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What to Know about Lenders

Often people ask about lenders.  I thought I would talk about  who they are and how they work.

When it comes to getting a home loan, making the choice between your local bank, a broker whose ads are on your shopping cart, or an internet lender advertised on TV, can be very confusing.  How can you know which is best for your needs, and ultimately, who has your best interests in mind?  Let’s look at this a bit closer:

First, when it comes to residential home financing, there are really only three types of home loan providers.  They are:

   1. Wholesale lenders (brokers).
   2. Retail lenders (banks).
   3. Correspondent lenders (large, independent companies who have warehouse lines of credit  with several large banks, but who lend in their own name).

There are some inherently good and bad things about each of these lending models, so lets go into them here.

Wholesale lenders, or mortgage brokers, maintain a real estate brokerage license, but don’t have any of their own money to lend.  When you make a loan application with a broker, he will analyze your loan file, package it in an industry-accepted manner, and ship it to the bank he or she selects.  A broker may have dozens of choices for where to submit your loan, but will usually make the determination on the basis of the revenue it will generate for him/her.  Let’s say you, as the customer, seek a rate of 5.5%.  Your broker will search to find that rate for you from the lender that will compensate him/her the best.  Regardless, simply having this choice allows a good broker to scan the lending landscape in order find you the best deal for you.  Brokers, however, can be at the mercy of the lender to whom they submit your file.  In many ways, control of your file is relinquished and this can compromise the broker’s responsiveness.

Retail lenders are your direct lenders --- either major banks or local credit unions.  While the sound of “direct” may lead you to believe that you’ll more easily find a better rate at these institutions because there is no middle man, it is not quite that simple.  Often, your bank lobby loan officer is merely waiting for the easy prospect, someone who doesn’t want to be hassled by shopping for a loan.  This client wants to feel they’re in good hands merely because they can walk into the bank and meet face-to-face with someone.  But beware, often the rates in the lobby are decidedly NON-competitive.  That is, you could very easily do better by way of even the smallest amount of research or negotiation.  While retail lenders may offer a processing efficiency beyond the capability of a broker, what they lack is selection of loan product.  Simply put, no single bank is the best priced for your loan all the time.  And if you need to lock your loan when your local bank is “out of the market” you could end up paying a much higher rate than necessary.

Correspondent lenders live somewhere between the bank and the broker.  Basically, what the correspondents have done is designed contracts with the major banks.  They have been extended lines of credit by these banks and they can use this money to write and fund loans as if they were the bank themselves.  When you work with a correspondent, they can then quote you an interest rate that is most competitive amongst their options (like a broker), but once you choose the rate, your loan actually stays with the correspondent and they are accountable for its progress (like a retail bank), possibly making the service standard higher.  Correspondents don’t have a major drawback other than they are harder to find than a broker or direct bank.
Ultimately, whichever option you choose, make sure you can work with your LOAN OFFICER on a personal level.  Preferably, this person will come to you recommended by those you know, or by your Realtor.  Every good loan officer will return your calls, explain things to your satisfaction, and respect your initiative to shop for the best deal.  It cannot be stressed enough that the quality of a loan agent can make or break your transaction.  And one of the qualities he/she must have is the ability to connect with you on your level --- whether you are a first-time buyer or the savviest real estate investor.  When you find the right loan agent, a key part of your team will now be in place, and together with your Realtor, can work to assure you an efficient and enjoyable home-buying experience.

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