How to Choose a Lender When Buying a Home
Do you know the best-kept secret in residential real estate? It’s not sexy; it’s not flashy, but it can save you a ton of money. It may even be the difference between being able to buy a home or being forced to continue to rent.
This secret lies in choosing the right lender, and the most common three options are big banks, brokers or direct lenders. So, which is right for you? Here’s a primer on all three:
Big banks are typically where most people begin their home-loan journey. After all, most people have bank accounts as well as auto loans. It’s only natural to think of your bank when deciding to buy a home. Banks can have great rates and be cost-effective, but big-bank programs are limiting. Traditionally, big banks are known for being rigid and very slow. Some banks are difficult. For this reason, many REALTORS® will steer their clients to other lending sources, which often leads to better alternatives.
Mortgage brokers can choose from a number of loan programs and are not limited by one bank. Because of this, they offer more flexibility than a big bank would. Also, because of the many options available, mortgage brokers can be a great choice if you have less-than-stellar credit. Finally, because mortgage brokers act as a go-between, connecting a borrower with a lender that can provide financing, they serve as the “middle person” between the homeowner and the lender.
The mortgage broker is compensated by the lender for completing your mortgage application and supporting documents, and it’s important to be aware that some lenders compensate brokers better than others. This creates a commonly accepted conflict of interest: Does the broker go with the lender that will pay the most money, or with the lender that has the best loan for the buyer? There are a lot of reputable mortgage brokers out there, but there are also some not-so-reputable options. For these reasons, it’s critical when picking a broker to choose one that is experienced and has a stellar reputation.
To be clear, big banks are direct lenders, but not all direct lenders are big banks. The benefit to using a direct lender is that the loan costs can be less, and they can move more quickly. A broker will need to pause and get approval from the lender at various stages of the loan process. A direct lender does not. In fact, many direct lenders have staff on site to make immediate decisions. If you want a fast close and a great rate, a direct lender may be your best choice. However, like big banks, they are limited to the programs offered by their company.
When choosing the right lender, it comes down to your specific situation. If you want a lender that is more conservative but also offers competitive rates and cost-effective options, go with a big bank. If you are looking for flexibility and an increased number of loan types and options, mortgage brokers may be your thing. If you want a less expensive and faster process, consider a direct lender. If you’re not sure what you want, talk to multiple lenders and compare their services. To expedite the interview process, talk to an experienced REALTOR® and always ask them to share recommendations and references. Most REALTORS® have relationships with reputable lenders, so narrowing down your choices becomes a lot easier with a good agent on your side.
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