Are there guidelines to choosing Lenders, Bankers or Mortgage Brokers?

Question

Hello BP,

I'm wondering if there are any guidelines to go by when choosing the lender?  Are there certain questions I should be asking?  Obvious red flags?  What am I looking for?

I've been looking into FHA loans since I'm a first time home buyer and I'm really liking the 3.5% down.

My plan for now is to purchase a SFH here in Houston that didn't need too much work but not brand new, live in it for awhile to build equity and then refinance to buy another, while making the first one a rental.

Does that even sound like a good way to get started in RE?

Any thoughts would be highly appreciated... Thank you!

Ken Campione · Answer

Hi guys..  If you looking for a company that specializes in fthb.  I can help.  Great fha/va/usda process.

touch base if you have any questions

Sincerely,

Ken C

Mark F. · Answer

I completely agree with you on this. Yes, I think it's good to shop around and make sure you're getting a good deal for rates and fees, but you also want to make sure the person you're working with is up front, honest, knowledgeable, and can get the deal done without creating headaches for you. Service is definitely part of the equation when trying to figure out if you're getting a good deal.  I'd be more than happy to take slightly higher rate or fees for better service. Getting loans done is tough enough without working with somebody who doesn't know what they're doing.

Michael Worley · Answer

I can understand the idea of shopping deals. If you feel the deal  you're getting with the bank isn't competitive with the market and/or the bank is taking your relationship for granted then you should address it.

I do think that there are far too many people who 'step over dollars to pick up pennies' though. People who quibble over .25% interest rate or fee only to get into a situation where the new bank has trouble closing the deals on time or with other problems.

Price is just much less important than whether the deal can get done in time and without headache if you're building a real estate investment business.

The other downside to shopping deals each time is that with a banker, you lose future leverage if the deals are seen as transactional. It's a very common discussion in committees for bankers to bend over backwards for 'good customers' and to not give an inch to 'transactional customers'.

Mark F. · Answer

@Michael Worley  We can certainly disagree on this, but I don't think shopping is a bad idea at all. If I'm refinancing a rental property, I want to make sure I'm getting a solid deal. No sense paying more than you have to.

Michael Worley · Answer

I personally think that the first paragraph is good advice, but the second paragraph is bad advice.

As bankers, we want relationships not transactions. Shopping deals and/or re-trading deals means the deal is transactional in nature and the bank will not try hard to make your deals work and the lender won't expend any political capital in the committee meetings on your behalf if you do this.

Michael Worley · Answer

When dealing with a bank, if they do their own underwriting (portfolio lender) or they have a correspondent bank (they sell their loans to a bigger bank)/GSE (government sponsored entity such as Fannie Mae, Freddie Mac) is the #1 question to ask. It completely changes how the underwriting of the loan is done which is why it's the most critical question to ask.

As an example, if you go to Bank of America or you go to Chase Bank (they both sell loans to Fannie/Freddie) then the underwriting standards will be extremely similar (call it identical for most intents and purposes). If you go to Bank of the Ozarks or to First National Bank (who both use correspondent banks like Bank of America) then the underwriting will be similar.

The final purchaser of the loans will be the final arbiter of how the loan has to be underwritten. Portfolio banks don't sell their loans, therefore they are the final say in how the loans are underwritten.

Once you start talking to a bank, ask the loan officer about what metrics the bank's loan policy looks at. Once you get an idea you can start a spread sheet of portfolio lenders in the area and ask lenders at each one about the metrics.

The key metrics they will be looking at most likely are DSCR (debt service coverage ratio, usually in the 1.2x range or better), LTV/LTC (loan to value or loan to cost, depending on the project), guarantor support, amortization in the 20 year range plus or minus, and maturities in the 5 year range plus or minus.

Just let the conversation go from there. Don't worry about interest rates or fees until you know what the bank's risk appetite is. It doesn't matter if they charge 3% interest if they won't approve anything and conversely, if you have to pay 7% interest but can get the deal done it might still be worth doing.

Worry about pricing last, risk appetite first.

Benjamin Blackburn · Answer

@Mark F.

Awesome! Thank you very much for your input.

Mark F. · Answer

@Benjamin  Blackburn  I think the best lender to work with is one who is willing to educate you, obviously knows what they're talking about, and is very up front about everything.

You still want to get a good deal as well, so once you've found a lender you like working with, you can bounce their offer of a few other lenders to comparison shop. If you get offered something better, take it back to the lender you like and see if they can match.

If you're not sure where to start to find lenders, ask for recommendations from friends, family, or people here on BP.

Good luck!

Benjamin Blackburn · Answer

@Kevin Wood

It's definitely the classic problem.  I've actually found a few potentials that I've reached out to that were referred to me from another BP member.  We shall see! Thanks again.

@Michael Noto

I will be searching for a lender that specializes in first time home buying clients today just incase the ones I found won't work out.  Thanks a lot!

Are there guidelines to choosing Lenders, Bankers or Mortgage Brokers?

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