Choosing a Lender
One of the most important yet most overlooked part in the home buying process is selecting a lender. Having the right lender is absolutely crucial and many times can be the difference between closing on your dream home and falling out of contract.
For many homebuyers, particularly first-time homebuyers, choosing a lender can be an afterthought because they think that all lenders are created equal. Many people have friends, family-members or acquaintances who do loans and others simply decide to trust their bank to handle the loan. These decisions can be costly and time-consuming.
Role of the Lender
The lender’s role in the transaction ultimately is to get your loan fully-funded by the close of escrow. Prior to entering into contract, the lender’s role is to perform a preliminary evaluation of your finances, present you with a variety of loan products that may work for you and pre-approve you for a loan amount. The pre-approval process typically involves a credit check and due diligence to confirm your income, which in most cases involves a review of tax records, W2s and bank statements. Some lenders may have access to considerably more loan products than others.
Once you are in contract, it is the lender’s job to get the loan funded. This requires very strong communication skills because the lender is often coordinating among several parties. Most loans require an appraisal, so the lender needs to coordinate the scheduling of the appraisal with the real estate agent to ensure things stay on schedule. The lender also needs to be a conduit between the buyer and the underwriter as additional documentation is often required in order to underwrite the loan. It is the lender’s role to communicate with all parties and to be an effective problem solver to keep things on track with the loan.
Direct Lender or Mortgage Broker?
Outside of non-traditional financing, there are two pathways toward getting a loan, through a direct lender or a mortgage broker. A direct lender is a financial institution that provides a loan for a mortgage. A mortgage broker is not a lender, but is rather a financial professional who works with a network of lenders and helps buyers find a good lender.
There are advantages and disadvantages associated with working with both a direct lender and a mortgage broker. With direct lenders, since you are dealing directly with the lender, turnaround times for the loan are generally faster because the processing and underwriting usually take place in house. Those who use a mortgage broker work through a middleman, which tends to slow down the process, particularly on complex loans.
On the other hand, mortgage brokers have access to many lenders and can be tremendously valuable in matching buyers up with the right lender and loan offer. This can result in a better rate and considerable time savings associated with shopping for lenders. When working with a broker, the buyer avoids multiple credit inquiries that would be associated with going through the pre-approval process with multiple vendors.
From a cost standpoint, mortgage brokers are tend to be more expensive than direct lenders. As a general rule of thumb, expect to pay 1% to 2% of the amount of the loan as origination fees, which are part of your closing costs.
Importance in the Transaction
In a competitive market, the timeframe of from getting into contract to the date of the close of escrow as specified in the contract can be quite aggressive, so having a well-organized lender who communicates well is critical. A good lender, particularly one who is well known can add a tremendous amount of weight to an offer because the quality of the lender adds to the confidence of the listing agent that the transaction will close. This is particularly true for transactions with a down payment below 20% or if there is complexity with the loan.
It is absolutely critical that the lender works well with your real estate agent since they need to be on the same page to get the transaction across the finish line. Many agents have a handful of lenders who they recommend, so if you are early in the process of evaluating lenders, ask your agent to recommend someone with whom the agent likes to work. If you have a prior relationship with a lender, or if you want to trust the recommendation of a friend or family member, it is absolutely critical to introduce the lender to your agent as early as possible.
A great lender is worth their weight in gold and can work magic to help make transactions happen. A poor lender who doesn’t communicate can torpedo the deal. Make sure to choose wisely and to ask your agent for help!
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by: Sean Engmann
Realtor® at Coldwell Banker
CA DRE# 02117899