Bank, credit union, broker, or direct lender? What is the difference, and where is the best place to get a home loan? Having worked for a national bank, a broker, direct lender, and having interviewed with a credit union, I can provide some insider information. Here are some facts most consumers don’t know.
A mortgage broker shops wholesale lenders to find the best option for your loan. Think of a travel agent shopping airlines for you. Some people assume that using a broker costs more–a middleman fee–but that is not true. Because brokers go to wholesale lenders, they can often find you cheaper financing than if you go directly to your retail bank.
Brokers are required by federal law to obtain a loan officer license from the National Mortgage Licensing System. This means they must attend classes in lending law and requirements, then pass a rigorous test that about 30 percent of applicants fail. They must also be fingerprinted and pass a background investigation and credit investigation.
A direct lender uses their own money to lend rather than broker out to wholesale. Using in-house underwriting is sometimes an advantage for closing faster and for getting a more streamlined approval.
Loan officers working for a direct lender must obtain their NMLS license, passing all tests and background checks, the same as for a broker.
A bank also uses their own money, but typically, they do not close faster or easier. In fact, the large banks are usually slower and have tougher underwriting requirements to pass. It is not unusual to be asked for more documentation in the 11th hour, requiring getting an extension on the loan.
Loan officers at a bank do not have to get a NMLS license. They do not have to pass an NMLS test. They do not get fingerprinted or have a background investigation. I personally know of a case where a woman who was under investigation for loan fraud waltzed into a big bank and was promptly hired.
Everything above that applies to a bank also applies to a credit union. Some credit unions have excellent pricing and service, but others have horrific service. One popular West Coast credit union that I interviewed with has a bad business model. They have application takers in their branches, then those applications get passed on to a regional loan officer who handles dozens of branches. So the person you met with in the branch is not your actual loan officer, nor does that person have any training in mortgage loans. I’m sorry, but that is not my standard of service when it comes to something as monumental as buying a house.
FULL SERVICE MORTGAGE LENDER
I’ve saved the best for last. A full service mortgage lender has their own money to lend (like a direct lender) but can also broker out when needed. This gives the most options and the most flexibility.
Loan officers must meet all NMLS licensing requirements and pass all investigations and checks.
Personally, I work for a full service mortgage lender, and I like having more choices for my clients. I am state licensed in WA and CA, so I have taken state courses for both states, and have passed state tests as well as the big national test. I was fingerprinted twice and have passed all background tests, including an annual credit investigation.
I want to make everyone aware that mortgage interest rates have been and are continuing to rise rapidly. The rate you were quoted last week no longer applies. In fact, the rate you were quoted yesterday no longer applies. Your interest rate is not secure until it is locked.
To lock your rate, ask your loan officer to do so. For a matter this important, make the phone call. Do not rely on an email which can be overlooked or missed.
A rate lock is tied to a specific property address, loan amount, and other terms. There is a “Lock and Shop” program where you can lock in your rate before you have an address; however, that is riskier to the lender, so the interest rate is higher, which pretty much defeats the goal in most cases.
If you want a lower monthly mortgage payment, I strongly suggest you resist the temptation to wait until after the New Year to find a house. Get with your Realtor now and make an offer. Then the minute you have a mutually signed Purchase Agreement, send a copy to your loan officer so that you can lock in your interest rate.
If you know someone who is thinking of buying a home in the near future, please pass on this vital information, because procrastination will result in a higher payment.
Thank you for reading my blog posts and for helping pass on intelligence through social media.
The best time to get a map is before you walk into the forest. Likewise, the best time to get your mortgage map is before you go shopping for a house. If you work the system backwards, you are setting yourself up for possible disaster.
Here is a simple checklist for home buyers:
Notice that you take care of the financing first, then the house shopping second.
1. Choose a lender by asking for a cost estimate worksheet.
This is your very first step. Not, go house hunting. Not, get pre-approved. And certainly not, make an offer! Why? Because, you don’t want to shop for houses that you are not qualified to buy, so you take care of your financing first. And, you don’t want multiple lenders pulling your credit report, so you choose your lender first. The way to choose a lender is to review the estimate worksheet and speak with the loan officer to ascertain how they answer your questions. (What to ask a loan officer is a topic for my next blog post.)
2. Get pre-approved for financing.
Now that you have your trusted loan officer, you are ready to have your credit report checked, provide your financial documents, and receive your official pre-approval letter.
3. Choose a Realtor.
I recommend working with a certified Realtor rather than a real estate agent, because a certified Realtor has gone through extra training and is held to a higher standard of ethics and work practices.
4. Go house hunting and make your offer.
Your Realtor will guide you through the offer and negotiations. Your loan officer will guide you through the financing.
Thank you for stopping by my blog. Feel free to share this simple list via social media and with others who are thinking of buying a home. You would not believe the horror stories I’ve heard from people who have run headfirst into disaster by signing purchase contracts before they had their financing approved. I hope to save more people from that situation!
One person owns a state licensed shop that sells cannabis and related products. His shop does not have the 24 months required for self-employment, but he owned another business previously, so he can claim self-employment for more than two years.
Anther person is a W2 employee who works tending the marijuana plants. Prior to his current position, he worked for a nursery tending many types of flowers and plants. He says he has a history doing the same type of work, and the company he works for is legal in Washington state.
Can the shop owner and the employee qualify for a mortgage based on their incomes?
To get the answer straight from the source that provides money to banks and mortgage lenders for conventional loans, I spoke directly with Fannie Mae representative Deborah DeGarmo on June 21. (A transcript of our conversation was recorded at Fannie Mae and is available for underwriters who call and request the information, she said.)
The W2 employee who works for a legal business that sells marijuana can qualify for a mortgage just like any other W2 employee.
The business owner of a shop that sells marijuana cannot qualify for a mortgage based on that income, because that type of business is not yet federally recognized as legal.
So there you have it, from Fannie Mae. To qualify for a conventional loan, you need a down payment of at least 3% (which can be from an acceptable down payment assistance program). If you are in WA or CA, I am licensed in those states.
Map source: psu.edu
If you plan to buy a house or refinance in the foreseeable future, this is important information. To avoid stress, grief, more paperwork, and a possible loan delay — or even a denial — don’t make these common mistakes.
Three Mistakes Home Buyers Make (Also applies to people refinancing)
- Don’t move money around!
This is not the time to transfer funds from one account to another. Keep your money where it is until after your loan closes. If you get angry at your bank and want nothing more than to say, “I’m outta here!” I don’t blame you a bit for feeling that way. But please, keep your patience and save that action for later. If you close one account and open another, you are in for a hassle in the underwriting department. Yes, you can still get your loan, but why set yourself up for more paperwork and letters of explanation? If a family member is giving you a gift toward the down payment, the same advice applies. Have them keep the funds in their own account until you receive instructions from your loan officer. Most lenders will ask the family member to wire funds directly to the closing agent at the time of signing.
- Don’t open new credit! Don’t buy a car!
No exceptions. Do not purchase new appliances or new furniture until after closing. Do not open a new credit card to get the instant discount. And whatever you do, don’t you dare buy a new automobile, truck, or SUV. Taking on any new debt could cause your loan approval to turn into a denial — even if you have signed the loan note and closing disclosures. Until your loan is officially funded and closed, the lender can still deny your loan.
- Don’t close out your good credit!
This is not the time to decide you have too much open credit and start shutting down your credit cards. Doing so could lower your credit score for two reasons. First, you can lose the positive points that the on-time credit card was awarding you. Second, you will be changing your percentage of total credit usage-to-available credit, and this has the potential of lowering your score. Even though the lender has already pulled your credit report and approved it, most lenders will do another soft pull right before closing. You don’t need to risk lowering your score and therefore risk your interest rate or approval.
Thank you for stopping by my blog. Feel free to subscribe. I post tips on mortgage and credit about once a week. If you have a topic you’d like to see, please email me here.
Mid-March, just about the time of the NCAA basketball tournament, home sales skyrocket to the highest of the year. That’s what happened last year and in the years before. There is no reason to think 2016 will be any different. Savvy sellers who have been waiting like patient cats suddenly list their homes for sale. Buyers, giddy with excitement at finally seeing more choices on the market, race to outbid one another.
I saw it with my own eyes right on my little cul-de-sac. Three home owners placed their properties for sale, and all three sold above asking price inside of a week.
Typically, the market continues at a brisk pace (although not as brisk as those two mad weeks in mid-March) until mid-August when the heat finally drives buyers off the streets and down to the beach, and families with children turn their attention to back-to-school.
If you are in the market to buy a home and want to save tens of thousands of dollars, you might want to get your Purchase Agreement signed around now before the spring frenzy begins. Whatever you do, make sure you have a written pre-approval letter in hand before you go out house shopping. Without that, no seller will take you seriously. If you are buying in California or Washington, I am state licensed in those states and am happy to help you.
Contact me here or send me an email at cwarren @ envoymortgage.com.
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- Interest rates will rise slowly and gradually, ending 2016 about half a percent higher than 2015.
- March will see a rapid increase in home sales with buyers bidding up prices.
- More home buyers will waive the home inspection contingency in “hot markets.” (A mistake in my opinion.)
- Hot markets will be Seattle-Bellevue, Denver, Dallas-Fort Worth, Portland, Boise, Salt Lake City, and Omaha. (Thanks to Bloomberg for this one.)
- More young home buyers will look at neighborhood walkability as well as ability to ride their bikes to work as an important consideration.
- First time home buyers will look at townhomes and condominiums for more affordability, and lenders such as Envoy Mortgage will close more of these purchases due to their more lenient guidelines for multi-family structures.
- Buyers will preview homes online but will avoid clicking on online ads by agents and lenders.
- Builders will continue to build larger homes on smaller lots, making existing homes more attractive to families who want privacy.
- More home buyers will get pre-approved before touring homes, thanks to being better educated about the home buying process.
- More people will choose the conventional 3% down payment loan over the FHA 3.5% down payment loan.
- First time home buyers will take advantage of private grant money for their down payment as well as state down payment assistance programs.
- Underwriting requirements will lighten up and do away with some of the overly tight requirements of yesteryear.
Thank you for 28,000 views of my blog. I know next year will see even more! Thank you to all the readers who purchased my books and a double thank you to the readers who emailed me their gratitude for the information.
May God bless and keep us all healthy and safe in 2016!
Here are four things you should know about how credit cards affect your FICO score:
1) If you carry a balance that is over 50 percent of the limit, you will lose credit points.
To remedy, either call your creditor and ask to have the limit raised, or spread out your spending over an additional card. I am assuming, of course, that you are not overspending for your income and budget. That is another topic altogether!
2) If you pay off your balance in full each month, you will be rewarded with additional credit points.
The credit system recognizes the proper use of credit and adds points to your FICO score when you don’t carry a balance from month-to-month. Moreover, you don’t waste your money paying interest that is non-tax deductible.
3) If your total use of credit is below 50 percent of your total available credit, you will gain points.*
Not only does the system look at your individual credit card balance-to-limit ratio, but it also looks at the total of all your available credit cards. So if you are maxing out all your cards, your score will receive a double whammy in point subtraction.
4) Any payment that is 30 days late will dock your score. If you’re 60 days late, it gets worse, and ditto for 90 days.
If you are 31 days late for the first time and call your creditor immediately, they might give you grace and not report you as late, especially if you are a long-time, perfect-paying customer.
If your one-off late payment has already reported, then you should take steps to get that removed from your credit report. The law gives you the right to dispute the late payment, and many creditors are happy to remove the late payment when you send the right type of letter through the good old-fashioned USPS mail system. Why? Because it is a good business practice for them, and it is within their legal right to do so. As the creditor, they own your credit information.
When you understand how the system works, you are in control of your own credit score.
* If you reduce the 50% credit usage to 30%, you gain even more points.
Having a score of 740+ puts you in the top tier for a conventional mortgage loan. If your score is 800 or higher, you gain respect, bragging rights, and may qualify for slightly better terms, depending on the lender and loan program.
Learn what the credit professionals know that you don’t about restoring credit and your good name. I received an email from a gentleman who read this book and has been following the steps for do-it-yourself credit repair. “Three negative accounts gone, three to go,” he wrote. Yes, credit repair does work when it is done properly.
Unless you’re as cute as a cat or have just won the lottery and plan to pay cash for everything for the rest of your life, you need excellent credit and a high FICO score in order to obtain the best financing, the cheapest insurance premiums, and save money.
The first house I bought as a young, single woman was a smelly little house with stained floors, dingy walls, and a stove covered in black baked-on gunk. Part of the roof was rotten, and the refrigerator was disgusting. It was ugly for sure, but it was all I could afford with my pre-approval of $80,000. The best thing it had going for it was the charming white picket fence.
Before you feel sorry for me, let me state that this turned out to be one of the best real estate purchases I ever made. Here’s why.
Ten Things I Learned From My Ugly House
- After ripping up the dog-stained carpet, I discovered the hardwood floors were permanently damaged. There went my vision of having beautiful hardwoods as I couldn’t afford to replace them. It was much cheaper to install a nice wall-to-wall carpet.
- Fresh paint in a light neutral color completely brightened up the home. My daughter chose pale pink for her bedroom, and my son wanted green. Letting them choose their bedroom colors gave them a sense of personal ownership in the new house.
- It made more sense to have the disgusting appliances hauled to the dump than to try to renovate them. New appliances made me feel like I had a new kitchen even though the cabinets and counter tops were the same.
- I splurged on pretty light switch covers and I could not believe how many compliments I got on those little things.
- Before my loan could close, the lender required the seller to replace the rotten roof. (It showed up on the appraisal report.) This delayed the closing of my loan, but it was worth the inconvenience. (Thanks again, Mom, for letting me crash at your place for a month after I had to be out of my apartment.)
- I chose an FHA Adjustable Rate Mortgage. This turned out to be a very smart choice, because I saved a significant amount of money on my payments for the three years I was there. Because this wasn’t my dream home, I knew I wouldn’t live there a long time, so taking a 30-year fixed rate would not have made sense. Why pay more interest than needed?
- Because I got a lower interest rate with the ARM, my payments paid down the principal balance faster. Thus, when I sold the house three years later, my loan pay-off was smaller and I netted more profit than I would have if I’d taken the fixed rate mortgage.
- It doesn’t take a dream house to be happy. I discovered a great deal of satisfaction by cleaning up that little house. When my friends came to visit, they exclaimed, “What a cute house!” And it was.
- If the bedroom window won’t open on a hot summer night, don’t give it a little smack with your hand. I tried that and my hand went right through the glass, which cut my wrist pretty badly. It took a bath towel to stop the bleeding. Fortunately, 9-1-1 sent out a handsome fireman to wrap me up and take me in for stitches.
- A smelly, little house can bring in a nice profit after you clean it up and live there for three years. I sold the house for $125,000. After subtracting the money I put into the house and subtracting the payments I’d made, I calculated that I earned over $300 per month just for living there.
How’s that for a happy ending?
One mistake people sometimes make is closing off their credit cards so that they have no open accounts.
With no open credit card accounts and all your auto loans, student loans, and other installment debt paid, your credit score will disappear. This is because the credit bureaus have no way of rating your credit when you have no credit!
I believe in living debt-free. However, it is imperative that a person keep two to three credit cards open and active in order to qualify for the best mortgage at the best price. Otherwise, you could find yourself being forced to take a higher priced mortgage — or pay all cash for your house.
For a conventional loan, lenders want to see three trade line accounts. A closed installment loan (auto, etc.) is acceptable if it is not more than three years old.
For an FHA loan, lenders want to see two trade line accounts.
You do not need to carry a balance from month to month. In fact, it is better for your credit score if you pay off the balance in full each month and avoid paying interest. You can use the credit card minimally once a quarter to keep it active and accruing credit score points.
I urge you to pass on this information to folks who have dug themselves out of debt and then make the error of closing down all their credit cards. People get so sick of being in debt, that when they are finally free of that burden, they shut down all their accounts. THIS IS A BIG MISTAKE! Unless you are financially independent and will be paying cash for your houses, you need some open credit and a credit score to get a good mortgage.