Editor's note: This is the fifth in a series of eight articles on how to assemble you home buying or selling "team." Today's article discusses how to choose a mortgage lender.
A good lender will make you a homeowner instead of a looker. Unless you're one of those rare all-cash buyers, you aren't a real player without a lender on your real estate team.
Your lender provides the loan money you need to buy. Today's complex loans have little in common with the Model T-type loans of just a decade ago.
To produce the Model T, Henry Ford combined the production line with standardization of parts. Every Model T was identical in every detail. Ford joked that you could buy any color Model T you wanted as long as it was black.
When I started my real estate career in the early `70s, home loans were standardized like Model Ts. You could get any kind of mortgage you wanted as long as it was a 30-year fixed-rate loan. All lenders' home loans were the same except for minor variations in loan fees and interest rates.
Back then, you didn't need an advanced degree in math to select a lender. Home buyers usually applied to a lender recommended by their real estate agent unless they had a prior relationship with another lender. Sometimes the lender was selected by the existing loan's prepayment penalty - the buyer had to choose between using the seller's lender or paying the seller's prepayment penalty if a lender of the buyer's choice made the new loan. In retrospect, simple decisions.
Welcome to the `80s. How things have changed!
Gone are the days when your only choice was the fixed-rate mortgage. Today you're confronted and confused by an array of adjustable rate mortgages, or ARMs. To understand what lenders are saying you have to learn the ARM vocabulary: assumability, periodic cap, life cap, reservation of rights to adjust caps upon loan assumption, index, margin, negative amortization, adjustment frequency, initial interest rate, annual percentage rate (APR), etc.
Unfortunately, things get considerably more complicated once you speak the lenders' language. You discover each lender has a variety of ARM loan programs with different initial interest rates, different periodic caps, different life caps, different indexes, different margins and different adjustment frequencies. Compounding the problem, some loans have negative amortization and others don't.
You also may be interested in a mortgage backed by the federal government, through either the Federal Housing Administration (FHA) or the Veterans Administration (VA). Both these loan programs have their own complications.
It IS possible, however, to find a good lender who will guide you through the financial mine field of loan programs being offered today. Here's how.
Start with your real estate agent. Most agents are just as confused about today's loan programs as you are. But your agent may be able to direct you to a good lender who can help you select the right loan.
Three characteristics of all good lenders are:
- Knowledgeable loan agents who explain their loan programs to you in plain English without using double-talk or jargon. Your loan agent will be familiar with other lenders' programs so you can compare the loan recommended with the competitors'.
- Local loan approval rather than having it sent to an out-of-town loan committee where you become a loan number rather than a living, breathing real human being. A good lender works with you and your agent to get your loan approved.
- Dependability. You get your loan on time at the promised interest rate. Your agent knows which lenders deliver and which don't.
Agents who don't have an established lender relationship or who think your loan requirements don't fit their lender's norm may recommend that you work with a mortgage loan broker. Mortgage loan brokers look for the best loan available without regard to which lender ultimately makes your loan. A mortgage loan broker acts as an intermediary between you and lenders.
Two cautions about mortgage loan brokers: One, some mortgage loan brokers aren't independent. On the contrary. They're subsidiaries of a specific lender and only work with you on their lender's loan programs. Don't be deceived.
Two, most mortgage loan brokers won't charge you extra for their service - they're compensated by the lender. Don't pay more to go through a mortgage loan broker than you would to get your loan directly from the lender.