My Strategy For Selecting a Mortgage Lender/Broker

[Jeremy Schappert]

Selecting a loan officer in brief…

For experienced home buyers, I want to quickly lay out my strategy for picking a loan officer. Subsequently I’ll go into the detail for those interested or less experienced with the process. In a nutshell, pick a loan officer who is good with the administrative work and is responsive. Use that loan officer for your pre-approval letters. Once under contract, immediately shop around for the best deal with other lenders. When you find the best deal give the loan officer you have been working with the opportunity to beat or match what you found elsewhere; they likely can match what you have found. If they can’t match what you have found, then move on to the loan officer with the better deal. Don’t feel guilty if you have to switch loan officers - it’s their job to be competitive. You’ll have the mortgage for up to 30 years, but the loan officer will be working on your loan for a few hours.

Selecting a loan officer for your pre-approval letter

With dream homes at your fingertips, thanks to Redfin, Zillow and other sites, it’s easy to fantasize about buying a home. It’s also easy to wade into the process and not take practical first steps to set yourself up for a smooth transaction. This is my advice for homebuyers, and I hope it’s practical information you can use.

If you are considering buying a home, especially if it’s your first time doing so, the most practical place to start is with an institution who will lend you the money. (If you’re buying your home in cash, congratulations! This article is not for you.) A note: choosing between a mortgage broker or a direct mortgage lender is not the point of this article and here I’m calling them both Lenders. I recommend shopping in two stages: first, shopping for a loan officer, or LO, when you first consider buying a home and using this LO for your pre-approval letters, and secondly, shopping for the best terms once you are under contract. Your LO should be able to tell you what they have to offer, help you apply for a loan, and after you’ve qualified, they can give you a pre-approval letter. Just like real estate agents, LOs are a dime a dozen, and similarly they may not all serve you equally.

For the vast majority of buyers, the lenders will provide extremely similar loan products and terms. The LO is a sales position, so look for the attributes of a good salesperson. The best LO will be able to explain your options, respond to your questions quickly, update your pre-approval letter for the second time on a Saturday evening, and perform all the administrative portions of their role quickly and correctly. Additionally, you will need to decide if you seek a Conventional, FHA, VA or other loan product, because it will be specified in your pre-approval letter and offer. Do your research and leverage your LO to explain your product options and of course make sure that the LO can provide the product you decide is best for you. If you personally know an LO, they could be the best place to start! Someone who knows you personally will likely go above and beyond to check all those boxes. At this stage in the process, don't agonize over the interest rate and fees as long as it's within 1/8% and a few hundred dollars of the next guy (we'll deal with that later). If you don't know someone personally that fits the mold, ask friends who they have used and how their experience was, but stay focused on the good salesperson criteria when making your selection. If you're still coming up blank, reach out to me and I can give you my top picks (I have no financial lender/broker affiliations). If you don't personally know anyone, have no friends to refer you, and don't like me enough to reach out, pick a big operation. They will likely have a wide variety of loan products and well-groomed process controls to help ensure you don't fall through the cracks.

Once you have selected an LO and applied for the loan, request a Loan Estimate disclosure from the LO. The ‘Loan Estimate’ disclosure is the document that replaced the ‘Truth-in-Lending’ disclosure in most cases. The Loan Estimate will provide you with all the relevant information you need regarding the loan as well as information extraneous to the loan. Lenders are required to provide you with their Loan Estimate disclosure within 3 days of applying.

Below I’ll walk you through next steps finalize a lender and to make sure you’re making the right comparisons so you get to keep more of your own $$ and spend less on fees.

Selecting a Lender for the Loan and Minimize your $$ out the Door

As soon as you have that dream home under contract (or even when you’re pretty sure you have the winning offer extended), you need to act quickly to shop and select the best loan deal possible. Up until this point the focus was on the LO selection, but now your focus shifts to the loan terms. Time is of the essence at this point, since your financing contingency days will be ticking by. You may be saying, “Hey, if it’s so urgent why didn’t you say something earlier?” That’s because interest rates and potentially fees change, and you can’t shop properly until you’re ready to pull the trigger.

Start with the LO you received the pre-approval letter from, and make sure you have all their terms noted, but don’t try negotiate yet. The biggest two loan terms you will be assessing are the interest rate and lender fees. The lender fees can be named many different things, and you’ll want to add up all the fees associated with that lender. The common names of these fees are listed in the table below “Fees to Include in Comparison.” Be aware, though - lenders may still have their own creative names for some of these fees! The Loan Estimate disclosure will make this process a breeze. The bank fees will be listed on Page 2 of the loan estimate in section A ‘Origination Charges’ and section B ‘Services You Cannot Shop For’. A note: Lender Credits would reduce the fees the lender is charging you, Lender Credits may appear in section A ‘Origination Charges’ or in Section J ‘Total Closing Costs’.

When looking at the Fees tables above, remember that the goal is to pick the best loan, not to determine the total closing costs! By stripping out all the items which aren’t the direct consequence of a particular loan product with a particular lender, you can compare the loans fairly and make the best decision. A simple example to demonstrate my point - let’s pretend you are buying a new car. Things have been going amazing for you so you’re going to buy a 2018 Aston Martin Vanquish (it’s just an example so might as well have some fun). You locate two dealers who have the car, dealership A & B. You ask the salesperson at dealership A how much the car will cost and they tell you in total the car will cost you $300k, that cost includes what they expect the sales taxes to be in addition to a new car cover that you think you’ll need but dealership A doesn’t sell. You have a similar conversation with the salesperson at dealership B, they quote you $340k, that price doesn’t include sales tax but it does include what they expect it will cost you to add a climate-controlled garage at your home, they say a car cover just won’t do for such a nice car. So, who should you buy the car from, who knows, right? That’s why we need the price for just the loan.

Another difference between lenders to consider is whether or not the lender offers an interest rate lock and if so, what the terms around that lock are. An interest rate lock is just the lender guaranteeing a certain interest rate as long as you close within a specified number of days (typically 30-60 days). If you believe rates may rise before you close, a rate lock protects you. Some lenders allow for a re-lock, so in cases where the interest rate drops, you can re-lock at the new rate. I’m a fan of interest rate locks. Without a lock, you may be able to negotiate the rate back down to what your original quote was but there is no guarantee, and if the rate changes at the last minute there may not be time to do anything about it. Keep in mind that an interest rate lock may cost you a fee or may be standard with some lenders.

What lenders call “points” are fees paid at closing to lower the interest rate, or conversely, some banks may give you money at closing and increase the interest rates. The price of buying or selling points should be very similar between lenders, so how many points lenders will allow you to buy or sell is the question to ask in addition to the price. The longer you plan to hold the loan, the better buying points is. If you expect to sell the property, or pay off/refi out of the loan sooner rather than later, buying points would not be desirable.

Lastly, a loan may require mortgage insurance which can add a layer of complexity when choosing between loans. If you are applying for an FHA loan it will have a Mortgage Insurance Premium (MIP). The premium is currently 1.7% of the base loan amount at closing, and then payments are due annually for the life of the loan. MIP will be the same between all lenders, so there is no need to consider it in your lender comparison. If the loan requires Private Mortgage Insurance (PMI) then that insurance can be paid either upfront at closing or annually, making it difficult to compare between PMIs with different payment structures.

Now that we fully understand the loan the original LO is offering, we can shop for a better deal. I recommend contacting as many lenders as you can. If you can get a Loan Estimate disclosure from them quickly then that’s great, but they aren’t required to give it to you for up to three days. This is not a problem for you since you know which fees to ask about. Some lenders may require you to apply before they quote you a rate; some may give you an idea of the rate without applying, indicating if it’s worth your while to apply. Regardless they should give you a quote for the rate and fees you want without sending in all the paperwork that will eventually be required to close the loan. If you find a better deal than what the original LO who gave you the preapproval offered, and assuming the original LO has provided you with quality service to this point, then go back to the original LO and tell them you have found a better deal elsewhere but you would like to give him the opportunity to beat it. Likely they will only match it. If you like your original LO and they have matched the best offer you can find elsewhere then stick with them - they likely are farther along with the paperwork and they have put in the work extending you pre-approval letters. If your original LO can’t match what you find elsewhere and you feel good about the new lender then it’s time to switch lenders. Don’t feel like you wasted the first LO’s time - the fact is they weren’t competitive enough to earn your business. When possible, you want to make your final decision on a lender before they order an appraisal, since you will pay for the appraisal and it may not be transferrable to a different lender.

I have had great success following this outline and I believe you will also. By putting in the work, you can feel good knowing you got the best deal possible. When buying real estate, a strong team of professionals is valuable but nobody will care as much about your deal as you. The real estate agent, loan officer and title company all work for you - you can negotiate their fee and you can go elsewhere if they aren’t meeting your standards. Being an active real estate investor, I look for strategies to save money and make great deals. When I’m working for a home buyer as their real estate agent I enjoy sharing the strategies I have learned to help them think like an investor and get a great deal.