When most people go shopping for a mortgage, they look for the best interest rate. Many will also compare closing costs from lender to lender, again looking for the best deal. Certainly the goal when mortgage shopping is to locate the lowest interest rate with the least amount of closing costs, but this has to be done with your specific financial situation in mind.
Consider this scenario. You have made 53 phone calls, sent 76 emails and are confident that you have identified the lowest rate/closing cost mortage lender. You make an application and lock in an interest rate of 7.50%. While your application is being processed, interest rates suddenly rise to 8.25%. Two weeks before the closing on your home is scheduled, your lender informs you that your loan has been declined due to some minor credit blemishes. Your real estate agent refers you to a mortgage broker who represents a lender who approves your application, but the end result is an interest rate of 8.50% (.25% higher than the original lender). Had you applied with this mortgage broker in the first place, you would have been able to lock in a rate of 7.75% and avoid a lot of aggravation.
As you evaluate mortgage rates and closing costs, you should understand what type of lender you are dealing with.
Mortgage Bankers generally only originate mortgages - no car loans, signature loans, etc. "Bank" appears in many mortgage banking company names, but these companies are not banks - they don't take deposits. Your loan is immediately sold after closing because these companies usually provide funds for your loan from a credit line that they maintain (since they don't have deposits to lend out). After closing, the idea is to immediately sell your loan to pay down their credit line so they have funds for someone else's loan. You should not be troubled with the idea of your loan being sold, this will not affect the terms in any way. A mortgage company's profit comes from collecting fees and a gain on the sale of the mortgage. Mortgage Bankers typically have the authority to make a decision on your loan and therefore may be able to help you with difficult situations or timing. If you need a loan processed quickly, go to a Mortgage Banker.
Mortgage Brokers operate in much the same manner as mortgage bankers with one exception - they do not have credit lines and do not use their own funds for your loan for even a short time. In most cases, you will see another lender's name on all of your loan documents - this is the lender you will be making payments to. Usually, this is also the lender who made the decision whether or not to approve your loan - many mortgage brokers do not have this authority. Mortgage brokers typically have relationships with dozens of lenders - mortgage bankers generally have fewer relationships. Depending on their relationships, mortgage brokers may be able to find a more advantageous type of loan for your particular situation and help you avoid going to numerous lenders in order to secure a loan approval. If you have credit problems, employment problems, or a unique financial situation, go to a mortgage broker.
Banks, savings and loans, and large national mortgage companies have a different motive in originating mortgages. Although some of these institutions operate like mortgage bankers, selling off all mortgages they originate so as to not tie up capital, many "keep" the mortgages they originate. In reality, large numbers of mortgages are grouped together and sold as securities, but again this does not affect your terms. Investors who purchase these securities do not want the hassle of collecting payments, paying property taxes, etc. So they pay the bank, savings and loan or mortgage company to handle this for them. This results in a monthly revenue stream that is likely to continue for a number of years. Because of this, the bank, S&L or larger mortgage company may be so interested in generating a lot of loan volume that they actually take a loss originating loans - this could mean a good deal for you. The downside is that you become one of hundreds or even thousands of loans that this type of lender is processing and it may be difficult to get fast resolution to any problem that crops up. If you have a good employment history, good credit and some time, consider a bank, savings and loan, or large national mortgage company.
In choosing a lender, evaluate the interest rate options that are offered, the closing costs that come with these options, and the type of lender making the offer. If your credit and employment histories are good and you have 3 weeks or so to get your loan approved, consider all types of lenders, especially banks and larger national mortgage companies. If you don't have this much time, a mortgage banker may be able to get your loan processed faster. If you have some credit problems or an unstable employment history, you will probably be better off with a mortgage broker who can present your application only to lenders who are likely to approve it.
Don Petrasek was employed in the real estate in industry for over ten years first as a real estate agent and later as a mortgage loan officer. He was President and owner of Lakeshore Mortgage in Rocky River, Ohio. Currently Don is webmaster of The Educated Home Buyer (www.educatedhomebuyer.com), a site designed to help homebuyers understand the home buying process and provide links to services for homebuyers. Email: EducatedHomeBuy@AOL.com
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