Most homebuyers finance real estate, which means almost all home buyers will need to get a mortgage. So what are your lending choices? Where can you get a real estate loan? Which type of real estate lender is best?
Unfortunately, there is no pat answer because the best choice for you depends on your personal situation, the type of property you want to buy, and how the lender's rates compare within the lending community. You can get a mortgage loan from a variety of sources.
Almost 25% of all the real estate loans made in the United States originate from mortgage brokers. This percentage has dropped in half since 2006. A mortgage broker is a middle-person who brings together lenders and borrowers. A mortgage broker can sometimes be a mortgage banker, but not all mortgage bankers are mortgage brokers.
Mortgage brokers each work with different lenders, sometimes hundreds. It's important to ask about the variety of products offered as this will vary from broker to broker.
Your choices depend on how many working relationships the broker has. Here are variations:
- Fees are paid by the buyer or lender or both.
- Loans made at "par" where the buyer is not paying a fee.
- Mortgage brokers can also operate as "upfront" mortgage brokers, meaning they will negotiate a fee directly with the buyer in exchange for shopping for the lowest (wholesale) interest rate and fees.
Commercial Mortgage Bankers
Commercial mortgage bankers, as you may have guessed, work for a bank. They may represent more than one bank, but the loans they make are bank loans, funded by the bank. Some variables:
- Fees are generally not negotiable and are set by bank policy.
- Loan products are limited to those the bank offers.
- The banker may not be licensed as many are required only to be registered with a registry.
Citigroup, Bank of America, and Wells Fargo are examples of well-known commercial banks. Commercial banks offer a wide variety of services. You probably have a bank like this in your neighborhood. Characteristics:
- The primary source of business is not in making mortgage loans.
- Their bank rates are competitive.
- The bank may offer a discount or incentive on your loan if you maintain a checking or savings account at that institution.
Savings and Loan Associations
Savings and Loans (S&L) accept deposits from customers into savings/money market accounts and pay interest on those accounts. To prevent a relapse like the S&L crisis in the 1980s, President Bush signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Many savings and loans are now regulated by the Department of the U.S. Treasury, Office of Thrift Supervision. Some facts:
- The primary source of the S&L business is making real estate loans.
- S&L does not make business or commercial loans but does lend for construction, purchase, or home improvement purposes.
- The process of obtaining a mortgage is a bit easier than going to a commercial bank.
These institutions are regularly under attack by lending competitors because credit unions do not pay federal taxes and enjoy certain tax advantages that other lending institutions do not. They are formed by a group of individuals with a common interest, such as state government and community education employees, or religious groups. Differentiators:
- Customers must meet the qualifications to be eligible for membership.
- Interest rates and terms are typically very attractive and competitive.
- Many credit unions do not sell their mortgage loans on the secondary market.
Anyone with money in the bank can make a real estate loan to you as long as they comply with federal and state regulations regarding such items as interest rates, fees, and charges, and provide legally required disclosures. The private individual could be the seller of the property you are purchasing.
Owner financing works best on properties that are free and clear because an existing loan will most likely contain an alienation clause requiring payment in full before the title can be transferred to another buyer.
The seller can also carry a second mortgage that the buyer pays back monthly.
In private financing, no appraisal or title policy may be required, but you should still obtain an appraisal and title protection.
Stock Brokerages and Online Lenders
You might be astonished to learn that the company handling your IRAs, mutual funds, or online savings also makes mortgage loans. A few easily recognizable names are Capital One, Charles Schwab, and Ditech. In this instance:
- If you need to shake hands with your loan officer in person, an online lender might not be for you.
- Internet lenders seem to work best for sophisticated borrowers with great FICO scores who know exactly what they want.
- Contact only reputable and known companies with secure sites, and stay away from fly-by-night operators.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.