If you are thinking about moving, you may want to review your financing options and the mortgage lender before scouring the real estate listings, experts say.
“People get really excited to buy a house,” says Celena Santiago, Manager of the Home-ownership Pre-purchase Program at the nonprofit Neighborhood Housing Services in Chicago. “They find a real estate agent or go to an open house, but it’s not a good first step,” she says. These same individuals “may have no idea what their credit looks like, or that they may have to make changes in their lifestyles or budgets.”
Santiago also noted that homebuyers sometimes don’t understand the terms of their purchase until they sign their closing documents, a process that can be daunting. Learning about these things beforehand “is the key to controlling financing,” she says.
“We want to make sure a client doesn’t just get a house [but that] they keep the house,” adds Santiago.
Education makes for a better home-buying experience, Santiago says. NHS sponsors a free class that helps consumers understand how to read their credit reports, understand what credit scores are needed to buy a house, change their lifestyles to budget for a home purchase, and learn how to compare fees.
Lenders, particularly small community banks, often require prospective buyers to attend home-ownership classes, “but once we get them through the door, they are pretty much sold,” she says.
“More than anything, understand what you are getting into,” says Chelsea Barrish, a program quality analyst at Clarifi, a financial literacy organization in Philadelphia. Know if you are applying for a fixed or adjustable rate mortgage, for example, and understand what that means.
When picking a lender, “compare apples to apples,” says Barrish. Interest rates for 30-year fixed mortgages are typically higher than those of 15-year mortgage loans, Barrish says, so mortgage companies often advertise 15-year loans because they have the lowest rates.
Interview several different lenders and real estate agents before choosing one, Santiago advises. See if they are a good fit with your needs. “You want someone who can answer all your questions,” she adds.
“A potential lender that doesn’t respond in a timely fashion from the very beginning will be that way through the end,” says Hilary O’Connor, a real estate agent and Vice President of Sales at The O’Connor Hebson Group in Chicago. “If they aren’t available to you from the get-go, then I would look elsewhere.”
Banks versus mortgage companies
Different types of mortgage lenders offer distinct advantages. Barrish notes a prior relationship with a bank can be a plus for a mortgage applicant. “And you are applying to one person,” she adds.
Banks may also have lower fees, offer down payment assistance programs or help with closing costs, Santiago notes.
However, applying for a loan through mortgage brokers can offer advantages, Barrish says. On the one hand, brokers can “shop around” a loan to different banks to get the lowest rate.
On the other hand, Santiago says that while mortgage brokers have a variety of lenders, their fees can sometimes be higher.
A credit union is another lender option, notes Santiago, and it offers competitive rates and lower fees. “But you have to be a member … part of a group, like a place of employment, to qualify to use it.” Santiago’s mantra is “shop, compare and negotiate.”
“Call lenders and ask questions about fees, down payments, assistance programs,” she suggests. “Find someone who will work for you,” she says, adding that’s also important when picking a real estate agent and an attorney to represent you at closing.
Lenders offering a qualified mortgage are required to make a good faith effort to determine that the applicant has the ability to repay a mortgage.
In addition, loans under the qualified mortgage umbrella have relatively stable features, unlike other types of loans. For example, interest-only loans are not qualified mortgages. These are also available by mortgage companies and banks, and require a borrower to pay only the interest on the mortgage for a certain period. Most balloon-payment loans are also not qualified mortgages; these have much higher (“ballooning”) payments at the end of the term of the mortgage.
However, while the new rules prevent excessive upfront fees, not all charges are included in the limit. Applicants still need to compare fees.
“I think that with whatever option you go with, the consumer wants to make sure that the lender chosen is one who is competent and familiar with your type of transaction,” says O’Connor. “You want someone with experience who can help guide you.”
Alternative credit: A lending minority
In addition to traditional and well-regulated sources of mortgage credit, such as banks, mortgage companies and credit unions, several new loan options are emerging.
Peer-to-peer lending, a source of non-bank credit that matches investors with borrowers, is expanding into the mortgage market. Also known as P2P lending, it started as a tech-friendly way for investors to back entrepreneurs through crowdfunding.
Social Finance, a San Francisco-based company, used the P2P model to help consumers refinance student loan debt, and it now offers mortgages in seven states.
Nontraditional “hard money” loans are also gaining some acceptance, although experts say they still represent a very small percentage of the market. These are not mortgages per se, but short-term loans similar to bridge loans, which are based on the projected future sale price of a property.
Hard money funds and lending firms require borrowers to pay much higher interest rates and typically only offer terms of about 12 months.