association sellers, often prefer a buyer using a local lender with a great reputation locally. A lender who lives and works in the local market has a solid understanding of the nuances therein.
2. Time to Close
How long is their average period from accepted purchase agreement to closing day? It’s typical to see about 30 days or so. Once you see that number start to balloon out over 35 days, listing agents will become a little bit skittish.
Why? A short “under contract” period leaves less room for anything to go off the rails with the financing (e.g. the buyer is laid off or buys a truck on credit and no longer qualifies for the loan 🤷🏻♀️). This reason also demonstrates the appeal of cash offers, which can often close in 10-14 days.
Big banks and credit unions often have longer timelines to close, for various reasons related to size and/or staffing. The time to close is something to consider when choosing a lender.
3. How does the lender get paid?
If your lender representative receives payment upon closing your loan, they are going to be very motivated to get you to the closing table. If your lender representative works on salary, they don’t have very much skin in the game, do they?
A perpetual problem child in this arena is your local credit union. Their mortgage person will likely work bankers hours. They will not be available on the weekend if a question arises while drafting an offer. There’s no sense of urgency because the banker is having his salary deposited regularly and whether or not your deal closes doesn’t impact his household budget.
For example, I once had a client work with a credit union on a HELOC. The estimated timeline to close was eight weeks. The actual time to close was twelve weeks, fifty percent longer than the estimate.
On the flip side, they have no incentive to push you into a particular product or program. If the credit union is offering you an unbeatable deal, you may want to use them. You just need to understand there is a tradeoff in that listing agents may recommend against your offer if there’s another competitive offer with a local lender offering a shorter closing timeline. Your loan process may also involve higher levels of frustration.
4. Pre-Underwriting
Does the lender offer pre-underwriting? Pre-underwriting goes a step beyond a pre-approval. The lender will fully underwrite (e.g. thoroughly vet) the buyer’s assets, debts and financial situation prior to submitting an offer. Once the buyer finds a house, the lender will complete the underwriting. It essentially means everything has been approved by the lender but the house itself.
Fully underwriting the buyer’s financial ability in advice gives peace of mind to listing agents, and by extension, sellers. There is a strong level of comfort that your loan will close because there should be no surprises in the buyer’s ability to afford the mortgage.
5. Costs
Your lender should provide you with a document that estimates the costs associated with the loan. Some of these costs are fixed, regardless of the lender (e.g. prorated taxes, local filing fees, etc.).
You should understand how much your lender is charging you to originate the loan. These may show up under various headings such as “lender origination fee”, “underwriting fee”, “processing fee”, etc. If your lender is charging you “points” (a fee to lower your interest rate), you should understand the cost of that fee and whether it benefits you.
Lastly, you should ask them to help you compile an estimate of the amount of cash you would need to bring to the closing table to complete your purchase. This cash total would include your down payment, payment for your lender, pro-rated taxes, insurance and interest, fees from the title company, etc. You need to have a level of comfort with the finances when choosing your lender.
6. Point of Contact
Who will be your main point of contact at the lender? Is it a single person? A small team? Or will it be multiple people from different departments?
Your loan is less likely to get lost in the shuffle with a single point of contact or a small team. There’s a big name player in the national industry who recently revamped their point-of-contact approach because their clients never knew who was in charge of their loan at any given time (which is a bit problematic, eh?).
7. Recommendations
Like most of the other industries tied to buying and selling residential real estate, word of mouth is a key generator of business for lenders. If a family or friend recently purchased a home, ask them about their lender and whether they recommend that lender. Your real estate agent also likely has a short list of lenders they recommend based on past successful transactions. (Note: The law – specifically, RESPA – prohibits a real estate agent from accepting any type of kickback from a lender.)
You should always cross-check the recommendations to online reviews to get a better sense of the lender as a whole and whether the lender is reputable. You should listen to your instincts, as well. If you don’t get a great feeling when speaking with the lender, perhaps they are not the lender for you.
Thank you for joining me this week for my tips on choosing a great lender! As always, I’m here to help with all your homeownership questions and concerns.
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