You have a lot of options when it comes to getting a mortgage. Buyer beware, though! Not all lenders are created equal. There are three main channels that you can go through to get a home loan:
- Online banks—USAA, Quicken Mortgage, Costco, and so on.
- Local banks and credit unions—Residential Mortgage, Alaska USA, Wells Fargo, and so on.
- Brokers—Pinnacle Mortgage Group (PMG), First Rate Financial, and so on.
What is the difference? Which option is best for you?
Online banks usually bill themselves as the low-price leaders. They say that their costs are lower than those of local banks or brokers because they have consolidated office space in one location and do all of their business online.
The challenge with online lenders is that real estate is very local, and online lenders don’t have intimate knowledge of any specific marketplace. Most real estate agents in our market won’t take a preapproval letter from an online lender because there have been too many issues that prevent the loan from closing. And when, not if, issues arise, the online lenders can hide behind the Internet and phone. You can leave all the messages you want, but you can’t drive to their office and talk to them. When major issues arise, real estate agents call on a local lender to save the day.
Banks are the most widely available option in most markets. Banks are everywhere and easy to get to. They have huge marketing budgets and make it easy to talk to someone about a home loan.
The challenge with banks is that they charge you huge fees, which the industry leads you to believe are standard.
Banks also all have overlays that supersede FHA, VA, conventional, and USDA guidelines. An overlay is a requirement the bank has for doing a loan that goes over and above what is required. For example, FHA guidelines do not require you to have a minimum credit score for banks to approve your loan. But all banks have an overlay that requires a minimum credit score for them to approve the loan.
Brokers are the outliers in the mortgage space. When I started doing mortgage loans back in 2001, about 70 percent of the loans nationwide were being done by brokers. The broker world was crushed in 2008 with sweeping legislative changes spurred by the National Association of Mortgage Bankers. The changed laws made it very hard for brokers to compete with banks due to unfair rules imposed on the broker world. For example, the laws required brokers to disclose their compensation with the initial application and disclosures, but banks didn’t have to.
Brokers currently fund about 30 percent of all mortgage loans nationwide. Brokers tend to be a lot more entrepreneurial than the big banks. The ones who made it through the legislative changes are a lot more nimble and quicker to adapt to changes in our market than the banks. We also don’t have the overhead that the banks do, so we can generally get you a much better deal on your home loan.
Here are some of the advantages that brokers have over online lenders and local banks:
- We work with multiple banks and can get you the best loan depending on your scenario and the home you want to buy. We have some lenders that want to work with people with high credit scores, and therefore they offer the very best rates to these people. We have other lenders that will work with the lower credit score buyers. We also have lenders that like working with investment property buyers. The bottom line is that we will have many more options to get your loan approved than a bank will.
- Brokers have workarounds for guidelines. Lending guidelines are not black and white. They leave a lot of room for interpretation. For example, the VA requires that a borrower have two years of management experience to use rental income to qualify for a multiunit property. If you are purchasing a fourplex, it is not uncommon to need the rental income from the other three units to help you qualify for the loan. The vast majority of banks interpret this guideline to mean that you need to have two years of tax returns showing Schedule E rental income from properties that you own. We have several lenders that will allow the rental income to be used if we provide a contract with a property management company to help you manage your fourplex after closing.
- Brokers can get you approved for a higher purchase price, in most cases. Most banks have a maximum debt-to-income (DTI) ratio that a borrower can have in order to qualify for a loan with them. The DTI limit is usually lower than what the loan program will allow. For example, there are several banks in Anchorage that have a DTI limit of 50 percent on an FHA loan. But FHA has a DTI limit of 56.99 percent. The 6.99 percent difference may mean the difference on whether or not you will qualify for the home you want to buy.
- We have to provide excellent customer service. Bank loan officers tend to work bankers’ hours, Monday through Friday from eight to five. Most real estate contracts get written during the evenings and weekends. Need a preapproval letter on Saturday afternoon? No problem with brokers. We can send you a preapproval letter from anywhere with cell service right from our iPhone. We only get paid when we make loans happen. Most bank employees, especially with online lenders, are paid on a salary. They have no incentive to go above and beyond for you.
- Our business is built on relationships with local real estate agents and doing a great job for our clients. We want to have an ongoing relationship with you that continues way past the closing table. We have a lot of clients whom we have done multiple loans for. We also have a lot of clients for whose children we have now done loans when they purchased their first homes. If we don’t do a great job for our clients, we won’t be around for very long.
- We can make sure that you use all of your seller credit. It is common in some real estate markets for the seller to give the buyer a credit of about 3 percent of the purchase price to cover their closing costs, prepaids, and reserves. The credit is a use it or lose it. In other words, if you get a credit for $9,000 but your costs come out to $8,000, you will forfeit the unused $1,000 back to the seller. Not so if you’re working with a broker. We have lenders that will allow us to use that additional $1,000 in seller credit to pay down the principal on your loan or towards something else like installing a new washer and dryer in the home.
- We can often get people approved for a mortgage loan who were turned down at the bank. Just because the bank can’t get you approved for a loan with them doesn’t mean that you can’t buy a house. We at PMG close loans every single month for people who were told no by their bank. If there is a way to get you approved for a mortgage loan, we will find it.
Brokers do it better!