How to Find the Best Mortgage Lender
Finding a mortgage lender involves more than just negotiating the lowest interest rate. Ask Elena Loutskina, a professor of business administration at the Darden School of Business at the University of Virginia. According to her recent comments to Investopedia, “If the customer wants to be protected, knowledge is the most essential thing.”
In the complex and somewhat perplexing world of house purchasing, Loutskina talked extensively about what customers need to know, what questions to ask, and how to select the best mortgage lender. Here is our edited dialogue.
- Casting a wide net while seeking for a mortgage, including local banks, mortgage brokers, and internet lenders, pays off.
- The three most crucial elements to think about while looking for a mortgage are the interest rate, the loan’s size in relation to the value of the home, and the impact of paying points upfront.
- Obtaining a mortgage pre-approval might be beneficial, but it often only lasts for 90 days.
- The best approach for borrowers to protect themselves is to educate themselves on the mortgage process and ask questions about anything they don’t understand, even if the law offers certain consumer safeguards.
Lenders Come in Many Forms
Investopedia: Let’s begin with the fundamentals. A mortgage lender is what?
Loutskina: The question is both straightforward and complex. In the mortgage industry, many participants are putting various value chain segments into action. Some companies deal directly with borrowers, such as banks, mortgage brokers, lenders, or internet portals like LendingTree.
Others may be the same company or a separate one that creates mortgages. Mortgage brokers, for instance, do not create mortgages. Different parties contribute the money that goes to the borrower or finance mortgages.
Then there are actors who keep mortgages on their balance sheet for as long as the loan is outstanding, which might be up to 30 years.
For instance, a bank might do all of these duties. It could communicate with the borrower, provide the loan’s origination and financing, and keep the mortgage until it matures. Or maybe there is a distinct object for each function. A mortgage broker could be the first step in the process, followed by the bank that originates the loan, for instance. The original lender is this one. The bank has two options: sell the loan to Fannie Mae or Freddie Mac or maintain it on its balance sheet. A financial or mortgage firm, rather than a bank, might be the originator of the mortgage. This company would borrow money from other financial institutions or on the wholesale market.
The identity of the lender gets hazy at this point. Do you have to engage with anybody to get a loan? Is it underwritten by someone? Was it first funded by someone? This is when things start to become murky.
Investopedia: I am aware that several actors may be involved at various stages. How can the customer make sense of it all?
Loutskina: I’m not sure why buyers need to understand every stage of the mortgage origination process. For instance, even if my mortgage was repeatedly moved between banking institutions, my financial responsibilities remained the same. In order to get the finest conditions possible, borrowers must concentrate on finding reputable agents, such as banks or mortgage brokers, who will provide them with a quotation.
Problems with Poor Enforcement and Shadow Banks
Investopedia: You wrote on the 2009 financial crisis in 2015 and highlighted how existing rules had a history of poor enforcement prior to the disaster. How does the situation with uneven enforcement relate to the issue with shadow banks? Both of these seem to have the potential to influence customers’ lending search behaviors.
Loutskina: There are unquestionably distinctions between banks and financial firms in terms of regulatory exposure and enforcement. Corporate financial institutions do not hold deposits. Additionally, they are not subject to the same degree of regulation since they do not accept deposits and are not covered by the Federal Deposit Insurance Corporation (FDIC). They perform the same tasks as banks and are referred to as shadow banking institutions or non-depository financial intermediaries.
After the financial crisis, the Consumer Financial Protection Bureau (CFPB) was founded, which fundamentally altered the enforcement landscape. Now that nonbanks are the target of a genuine danger, restrictions may be put into effect.
Being informed is one of the most crucial things from the consumer’s point of view. I place a considerably greater value on educating consumers about financial markets than I do on the implementation of regulations like the Home Ownership and Equity Protection Act. This is thus because laws can only marginally alter conduct. The most crucial factor is education if the customer wants to be protected.
Investopedia: What are some examples?
Loutskina: Consumers must make an investment to comprehend mortgage pricing and ensure that fair disclosure laws are in effect, which means they must have the information in advance of applying for a mortgage. When they come to sign the mortgage documents, it is generally not a good omen if they are astonished.
Additionally, they must ask a lot of inquiries, such as “What will be my monthly payment?” Will it continue to be corrected in the future? Is mortgage insurance necessary? How does the escrow account function? On the front end, this offers the buyer the greatest protection.
How to Search for a Lender
What kind of considerations should homebuyers make when looking for a mortgage lender, according to Investopedia?
Loutskina: The most apparent piece of advise is to avoid borrowing money from sketchy people whose identities you cannot confirm. Apart from that, there aren’t many differences between LendingTree, BBVA bank, University of Virginia Credit Union, or Bank of America.
It’s a matter of pricing. My recommendation to consumers is to cast a broad net. Reach out to your local bank, reach out to online portals, reach out to local mortgage brokers, ask all of them what they can offer you. It’s a low-cost search, and it will allow you to better understand the prices that are available in the marketplace. This broad-net approach will also allow you to negotiate.
Investopedia: Anything else consumers should be aware of?
Loutskina: Consumers need to understand the tradeoffs available to them in terms of up-front points and the mortgage interest rate. Points represent the up-front fee borrowers pay for the origination as a percent of the total amount. Some prefer to pay a fee up front and lower the interest rate for the duration of the mortgage—for example, 30 years. Others want to avoid paying the origination fee and even get the lender to cover some of the closing costs. But that will come at the expense of a higher interest rate.
Investopedia: What about the appraisal of the property you want to buy?
Loutskina: You need to find out whether your lender will require an assessmentor appraisal of the property value and how much that weighs into a decision to lend you the money. These days, when you have a good credit history and a 20% down payment, lenders frequently do not require an appraisal.
You shouldn’t be caught off guard when you sign a contract to buy a house without any contingencies and then go for an assessment of the property value, and that assessment comes in low and the mortgage lender refuses to originate your mortgage.
The Value of Mortgage Pre-approval
Investopedia: Is pre-approval an advantage for the borrower?
Loutskina: I think so. Pre-approval provides an opportunity to ask if you can actually get this much money given your credit history and income. Pre-approval is a great way for the lender and the borrower to come to a consensus without a formal commitment.
Borrowers can think of pre-approval as a tentative confirmation from a lender: “If everything you’re telling me is correct and the house is worth as much as you are willing to pay for it, then I will be willing to give you this loan on these conditions today.” But in the mortgage market, borrowers are frequently trying to figure out how much you can borrow in March to close on a house in July or August. Quite a bit of time is going to pass between March and July or August. Situations can change. Lenders’ finances can change. Borrowers’ intent to buy a given house might change.
A pre-approval offer usually lasts for 90 days before expiring (but without a commitment). A pre-approval gives a borrower a reliable idea of how much money they can borrow and under what conditions. However, don’t be shocked if a bank decides to renegotiate by the time you are ready to sign a contract. To ensure that the promise they obtained in March is still valid in June or July, I advise borrowers to stay in contact with their mortgage agency (lender).
For an additional cost, borrowers may lock in the terms of their mortgage. However, consumers should be aware that the bank may still alter the mortgage terms if their credit history drastically worsens or the value of their home appraises for less than expected.
However, by locking in the mortgage terms, a borrower is guaranteed they will still be able to acquire a loan under the pre-approved terms, barring any changes in their credit history or home value. However, they are not required to sign a mortgage loan contract if, for instance, they choose not to sell their current home or if their new home fails the inspection.
Is the Lowest Interest Rate the Holy Grail?
Investopedia: Obtaining the lowest interest rate appears to be the objective when purchasing a property. Is it ultimately the most significant factor to consider when selecting a lender?
No, Loutskina I believe there are three things at play. The amount of the loan in relation to the value of the property and the interest rate are the two factors that matter most. The bank is at less risk when there is a greater down payment. Here, you may anticipate somewhat reduced interest rates.
The third element is the upfront points you pay for a loan’s origination. One factor is whether you currently have the funds available for a down payment and to pay the points. That’s a different story if you don’t. Therefore, borrowers must choose between paying more points up front and paying a higher interest rate throughout the course of the mortgage.
These are the three most crucial elements. Some other factors may be that not all banks would be prepared to pre-approve you in March and finish the purchase in August. Make sure the bank is prepared to uphold the original conditions.
COVID-19: Lessons Learned
According to Investopedia, how has the pandemic influenced interacting with mortgage lenders from the perspective of consumers?
Loutskina: The epidemic unquestionably affected the housing market. People are moving out of major cities and towards the suburbs. People now demand a home office, which is another structural change in what is a need in a home. Less focus is placed on bedrooms. It’s important to have a dedicated workspace so that family members won’t distract you when you’re working.
House prices increased as a result of the tremendous strain this put on housing demand. According to some estimates, the median home price in the US has increased by as much as 19%. The majority of urban regions are seeing a construction boom, and developers are attempting to take advantage of these trends. It reminds me a lot of the financial boom before the 2007 financial collapse.
Whether this impact is transitory or lasting is something that lenders and homeowners should be concerned about. If the patterns change, for example as a consequence of employers requiring employees go “return to office,” this may result in a reversal of migration and a drop in home values. Some borrowers may find themselves underwater, owning a home that is less valuable than their loan.
Investopedia: What parting words of wisdom would you want to offer our readers?
Loutskina: My best piece of advise is to take the time to ensure that you comprehend the fundamentals of mortgage lending when you’re making such a significant financial choice in your life as purchasing a home and taking out a loan that you will be repaying over the course of 30 years.
Speak with your loan agent if there is anything you see or hear that you don’t understand. At any stage of the procedure, don’t be reluctant to ask questions. The amount of paperwork I had to deal with when I initially received my mortgage was intimidating, despite my extensive education and professional experience. To ensure that your expectations concerning the goods you’re obtaining are satisfied, it’s important to ask questions throughout the whole process.
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