Getting a mortgage loan in Colorado can be a daunting task. Of course, a good REALTOR will suggest some reliable lenders. But, your friends or colleagues might also make suggestions too. How do you choose the right mortgage lender? Its’ not all about the lowest mortgage rate. Ask questions before committing to anyone!
The idea of interviewing your mortgage lender is not appealing. In a business that runs on referrals and “He said, She said”, the most unappealing steps to a home loan might be the most valuable. I’ve been doing this a long time. And, almost without fail, when one of our buyers “Goes Off Campus” to an unknown lender, the results are never good. I would like to offer some of the questions that were never asked but should have been.
We certainly hope you never get trapped with the “wrong lender” for one of the most important jobs effecting your life. These questions should help you along.
How Do Mortgage Lenders Set Rates
- What are mortgage interest rates based on? The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.
- When the Fed “changes rates,” what does this mean? And what impact does this have on mortgage rates? The answer may surprise you. When the Fed makes a move, they are changing a rate called the “Fed Funds Rate.” This is a very short-term rate that impacts credit cards, credit lines, auto loans and the like. Mortgage rates most often will actually move in the opposite direction as the Fed change, due to the dynamics of the financial markets.
- What outside factors affect interest rates? There are several economic factors that can affect interest rates, such as the rate of inflation and the unemployment rate. In general, negative economic news puts downward pressure on rates, while positive economic news puts upward pressure on rates.
- What is happening in the market today and what do you see in the near future? If a lender cannot explain how Mortgage Bonds and interest rates are moving at the present time, as well as what is coming up in the near future, you are talking with someone who is still reading last week’s newspaper. That’s probably not a professional with whom to entrust your home mortgage financing. More than likely, this is one of the largest and most important financial transactions you will ever make. You might do this only four or five times in your entire life.
Where is the Loan Sold?
- Do you sell directly to Fannie and Freddie? And, what does this mean for me the borrower? What that means to a borrower is there are no investor underwriting overlays. That makes it easier for a borrower to get qualified for a mortgage loan. For example, when a borrower is self-employed, Freddie Mac will allow using only 1-year tax returns to qualify. Although borrowers must prove 2 years self-employment, they may use one year instead of two years with Fannie Mae. Many banks and lenders only sell to Fannie Mae. I think it is most important to know you are working with a loan officer who is very competent. And, that they are backed by a lender that sells directly, allowing more flexibility than banks with overlays or Brokers.
- Are you acting as a Correspondent or Broker? The difference between the two is Correspondent Lender finds counsels and qualifies borrowers, processes, underwrites, closes and funds the loan with their own money. Or, a Broker only finds the borrower. A Broker does not provide final loan approval or disburse money for funding. The Correspondent Lender has more control as everyone involved is an employee of the company vs sending the file to an investor who we do not have a consistent relationship with or possibly have the most recent underwriting requirements.
- Is your potential lender a broker or a banker? A Correspondent Mortgage Banker has many investors where they can place a loan with after closing and funding the loan in our name. A correspondent bank is required to maintain a percentage of all loans closed in their name and accept full risk of loans made. A Broker only finds the borrower and has no risk after closing. An online lender could be a broker or banker, however, has the limited personal connection with the borrower. The person who talks you today will rarely answer your next call. A Banker, such as one of the large National Banks typically underwrites to Fannie and Freddie but often has internal underwriting overlays that are more conservative than the Fannie/Freddie agencies.
Pre-qualified or Pre-Approved?
- What’s the difference between being pre-qualified and pre-approved? Pre-Qualified is usually done by just verbally or manually gathering information from a borrower, pulling a credit report and stating the borrower is pre-qualified for a purchase price and loan amount based on preliminary information. A Pre-Approval is based on gathering all of borrowers documentation and obtaining a loan approval thru an automated underwriting or an underwriter. Get pre-approved to improve your chances in multiple offer situations. Sellers will be more impressed.
- Do you get a commission on my loan? Yes, it is set to a given percentage of the loan amount. Per government regulation, there can be no variance in the percentage of income once established.
- How competitive are their rates? Mortgage lenders have to be competitive to be on top. However, it may surprise you, but the lowest interest rate is not always the BEST solution to your home financing. Many factors such as “points”, underwriting and processing fees can make a difference in the actual cost. This is where your trust and comfort with your loan officer will pay off big time.
- How closely do you work with your underwriters? The right answer is: Our underwriters are all employees of our company and we work with the same underwriters on every transaction. It’s actually best if the underwriters are in the same physical office for even better communication. We will be communicating with them directly and daily.
- Do you have any underwriting overlays? Or, is the only underwriting to Fannie and Freddie Guidelines? Look for a lender that underwrites to Fannie and Freddie but can also place your loan with another investor if need be. Sometimes, portfolio loans are the best for high balance jumbo loans or foreign nationals on visas.
- How soon can you get us to closing? A closing can happen as soon as 10 days on a purchase transaction if the borrower provides all documentation on day one of loan application.
- Is there any chance funding will be delayed? How can you assure me the money will be there by the closing date in the contract? Colorado a table funding state? That means there usually isn’t an escrow period like in other states. Contract dates must be met. Otherwise, your earnest money could be at risk.Out of state lenders are notorious for not knowing this.
Last but not least, take notes and hold your lender’s toes to the fire if you don’t understand a point. But at the same time, if your lender asks you for certain documentation, get it back to them yesterday. Don’t wait. Don’t procrastinate. What you do affects everyone in the transaction too!
But, start by asking the questions of any mortgage lender you choose. An ounce of prevention is worth a pound of cure!