How to Choose a Lender

Getting a mortgage is one of the largest financial decisions you’ll ever have to make. The financial implications of getting a loan to purchase a home ranks behind your career path and your choice of a spouse, but not by much. So if the decision is so important, why don’t people understand even the basics of how to choose a mortgage lender?

There are thousands of places you can get a mortgage loan and it’s confusing and difficult to know how to choose. The reason most people outside the industry have little knowledge of how to compare mortgage lenders is because finding good information on the subject is almost impossible.

Your Choices

To help narrow your choices, I believe you initially have two factors to consider.

1. Type of Lending Institution

The first consideration is the type of lending institution. There are 3 major types of lending institutions to consider, and they all have their strengths and weaknesses – their positives and negatives. The 3 types of institutions are:

• Traditional Banks or Credit Unions. Those institutions you see on the street corner that offer banking services, like checking and savings accounts. These institutions have that big stainless steel door that they use to lock up all the money. Concerning your mortgage application, they lend you their own money and get to make their own lending rules.
• Mortgage Brokers. These institutions do not lend you their own money, nor do they make their own lending rules. They are a middle man and their function is to help you borrow money from Traditional Banks or other sources of mortgage money.
• Mortgage Banks. They lend you their own money, but they don’t set the lending rules. Mortgage Banks have relationships with Traditional Banks and other sources of mortgage money, but instead of just acting like a middle man like a broker does, the Mortgage Bank actually lends you the money – they just do it under the guidelines of other mortgage sources. (Read more about the pros and cons of these institutions in a related article.)

2. The Individual – Your Loan Officer

The second consideration when choosing a lender is the type of individual you are working with. Regardless of the type of institution you decide on, the actual individual you are dealing with at that institution will have by far the most impact on your final loan costs and terms. This second consideration often surprises people.

Your loan officer, regardless of the type of institution you choose, often has enormous leeway in setting your interest rate, terms, and even loan fees. In some institutions, these decisions are made higher up the chain of command and dictated to the loan officer. In other places, the loan officer can just sell you whatever program is most profitable to him or her. (See related article on choosing the right kind of individual to do your loan.)

We hate to think our bank is operating this way, but they do. You walk into the lobby and see that handwritten sign displaying today’s mortgage rates and you think everyone who qualifies will get that rate. But this is simply not the case in most places. Many times these institutions allow the loan officer to make more money off of your loan by up-selling you and other times, your personal loan profile will affect the final terms you are being offered.

So How DO You Decide?

Of course, everything is YOUR decision to make. Do not rely on your real estate agent, your friends or family, or the “We’re the best” radio ad to make you decision for you. You have the right to choose anybody to process your loan, and you should never be pressured into a decision you don’t feel comfortable with.

Rates Change, Programs Change

Rates also change over time, and having someone there constantly monitoring your loan and looking for refinance opportunities for you can save you thousands and thousands over the life of the loan. You may have saved a nickel or two when you did your first loan, but those savings will be meaningless unless that person keeps you on the radar screen helping you manage your equity.

Read our companion articles for more help on this subject. Once you understand what your options are and how the industry works, you’ll be in much better position to make a sound, informed choice – one that could easily make a huge financial difference in your life.