Millions of homebuyers shop for months to find the home of their dreams, but about half of all buyers don’t shop at all for the mortgage lender who is going to make that dream come true―or not.
A 2013 study by the Consumer Product Safety Commission found that almost half of all borrowers seriously consider only a single lender or broker before deciding where to apply, and approximately 75% only apply to one lender. Your mortgage is the largest loan you will ever have, and you’ll most likely be living with the lender you choose for the next 30 years. The CFPB estimated that a borrower taking out a 30-year fixed-rate conventional loan could get rates that vary by more than half a percent if they shopped for lenders.
COVID-19 Crisis Mortgage Policy Changes
Before diving into the “mortgage lender 101” portion of the post, let’s look at things currently in the midst of the COVID-19 crisis. As regulations and restrictions from the government are ever-evolving at a quick pace, it’s important to know all of the policy changes mortgage lenders are putting in place. JPMorgan Chase enacted a policy that’s putting a temporary stop on low down payment mortgages while the crisis is prevalent. “Due to the economic uncertainty, we are making temporary changes that will allow us to focus on serving our existing customers more closely,” Amy Bonitatibus, chief marketing officer for JPMorgan Chase’s home lending business, told Reuters. Chase Bank’s new policy states that it has temporarily eliminated standards for its mortgages and eliminated making loans with loan-to-value ratios above 80% as of April 13. Customers who apply for a mortgage after that date will need a FICO score of at least 700 and will be required to make a down payment equal to 20% of the home’s value or more.
JPMorgan stated these new policies won’t affect existing mortgage customers or low and moderate-income borrowers who qualify for its “DreaMaker” product, which requires a minimum 3% down payment and 620 credit score. Although JPMorgan is the first to lead the charge of mortgage lenders stopping low down payment options, that’s not to say more won’t follow suit. Stay updated by frequenting Homes.com’s COVID-19 page for any resources regarding real estate and the coronavirus.
Know Before You Owe
That study led to an entirely new process for taking out mortgages called “Know Before You Owe.“ The CFPC designed it to empower borrowers to find the best mortgage for their needs. It requires lenders to provide borrowers a disclosure of the interest rate they will charge, the estimated closing costs, and all fees and expenses they will charge. Lenders must provide this information within three days after receiving a mortgage application.
Homebuyers typically apply for a mortgage shortly after a seller has accepted their offer to buy. At this point, borrowers will know how much they want to borrow, how much they will put down, and the property they wish to purchase. This information, plus information from a credit check, give lenders enough to provide the specifics that borrowers will need to compare lenders and make an informed decision.
Borrowers can apply to as many lenders as they wish but should apply to three at a minimum to provide a reasonable choice. Each time a lender pulls your credit score, your score will suffer a minor and temporary decline. That’s a good reason to limit the number of lenders you are considering to three or four at most. You do not have to include the lender who provided you a pre-approval or pre-qualification letter that you used before you started home shopping.
So it’s a good idea to get your credit score in shape as soon as you start home shopping, if not earlier. For details on fixing up your score, check out Four Tips to Improve Your FICO Score.
Types of Institutions
Start by deciding what kind of lending institution you prefer. Here’s a shortlist of different types.
- Federally-chartered banks. These are the large, full-service lenders that have many branches and provide a full range of services, including deposits. Some are more committed to mortgage-lending than other profit centers and may be less competitive than other types of lenders. Advantages include accessibility through many branches and websites. The fact that the Federal Reserve regulates them could be significant in a time of crisis.
- State-chartered banks and community banks. These are smaller and regulated less than federally chartered banks. They have fewer or no branches and provide fewer services. However, they are more community-oriented and may be better at serving local needs, such as selling flood insurance or financing farms.
- Non-bank banks. These lenders are not banks but can be quite large. They are not as regulated as banks, do not accept deposits, and are only in the business of making mortgages and related loans. Since they specialize in mortgages, most offer a wide selection ranging from jumbo mortgages to low down payment loans. For military members, Veterans United Home Loans is an example of a “non-bank” lender that offers mortgages backed by the Department of Veterans Affairs.
- Credit unions. These are relatively new to the mortgage business, but credit unions are also the fastest-growing segment. Only the largest make mortgage loans. You can apply through your local credit union, and you may end up working with Credit Union Mortgage Association, a non-bank lender that works only for credit unions.
- Mortgage bankers. These companies work for a specific financial institution and package loans for consideration from the bank’s underwriters.
- Correspondent lenders. Correspondent lenders are often local mortgage loan companies that have the resources to make your loan, but rely instead on a pipeline of other lenders, such as Chase, to whom they will immediately sell your loan.
- Mutual savings banks. Another type of thrift institution, like savings and loans, mutual savings banks are locally focused and often competitive.
Questions to Ask
The loan estimate you receive back from your lenders may not provide all the information you will need to make a decision. Here are questions to ask.
What is their process for closing?
Make sure the lender’s timelines line up with yours. Find out when they will pull your credit scores. Don’t open or close any accounts during that time, or take out credit for any other large purchases. Ask about the lender’s closing process. Where will it take place? Do they work with a particular settlement attorney, or do they do it in house? Some lenders may offer a closing online.
How do they communicate with homebuyers?
Excellent communication is critical in the lending process. Ask how they will manage your loan process and all the steps along the way. Will you have an account representative who will inform you of updates? Do they offer an online system with notifications? Think about how you like to communicate and what works for your schedule.
What will be your down payment requirement?
Make sure your down payment is clearly stated. Make sure that the lender knows if you want to work with a down payment assistance program. Are they an approved lender with the FHA, VA, or your local housing finance agency?
How do they select their closing service contractors? Find out more about the appraiser, title company, settlement attorney, or any other supplier or closing services that they recommend.
Do Some Research on Your Own
It’s easy to search online and find out more about the lenders you’re considering. Check out Better Business Bureau complaints, surf consumer watchdogs like the Consumer Federation of America, and browse finance sites like Nerdwallet and Wallethub.
The amount of information you can find out on the Internet plus the “Know Before You owe” program puts borrowers in the driver’s seat. Use the tools that are out there to find the best deal that you can. You can easily save thousands in interest payments over the life of the loan and build your equity faster as a result.