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Mortgages 101: taking the best route to your new home

Purchasing a home

The time has come to buy a house. Cue the applause. It’s exciting news! All that hard work has paid off.  Though once the excitement dies down, nervousness might take its place.  For those who’ve never purchased a home before, the process can be especially intimidating.

The mortgage industry isn’t known for easy to understand rules and regulations, not to mention the lingo. Even workers who specialize in the mortgage industry are cognizant of the difficulty inherent in their field. “Our industry is quite confusing for the most part,” admits Brian Johnson, president of Valley Mortgage. He’s been in this business for over 13 years.

As if buying a mortgage isn’t intimidating enough, add to it the nightmarish housing crash of 2008, which left most people wondering if their houses would ever again be worthwhile investment assets. Fortunately, times and regulations have changed. Houses have again proven their value. (Besides, who doesn’t love no longer sharing floors or ceilings with the neighbors?)

Most people know that buying a house begins with a trip to the bank or broker. Usually they choose the same bank where they have their checking and savings accounts. When it comes to brokers, most are selected via recommendations or by their reputation in the local community. However, unbeknownst to most first time buyers, there is a third option – mortgage lenders.

Mortgage lenders, banks and brokers

Each of these options differ in subtle and not so subtle ways. Mortgage lenders operate like banks though they only specialize in home loans. They originate, process and underwrite the loans, which means they also approve them. Once loans are approved, mortgage lenders then fund it using their own money. Mortgage lenders then outsource the loan’s servicing, e.g. the bank to which the homebuyer will send their payments, as do most banks.

Brokers can lose a lot of control over the loan since they are only able to originate and process it. The rest of the loan process such as underwriting, closing, funding and servicing is done by the lender who receives the loan from the broker.

Though some banks may service their own loans, most banks sell them to larger servicers or directly to Fannie Mae/Freddie Mac. Since the loans are sold to larger servicers, traditional banks tend to use the most restrictive underwriting guidelines across the board. This does not always serve the customer well. On the other hand, mortgage lenders outsource loans to a variety of servicers which allows them to find the best loan program and rate for each unique customer. According to Johnson, “Every customer’s needs and situation differs and since we are a more service-oriented lender, it allows us to customize different loans for different scenarios.” For home buyers, this is an ideal scenario.

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Benefits of mortgage lenders

There are many advantages to borrowing from mortgage lenders when compared to traditional banks and brokers. In general, mortgage lenders can be more cost-effective, offer a more diverse set of loan programs as well as better customer service. Also, mortgage lenders tend to be well-informed, as it is their only service and product. They spend all day, every day working on mortgages.

Cost savings

When it’s comes to cost savings, mortgage lenders and banks usually beat out brokers. People may be more apt to go directly to their bank for a mortgage. However, it’s best to look around to find out who offers the most competitive prices and services. Most research reveals that mortgage lenders can trump both banks and brokers when it comes to price. Larger lenders offer mortgage lenders lower fees and rates because they take on the initial loan risk as well as the overhead costs, e.g. educated staff who ensure loans meet regulations and servicers’ guidelines. According to Johnson, “Generally speaking, we can offer better deals than some banks.”

When surveying costs, know that brokers only get paid by closing loans. Lenders also charge brokers a higher fee and rate which they pass along to the customer. When in doubt about what extra fees might be charged, it’s advisable to inquire. Though keep in mind, banks, unlike brokers, are not required to disclose their commission.

Loan program diversity

Mortgage lenders have greater loan program diversity. Since they outsource their servicing, they remain current on the intricacies of a variety of loan programs. This allows for a more custom fit for their clients.  Brokers are also able to offer some variety when it comes to programs. However, since they don’t fund loans directly, they must wait for the underwriting and closing center to finish the loan. This can lead to delays.

Banks tend to offer more conservative loan programs, which might exclude more potential homebuyers from eligibility. While searching for where to purchase a mortgage, it’s best to favor diversity to ensure that unique needs are met.

Customer service

Since mortgage lenders are not an actual banks, they don’t obtain their customer base by offering checking and savings accounts. They must instead attract customers with excellent customer service. This typically includes educating clients to make sure they understand the mortgage process. According to Johnson, “Usually after clients meet with us, they’ve got a pretty good grasp on things. If they’ve already gone to their bank before they meet with us, typically they’ll end up working with us because we’ve explained more to them than their banker.”

In addition to education, mortgage lenders often remain available for clients’ questions post-closing. Once the mortgage is in place, the new owners will receive correspondence from their servicer. Some of these letters may contain difficult to decipher jargon, so it helps to be able to ask an expert, such as the loan officer who helped secure the mortgage in the first place.

Overall, mortgage lenders may be a safe bet for most home buyers, so it’s essential to include them in the vetting process.  As with all large purchases, shopping around is key, especially since most mortgages will last 20-30 years. Not only is it an effective educational process, but it’s easier to find the mortgage lender that best fits your needs and budget.

For more information, contact Brian:

Valley Mortgage, Inc.
3301 13th Avenue South
Fargo, North Dakota 58103

Office Phone: 701.461.8450
Toll Free: 800.373.5654
Fax: 701.293.4047