Demystifying Mortgage Lending

There are 2 primary types of lending for consumers seeking to obtain a mortgage; Direct Lenders (this includes Banks, Mortgage Banks, Internet Lenders & Home Builders) and Mortgage Brokers. Many times the average consumer makes the wrong decision and ends up spending thousands of dollars more than they needed to. Let’s break it down…

Direct Lenders (retail institutions that may not have an abundance of loan options and programs individually)

• Banks - Many borrowers prefer to secure financing with their current bank or credit union before turning to another source. Banks are usually the more trusted and familiar choice, and can often provide borrowers with discounts based on known financial information and a pre-established relationship. Usually not the best option for individuals with less than perfect credit, banks typically turn down these applications. Many times if a person does have good credit, the bank ‘auto-pre-approves’ them, it is later in the process when the contract can break down because the person really can’t afford the mortgage. Personal service is limited with calls usually directed to call centers or an abundance of automated phone prompts. Commonly known for lengthy processes, bureaucracy, mistakes & incompetence and lack of disclosure on the yield-spread premium.

• Mortgage Banks – Provide one on one personal service and will guide you through the loan process. Usually a single person to deal with, a direct phone number and offices you can visit if you have questions. They are solely in control of the process from beginning to end and make approval and rate decisions, often times can make small exceptions and subjective determinations quickly. The pre-approvals that are received by mortgage banks are usually very strong because a thorough financial evaluation was completed to ensure the customer can truly afford the mortgage.

• Internet Lenders – (Quicken Loans’ Rocket Mortgage or Lending Tree, etc.) Faster and sometimes cheaper and will often times secure lending for individuals with less than perfect credit (with higher interest rates, of course). Very easy application process – from your laptop while sitting on the couch! Can often times offer the lowest interest rates and most flexible payment terms with lower closing costs since they don’t have to pay for the same type of expenses (offices, etc.) as other lenders do. They usually charge upfront fees that should not need to be paid until later in the process. The lack of personal one on one service can impede the success and completion of the loan – usually only toll free numbers with limited hours.

• Home Builders – Usually own an in-house mortgage company to assist in making purchases easy (could be a mortgage bank or broker) when building a new home.

Mortgage Brokers (acts as middle-man to many financial lending institutions for various loan products)

• Mortgage Brokers – Like mortgage banks, brokers provide one on one personal service and will guide you through the loan process. They operate on the wholesale market to secure financing for buyers and homeowners and are able to compare mortgage rates from a large number of banks and lenders all at once; often times finding lower interest rates and more loan options than retail institutions. They must rely on the borrower’s cooperation to verify financial information, potentially causing higher interest rates. Brokers do not make any approval or rate decisions, they rely on the lending institution to do this which can sometimes delay the process. They are commonly known for having supplemental or padded charges associated with loans, but they save you time from shopping for a loan.

So, my best advice to you is… do your homework! Remember your parents telling you this when you were a kid, well make sure you know the process and associated fees that come with acquiring a loan. Check credentials and research different institutions before you decide, talk to 3 or 4 of them. Always ask friends, family members or your real estate agent for a recommendation or referral – usually this is the best way to find a reputable and dependable mortgage banker.

Some items to consider and ask about when comparing lenders:

• Interest Rate (it’s a moving target!) 
• Lock in Fees 
• Interest Points 
• Closing Costs 
• Lender Origination Fees 
• Prepayment Penalty 
• How the Broker is being Compensated 
• How are you being treated? Are they asking YOU questions, or just telling you a rate?

Good luck to you on your mortgage journey, and remember… if it seems too good to be true, it probably is!

Jason Wallace, Licensed Real Estate Agent & Realtor® (Florida #SL3354332)