The purpose of this article is to discuss the difference of obtaining a mortgage through either a bank or a mortgage broker/banker and the importance of shopping around.
Many of my clients get into home buying in much the same way. Eager to get out looking at properties with no idea how much money they qualify to spend. As any seasoned agent will testify encouraging new clients to take this step is a prickly pear. While the importance of this step is obvious to those in the industry, some buyers are more exited about shopping than they are about figuring out whether they can afford what they’re shopping for. The test for the agent is how to encourage the latter without extinguishing the motivation of the former. While this article is not meant to explain the prudence of pre-qualification, let it be said that this step is enormously important for an efficient home shopping and buying experience.
Shopping at the Local Bank
Many home buyer’s start with the bank they have their checking account with when looking for a mortgage. “After all, I’ve banked with them for 30-years, I’m sure they’ll give me the best rate.” While this is a perfectly acceptable first step, to stop here would be erroneous for several reasons. First of all, a bank has only one option for their clients, their product line. A borrower will either qualify or not. If a borrower qualifies for a mortgage through their bank without shopping around, they have no idea if they are getting a good deal. In a situation where the slightest adjustment can equate to many thousands of dollars paid in interest by the borrower as well as how much house they can buy, it is a wonder why many people stop at the first bank they go to. These are the same people that will go to three different grocery stores in order to get the cheapest price on eggs! Assuming the borrower is approved and decides to shop, they must go through the same labor intensive process of calling three or four banking institutions and engaging in the application process three to four times in hopes of obtaining the best deal.
If a borrower is turned down at a bank for one reason or another, they have to start from scratch. Not giving up, say this borrower goes to another bank and applies there and is denied again. This process could repeat indefinitely because of a small criteria on their application that many banks would say no to. The rub is, there may be a bank out there that would salivate at a chance to loan this person money and since the original bank is a small or regional bank with few branches the potential borrower may never know about the other possibilities.
In addition, many major banks have much stricter lending guidelines regarding the property a buyer is attempting to purchase. In major metropolitan areas this is a significant concern as many properties for sale are in multi-unit buildings and the guidelines vary greatly. Such as percentage of owner occupancy to the type of ownership. Try asking Chase for a loan in a co-op. (Cooperative: meaning the buyer is purchasing personal property as is therefore buying stock in the association). As such a borrower may qualify for $200k loan from their bank, but they will be limited to the buildings they can buy in. If a building has a 100% occupancy and more than adequate reserve cash, some banks will still reject a loan for a unit in that building because it has only 69% owner occupancy. In this case an under educated buyer would be turned away from a property that meets their needs. The worst part is if they would have elicited the services of someone who is paid to know where to shop their file, they would have been able to purchase that unit without a hitch. It is sad to think of how many people were turned away from their dream home because because they didn’t shop around.
Working with a Mortgage Broker
The easiest way for me to describe what a mortgage broker does is to use an analogy. I typically explain that a mortgage broker is like a Geico for mortgages. They work with many banks; big and small, credit unions, private lenders and more in order to find you the best possible deal with the most options. In some cases they can get you a better rate through your bank than you could get! You apply once with them and they do the shopping for you. As many agents do, I have a preferred lender (a Mortgage Banker) that I recommend to my clients as well as a back-up or two just in case. Because my preferred lender works with 30-plus lenders and knows the in’s and out’s of their requirements, he is able to take our client’s file along with the property information and submit it to the right lenders the first time. Based on my experiences and those of my clients I have found an improvement in not only the rates and fees, but a significantly higher level of customer service. Of course there are always exceptions, and I have had my fair share of bad experiences with brokers and banks alike. The simple truth is that you should consider your Realtor’s referral of a mortgage professional as a strong candidate. If you don’t trust your Realtor, why are you working with them? I cannot tell you the number of times my clients went with a lender they’ve never worked with before, and because of poor customer service and insufficiently explained loan guidelines they missed out on their first choice. In some cases with clients who had low, out of pocket funds, a bad lender ruined their chances of buying all together (write me privately if you require an explanation). The reason I choose my lender is not because he is a nice guy, though he is, it is because he works with a reputable Mortgage Banker, is willing to be competitive with pricing, and he has the level of customer service and responsetime that is needed to get the job done quickly and correctly the first
Mortgage Bankers have the best of both worlds when compared to Banks and Brokers. Like brokers they work with many lenders of various types to fit as many loan scenarios as possible while also shopping around for the lowest rates. Like banks they have the ability to write loans in house. Since Mortgage Bankers are considered a lending institution they are held to a higher level of accountability on the loans that they originate. As we endure the aftermath of an under-regulated economy largely driven by the bad loans written over the past few years, more accountability is never a bad thing!
See For Yourself
While researching this piece I have come across a lot of hearsay about who’s fees are more or less and who’s rates are better or worse. To that I say, the proof is in the pudding. Rather than listen to spin one way or the other, call a bank, call a broker, there is no fee for pre-qulification. Because rates and terms change daily, make all of your calls on the same day. This is extremely important when trying to see who is giving you the best deal. Also, ask them all for a “Truth In Lending Statement.” This will make sure you are getting the same information from everyone you talk to. This will include fees, interest and APR (educate yourself about the difference between the two). Remember that almost everything you are being charged for your mortgage, be the fees or rates, may be negotiable. I would recommend making it known up front with all parties you engage that you plan to shop, and give them one shot to give you their best number. Let them know that customer service and timely response is a factor. Service is critical. If you get the lowest number from someone that takes a week to return your phone call you may want to use their number to whittle down the price of someone who has better customer service. In the time sensitive business of real estate, the difference a couple of days can make could mean the difference of you getting your dream home or not. In my humble opinion, a slightly higher up front fee (if applicable) may be worth the value of service you are getting.