Types of Lenders

For most people, the first serious step in the home buying process is talking with a lender about getting pre-approved for a loan. These days, buyers generally understand that in order to know what their purchasing power is – and to have the ability to actually submit an offer on a house – you have to start with a loan pre-approval. But who should you talk to in order to complete that process? I have found that buyers often don’t understand the different lending options available to them. Picking the right lender for you is a key component in the buying process, and it’s a decision that is often done quickly – with little research – while buyers are scrambling to get an offer together. Loan issues can cause a huge amount of stress to buyers, so it’s important that you take some time before opening escrow to find a lender that fits your needs. Here is some information about the different options available to you help you as you are moving forward.

Big Banks

The first instinct of many buyers is to go to their bank and ask for a loan. People tend to have a certain comfort level with the bank that they do their usual transactions with, and since most large banks are national companies, many buyers feel that working with their own bank eliminates the worry that you are getting a loan from a lesser known Internet lender. Additionally, most buyers assume that getting a home-loan with the bank where they house their deposits (checking, savings, retirement) will somehow make the process easier – but often it doesn’t.

There are some potential downsides to using a large bank for your loan, starting with your loan officer. Most people have an initial contact with whoever happens to be sitting in the bank when you walk in. This person may end up being your “loan officer” but the reality is that they may have very little to do with your loan. When you work with a large bank, they often send your files out to another division of the bank for underwriting, processing and funding of your loan. Frequently that team, or teams, may be in another state or states. Your loan officer may not have any relationship with your underwriter and very little influence over when your file is processed. In real estate contracts, all time periods are written as calendar days, not business days. However, big banks don’t work on the weekends, so there are often delays during crucial points in escrow. The most common issue that I have had with big banks is that they are often unable to meet contract timelines such loan contingency removals and closing dates. Nothing makes a buyer feel more helpless than endangering their escrow because their lender hasn’t fulfilled their obligations on time. In addition, big banks typically have stricter rules and regulations for underwriting, so you may be more likely to run into problems with your appraisal or final file review.

Mortgage Brokers

Another option that is often confusing for buyers is the concept of the mortgage broker. A mortgage broker is typically an independent loan officer who does not work for a company who will actually loan you money (referred to as a direct lender). Instead, the broker is basically a middle man who ostensibly shops around to find you the best loan package. In this situation, you may end up getting your loan from a big bank after all – the difference is that mortgage broker will be the point person who collects all your documents and coordinates your file. I find that mortgage brokers are often better communicators than loan officers working at a bank – they are typically available after hours and on weekends and they understand that in order to get clients, they have to provide a certain level of customer service. So this is a positive aspect of working with a broker as opposed to going directly to the bank. However, working with a broker does not erase the issues already present in the “big bank” scenario. If anything, working with a broker exasperates those issues because it adds one more link in the chain of people communicating about your file, possibly creating additional delays. Brokers do not lend money themselves; they package your loan and send it out to a direct lender who hopefully accepts the file and income as presented by the loan broker. If the direct lender has a difference of opinion, you can be in for a long fight over getting your loan approved. And because brokers constantly work with different lenders, they don’t typically have any relationship with the underwriters for your loan – which means they don’t have any pull to influence processors to rush your file if necessary. I would say the biggest issues with using a broker is that many buyers trust that single person to make the decision about who lends them their money (some buyers don’t even know what bank or company is giving them their loan because they are thinking of the broker as their lender) and the process may take longer since you are adding an additional middle man into the process.

Mortgage Companies and Mortgage Bankers

The third option available to you is to get your loan from a mortgage company, or direct lender – sometimes referred to as Mortgage Banker, Credit Union or “Thrift”. Mortgage companies are like banks – they loan you the money themselves, and then typically sell your loan off after your have closed escrow to large entities like Fannie Mae and Freddie Mac. This process starts with you meeting with a loan officer who will be your point person throughout your escrow. The difference between working with a big bank and a mortgage company is that your loan officer usually has an in-house team of underwriters that they have a close relationship with. Because of this, your loan officer has a lot more control over what happens with your file and how quickly your documents are reviewed. I have often found in this scenario that loan officers and their processing teams will work on the weekends when necessary to prevent delays. In addition, mortgage companies sometimes have the abilities to “farm out” loans to other companies in order to get the buyer a better rate or to circumvent a difficult approval. However, unlike working with a mortgage broker, when mortgage companies work in conjunction with other companies or banks, they keep your processing in house – so you don’t have to worry about your file being sent to another state to be reviewed.

No matter which of these three options you choose, problems could come up with your loan during your escrow. The key to solving these problems is working a loan officer or broker who can foresee potential issues and navigate the process quickly to resolve them before they endanger your escrow. If you would like some recommendations for lending options, I am happy to put you in contact with some wonderful mortgage teams!