The lender you use to finance a home can make the difference between an awesome experience, or a horrible one that costs you a lot of money. As a real estate agent and investor, I know there is a huge difference in the quality of lenders and banks. Some banks in my area you stay away from because they almost always mess up a deal. When I refer to the term: “lender,” I am talking about a person who you communicate with. The lender may work with one bank, one mortgage company or be able to shop multiple banks and mortgage companies for you. I know of lenders who work with great banks, but they manage to mess up deals on a regular basis. I have worked with banks that tend to mess up every deal they do, unless you work with one of their great lenders. It is important you line up a great lender with a great bank if possible.
There are many lenders and banks that advertise online and on the radio. Most of these lenders are national and work all across the country. In my experience it is much better to work with a local lender. They know the title companies, the local traditions, what fees are charged to who, the appraisers and more. When I have a client who wants to work with a national lender, I expect to have delays and problems with the loan.
How can you find a great local lender?
The best and easiest way to find a good lender is to ask your trusted real estate agent. Hopefully your agent has some experience selling houses and they know who the good lenders are. The real estate agent should give you a couple of choices to talk to. Interview those lenders and pick the one you feel the most comfortable with. Most lenders will have similar rates and terms for owner occupied loans. If you are an investor, looking for a line of credit, or need a different type of financing, the rate and terms start to vary.
Another place you can look for a lender is the bank you have savings or checking accounts with. Some of these banks have great lending programs, but not all of them. If you want to use your own bank, I would ask your agent if they have any experience working with that bank. I know of some large banks in our area that are horrible at mortgages.
You may also find online mortgage companies that sound great, but may not pull through when needed. I have had multiple experiences with online mortgage companies that offered lower rates online than what they actually gave consumers, greatly misrepresented the time it would take to close a loan, or made other huge mistakes. Remember a local lender must do a good job to maintain their reputation in the community. The better job they do, the more people will use them, and the more money they will make. A national lender can screw up, and not care because they get their business from advertising across the country, not local referrals.
How can a lender mess up a deal?
Getting a loan on a house is one of the most important parts of buying a home. Most people cannot pay cash and even if they could, a loan usually makes more sense. Here are just a few of the things I have seen lenders do that delayed or killed a deal:
- Not ordering the appraisal on time: In Colorado and some other areas of the country appraisals are taking weeks to complete. If a lender does not order the appraisal right away it can delay closing weeks or longer. Delays can cause havoc with buying a house, especially if you must sell your house in order to buy another.
- Not properly qualifying a borrower: I had a listing for sale where the lender did not find out the buyer on a house had a recent bankruptcy one week before closing! This should have been known before the buyer even made an offer on a house. The buyer could not get the loan, lost money performing an inspection, and paying for the appraisal.
- Not knowing their loan products: You would think a lender would know how their loans work, but that is not always the case. Some lenders grossly overestimate how fast they can complete a loan, and even misquote the costs.
- Thinking they know the seller better than the listing agent knows the seller: Many lenders assume HUD homes and REO sellers will act like normal sellers by making repairs etc. HUD and REO sellers are very different and often will make no repairs even if required by an appraisal. I have seen many buyers waste a lot of money because the lender did not know how HUD or REOs work.
- Not knowing the best loan option for the buyer: There are a lot of loan options as we have discussed in my blog: VA, USDA, FHA, FHA 203k, Conventional, and more. You can also use down payment assistance programs with many of these loans. Not every lender is approved to offer every loan product. Some lenders may steer a buyers towards the wrong loan, because they do not offer the right loan for that buyer like a 203k rehab loan. That lender may not be approved to offer state funded down payment assistance so they convince the buyer to use a much more expensive loan.
What are some questions you should ask a lender?
Not every lender is great, and just because your real estate agent refers them, does not mean they are great either. It helps to get an agent to give you some choices, but there are some things you can ask as well to make sure you have the right lender:
- Are you approved for down payment assistance programs, and if so which ones?
- How much do you charge for origination fees?
- What other fees do you charge besides origination fees?
- What are the current rates for a 30 year fixed rate mortgage?
- How long will it take to close on a loan?
- What debt to income ratio will I need in order to qualify?
- Do you have loan programs for homes that need repairs? FHA 203k, other rehab loans, escrow programs?
- Do you lend on HUD homes and are you familiar with their repair escrow program?
- Do you offer loans with removable private mortgage insurance?
- Does your company/bank sell the loans they originate or keep them in-house?
Many of the answers to these questions will not mean much to you. This is why it is important to talk to a couple of different lenders to see how their answers differ. You will start to see which lender offers the best deal and has the most options.
One of the biggest advantages of buying a house is being able to get a great deal. One of the biggest challenges of getting a great deal is that many of those homes need repairs. The right lender should be able to work around repair issues with the right loan.
What if a traditional lender does not have the loan for you?
As a real estate investor I ran into problems buying rental properties because traditional lenders stopped lending to me. They said I could not have more than four mortgages and I could not finance fix and flips. Those banks and mortgage companies made it sound like I had no options. The truth was their company or bank would not lend to me, not that no one would lend to me. The same goes for owner occupants who want to buy a house that needs work. We have saved many deals because we convinced a buyer to change to a local bank, after the national bank denied their loan.
If you cannot get a big bank to lend to you, you may be able to get a smaller local bank to give you a loan. Local banks often have guidelines that are not as strict as bigger banks. These banks are often called portfolio lenders, because they hold the loans in-house as part of their portfolio. It is easier to buy homes that need repairs, easy to qualify for loans in some cases, and the portfolio banks are often easier to work with. The draw backs with portfolio lenders are they do not always have 30 year fix loans. You can find out more about portfolio lenders here.
Finding a lender is not difficult, but you must make sure the lender you work with is a good lender! Take your time interviewing potential lenders to find the best one for you. If you have trouble qualifying for a loan with a traditional lender, a portfolio lender might be able to help you.