Our goal here is to help you understand who’s involved in the process of helping you get a loan to make your home purchase possible. We’ve outlined broader issues involved loan types and the process of obtaining a loan in our section called Loans and Financing.
The Lender's Team
In principle, you can obtain a mortgage loan from an individual. I’ve had clients who’ve received their mortgage loan from a family member or a family trust. In this situation, a single individual may set the rules for your loan, talk them through with you, make the final decision regarding whether to make the loan or not, and handle all the necessary paperwork. When dealing with most mortgage lenders, however, there are several people involved in this process. Since you’ll have direct contact with some of them, and hear of others, you should know who’s involved.
- The Loan Officer or Loan Originator. The loan originator is the public face of most mortgage lenders. They are the person who handles loan inquiries and interacts with potential borrowers, whether in face to face meetings or by phone and email. The loan officer’s job is to find a loan that will meet your needs and help you submit an application for that loan. It is typically the loan officer who will act as the lender’s liaison with you and with any real estate brokers or attorneys involved in the transaction.
- The Loan Processor. The loan processor handles the application once it is submitted and gathers supplementary information, confirming your employment, income and savings for example. They also play a key role in putting papers together for closing. Depending on the way the lender’s business is organized, you may be dealing directly with the processor during this phase of the transaction. In other cases, all communications with the processor may be flown through your loan officer.
- The Underwriter, Once all the required documents and information have been gathered and put together by the processor in the proper forms, this loan package with be forwarded to the underwriter. The underwriter will review all of the documentation and make the final decision regarding whether the lender will make the loan. The underwriter’s primary task is to make sure that your package fits the criteria specified for the loan program so that the mortgage company can sell or transfer the loan to the investor that is funding the loan.
- The Investor. Funds for most mortgage loans come not from your lender but from other sources. The rules and conditions for various loan types are set by these entities, not by your lender. In rare cases, your lender may contact the fund source to obtain assurance that you meet their criteria or to ask for exceptions to these rules in your case.
Good General Sources of Information on Loans and Lenders
With respect to the general issue of loan types, lenders, and interest rates, there is a virtual ocean of information on the web. Begin with our section on Loans and Financing
, but another good source is HSH Associate’s site
. Both describe the many types of loans that are available, how loans are priced, how your credit influences the types of loans you qualify for, and what current interest rates are like. They also provide mortgage calculators to help you get a feel for what you may be able to borrow as well as information on current loan rates. However, one of the problems people have with oceans, including oceans of information, is that they can so easily drown in them.
So, while it can be useful to familiarize yourself with some of the information on these sites before you meet with a lender, I would strongly recommend that you sit down with a real live loan officer very early in the purchase process. Elsewhere, I’ve discussed why beginning work on the loan at the outset is so critical to the process of focusing the home search and negotiating the contract (see Getting Started). Here I want to emphasize that you need to begin this process with a real live human being, not with a web site, a book, or a telephone call.
Why a Good Loan Officer is Useful
A good loan officer knows more than three or four basic loan options, or how to calculate the loan amount you can qualify for, or what to put in the blanks of a loan application. They’ve spent years studying the multitude of loan options that are available on the market. They’ve also spent years matching loans to buyers, considering issues such as the buyer’s risk tolerances, their credit and employment history, or their plans for how long they are likely keep the property or the loan. A good loan officer will know whether you are likely to run into problems if you chose a particular type of loan to finance a “fixer-upper” property or if you decide on a condominium rather than a single family home. You don’t have this level of expertise and you will never get it from a web site or a book. No mortgage calculator on the web is going to solve this calculation.
A good loan officer who has worked for years in your local market also knows how to match loans with the realities of that market. They will be sensitive to the fact that what you can afford to buy in Erie may differ by $100,000 depending on whether you’re in the Boulder County or Weld County side of County Line Road. They will know that an appraiser from Castle Rock will not know Boulder neighborhoods and the Boulder market and that they may not have access to sales data given the multiple MLS systems in the area.. They will know that the proximity of Rocky Flats is not a big resale issue in Lyons. And when you get to the point where’re submitted an offer on your dream home, the fact that the listing agent knows your local mortgage lender or your loan officer from past transactions, and has confidence in their ability to get the job done right, may make the difference between the seller accepting your offer rather than someone else’s.
Coach vs. Gatekeeper
When you meet with a loan officer to review your options, you need to understand their role in the system. They are not the gatekeepers to the bank vault. Their job is not to keep you from getting the bank’s money, but to find a way to make you a loan. With very few exceptions, lenders are not loaning their own money. They are loaning money that comes from other funding sources including governmental, quasi-governmental, and private organizations. There are no limits in the funds available for lending. If your loan officer could originate a billion dollars in loans each month, she and the mortgage company she works for would be thrilled and the money would be there to fund the loans. You also need to understand that it is not your loan officer, her underwriter or her company who make the rules under which you’ll get your loan. The rules are established by the investors who provide the money for the loans to the mortgage company. The loan originator’s job is to evaluate your financial situation, your plans and goals for the property and the loan, and your tolerance for risk, and then to figure out which loan program or programs provide the best match and will create the least headaches given the rules under which these loans are granted. They are your coach and councilor, not your enemy. For them to do their job, they need to know everything you know about your financial situation and your plans.
Locate a Loan Officer Not an Interest Rate
Many buyers, even experienced buyers, try to use loan rates and loan costs as the basis for this decision. After all, if you’re borrowing money, you naturally want the lowest possible interest rate and you want to keep the fees for obtaining your loan to a minimum. It just makes sense to call around and find the lender with the cheapest rates and the lowest costs, and then set up a meeting with one of their loan officers.
While this strategy would seem very difficult to fault, it actually makes almost no sense at all. Some key points:
- Committing to an Interest Rate. Lenders generally won’t commit to a loan rate until after you’ve contracted on a home and have a closing date set. This isn’t part of some evil conspiracy. When the lender commits to a loan rate with you, they are simultaneously committing to take a specific chunk of money from their funding source at a specific interest rate. They can’t afford to do that unless you’ve committed to buying a specific home at a specific price on a specific date. This means that as you call around asking lenders what their rates are, they are not committing to provide a loan at a particular rate. Loan rates change every day, often several times a day. Unless you’ve already contracted to buy a home, the interest rates they are giving you are almost entirely hypothetical.
- Rates are Determined by Profit Margin. Since mortgage lenders are generally all getting their funds from the same sources at the same rates, the difference between the rates and fees that lenders actually charge is primarily a function of the margin between their cost and your cost for borrowing the money. This creates a serious problem for the borrower who is calling around to find the lender with the best rates and lowest costs. A loan officer who is ethically challenged may quote you rates that give him, and the mortgage company he works for, little or no profit margin. In principle, he could make a loan at that rate, but when it comes time to lock your loan he’s not going to accept that margin. He can’t afford to. So, if you use this “lowest-rate” technique to find your mortgage lender, you may just be doing a lot of legwork to systematically locate the least trustworthy people available.
- Available Rates are Dependent on the Borrower and Loan Program. No lender can really give you serious answers to your questions about interest rates until they’ve decided what type of loan programs you’re likely to qualify for and what types of programs will meet your needs and goals. They probably can’t even give you their best rate on a specific loan type without knowing your credit history and/or credit score. And you don’t want a lot of lenders pulling your credit report and credit score, because this can actually reduce your score and increase the interest rate on your loan.
Criteria for Selecting a Good Loan Officer
Ok. If you need to start by sitting down with a good loan officer and talking through your situation, how do you decide who to sit down with? It’s a good question, and like most good questions, there is no easy answer. But here are some thoughts.
Knowledge and Experience. There are a myriad of loan types and loan programs, all with strengths and weaknesses and all with their own rules and restrictions, and all of this is constantly changing. Matching this fluctuating universe with your situation and your needs is not simple. Further, as you work through the purchase process, there will be many points at which the loan officer’s knowledge of your loan program and its rules may be critical. You need to work with a loan officer who has a lot of experience and does a lot of loans.
FHA Loans. If you have a down payment of less that 20% of the purchase price, an FHA loan may well be the best option for you. The only way that you’ll get an honest evaluation of the pluses and minuses of an FHA loan is if your lender is approved to originate FHA loans. If it’s possible that your down payment will be less than 20%, and particularly if it may be less than 10%, begin with a lender that routinely handles FHA loans.
Recommendations. Anyone who has been through more than one home purchase knows that the loan officer and the other mortgage company staff need to do their job right and do it on time. They also need to maintain good communication with everyone involved if the transaction is going to work smoothly. You can’t evaluate a mortgage lender on this issue unless you know people who have worked with them before. Get recommendations from your co-workers or from your real estate broker, and use those recommendations to pick someone to start with.
Mortgage Banks vs. Mortgage Brokers. A mortgage bank initially loans its own money and then transfers the loan to the funding source. A mortgage broker claims to shop for the best loan they can find and originates the loan through that source. Some people claim that mortgage brokers can find you better deals. Others claim that brokers are simply “middle men” and that their added commissions will increase your costs. I strongly prefer mortgage banks, because your loan officer will have closer relationships with the processors and underwriters upon whom we depend to get things done right and done on time.
A Plan of Action
Begin by getting specific recommendations not just for mortgage lenders, but also for a specific loan officer. Talk with family members or co-workers or with a real estate broker who you have some level of confidence in. The latter is probably your best source. Real estate brokers have repeated experience with many loan officers. They know which ones know what they’re doing and do a good job time after time. While your interests and that of your real estate broker may be at odds in many contexts, you both have a vested interest in your working with a first rate loan officer and with a mortgage company that does the job right.Meet with that local loan officer and tell them everything you know about your financial situation and your plans for the property and the loan. Work through the options and decide on one or two loan programs that seem to make sense.Get a Good Faith Estimate from that loan officer. This is a standardized written statement outlining the fees that will be charged by the lender and by the title company
. Ask the lender to specify which of these are lender fees and which are title company fees, fee that the lender really has no control over.Once you know what loan program or programs you’re likely to use, and once you know what the lender fees are for each program, call your loan officer and ask what the interest rates for those programs would be if you locked today. Then call several other loan officers who someone has recommended to you and ask them for their rates on those programs and for a Good Faith Estimate of fees. Make sure you get all these rates on the same day or your comparison will be meaningless, since rates will change on a daily basis. Compare rates and lender fees to verify that your lender’s rates and fees are competitive. You may even be able to use the competitive bids to try to negotiate lower fees with your lender.
Assuming the mortgage lender you started with is competitive on rates and fees, complete the loan application process and stick through the rest of the transaction unless you have serious reasons to do otherwise.