Looking for A Mortgage Lender?

You’re thinking about buying a home, but you can’t pay all cash. Gee, join the least-exclusive club we know! Now you have to get a loan secured by whatever home you want to buy, a loan we call a mortgage.

lendingtree1

You Lose!

“Oh, I’ll just click on one of those ubiquitous pop-up Internet ads, and lenders will come begging for my business!”  Please, please, don’t! Whether it’s the one where lenders advertise their “best rates,” or the one where you ask for four lender quotes (and get hundreds of them calling you day and night), they won’t be any good at this point. What you need to know first is what loans are available to you, and how much house you can afford based upon those loans. You want someone who will tell you what’s going on in the loan market right now.

You are not ready to sign up for any loan yet. Instead, you are trying to find a loan officer who will be there when you are ready. Will they guide you through the process, and explain how they get from A to B? Taking your income as a starting point, they would subtract from that your current monthly obligations, to arrive at a reasonable monthly budget for housing, using current interest rates, tax and insurance costs. As for what kind of mortgages, they should start with a fully amortized 30-year fixed-rate mortgage with no more than one point of combined origination and/or discount fees. (A “point” is 1 percent of the mortgage amount.) They should then discuss alternative loan types, such as the 5/1 adjustable (see below), but the main purpose here is to ensure you will not be getting in over your head.

You might like the numbers the first lender gives you, but don’t stop looking. You want to have this same discussion with at least three different loan officers. You need to confirm that what you’re hearing is the truth, both in terms of what you can afford and the likelihood that the loan terms are valid. You see, loan officers in general have an incentive to tell you what you want to hear, and despite the existence of a “Good Faith Estimate” and/or “Truth in Lending” documents, they don’t have to deliver what they promise unless and until they provide a loan quote guarantee or “lock.”

What kinds of loans are out there that are worth considering? In the current interest rate environment, where rates are historically low, forget negative amortization (where you pay less interest than the actual loan rate, and the underpaid interest is then added to the loan balance). And forget “teaser” loans, where the first couple of years is at an artificially low rate, like 1.25%. Both of these are sure recipes for disaster – they were the cause of many of the foreclosures we are going through right now.

All the rest have their advantages and disadvantages. The fixed rate loan is almost always at a higher rate. In effect, it’s 30 years of insurance against rate changes. Yet most people either move or refinance in 5 years or less, so why would they pay for a 30-year guarantee? The 5/1 (or 3/1, 7/1, or 10/1) ARM – where the rate is fixed for the first several years and adjusts annually after that – is usually a lower rate.

And why spend money “buying down” your interest rate by paying discount points, if you’re not likely to keep it long enough to recover the money? You might cut your monthly interest charge, but it takes 6-8 years to break even.

house

Once you have believable info on how much you can afford, then you can start looking at properties. Stay in touch with the lenders you believe would be most reliable. You’ll notice I said “lenders” – keep reading.

You might want to strongly consider having a backup loan. When you’ve decided who your first choice lender will be, ask the next best lender if they will be your backup. They might, if they don’t think the first lender can deliver. If they’re right, you’ll be signing their paperwork at the end. You will need to do everything necessary so that both loans are ready to go. The backup loan is useless to you if it’s not ready to go at the same time as the main one. You may have to pay for an extra appraisal, but it’s $300 or so well spent.

mandollar

If you decide not to have a backup loan, you will have to sign whatever papers your one lender gives you, whether they deliver on their promises or not – you won’t have a choice unless you decide to renege on your purchase contract, which can be extremely expensive, as you can imagine.

Having said all that, I have only been involved in one settlement where the buyer had a backup loan waiting in case the first one fell through (it didn’t). Most of my buyer clients have used mortgage officers I knew would deliver. I have seen a couple of situations where the settlement (my sellers) was delayed because the buyers’ lender was incompetent or untruthful, and it’s not a pleasant place to be for anyone.

UPDATE: Here is a great post about What To Look For In A Mortgage Lender

Advertisements

5 Responses to Looking for A Mortgage Lender?

  1. […] Looking for A Mortgage Lender? « It’s Good To Have A Friend In The … […]

  2. […] news by khannemann « Refinance Right – Mortgage Refinance Faq and Advice: Last Chance […]

  3. […] your price range. Before beginning your home search, get pre-approved by a mortgage professional – preferably one you know or one recommended by your agent – to get an idea of how much you may be able to borrow. Use this information as a starting point in […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: