Shopping for a mortgage is complicated and time consuming.
You have lots of choices when it comes to financing a home, from loan programs, a span of interest rates and price options.
You should be aware the mortgage world is comprised of four types of lenders: depositories, mortgage bankers, mortgage brokers and private money lenders.
Which one of these might be a better fit for you? I am going to explain the general strengths and weaknesses of each type of lender. Hopefully, this will give you some ideas where to shop for your best deal.
Depositories
Depository lenders are banks and credit unions.
Oftentimes, they will use depositor funds to loan out mortgages. Perhaps they pay depositors 3.5% interest and offer mortgages at 6%. If and when they do that, you might be able to find cheaper pricing because the depositories are able to dictate the rates instead of relying on the secondary mortgage market — the likes of Fannie Mae and Freddie Mac, for example.
Typically, the cheaper pricing is for jumbo sized loans: more than $806,500 in the Inland Empire and more than $1,209,750 in Los Angeles and Orange counties.
Some banks offer an interest rate reduction for every X amount of liquid assets you bring to the table.
For example, say the rate is 6% and you have $250,000 in bank deposits, which might reduce the rate to 5.75%. Bring more than $1 million, and you might get a 5% interest rate.
While not all banks do this, the ones that do home equity lines-of-credit tend to offer them without closing costs.
On the downside, depository lenders tend to underwrite conservatively. So, if you have poor credit, job instability, a high ratio of total debt (house payment compared with your income) or you have difficulty proving your income via tax returns and the like, a depository lender might not be right for you.
Depositories have a more limited mortgage menu compared with mortgage bankers and mortgage brokers.
Mortgage bankers
Mortgage bankers are also known as non-bank or non-depository (bank) lenders. Mortgage bankers originate, underwrite and fund loans. They don’t accept deposits like traditional banks and credit unions do.
The wheelhouse for mortgage-banker financing are the conventional, FHA and VA loans.
Mortgage bankers tend to take on a wide range of borrowers, those with strong credit and income, or not.
Mortgage bankers tend to be less limited than depositories but more limited than mortgage brokers, considering the financial instruments they can offer. Their jumbo pricing may not be as good as you might find at a bank.
Mortgage brokers
Like an insurance broker with several lines to sell, mortgage brokers have the widest menu of mortgage loan programs.
They act as an intermediary between consumers and wholesale lenders. They may arrange conventional loans, FHA and VA, jumbo loans, exotic loans, second mortgages, reverse mortgages and private money or hard money loans.
Strong borrowers and weak borrowers are all in play here.
Mortgage brokers are the lowest cost (to produce a loan) providers because they do not have the typical layers of overhead found at depository institutions and non-bank lenders.
Borrowers who shop through mortgage brokers tend to do it because the broker finds a better deal for them than they can find on their own.
Most mortgage brokers do not have access to aggressively priced jumbo loans as most banks don’t accept wholesale business from brokers.
Private money lenders
Private money lenders are also known as hard money lenders.
Typically, their rates and points are significantly higher than other lenders,mainly because their borrowers can’t find traditional loan sources, for one reason or another.
Funds come from private investor sources focused on short-term loans. Private money lenders desire equity-rich properties as protection in the event the borrower defaults on the loan.
Private money lenders are famous for doing fix-and-flip home loans.
Conventional, government mortgages (FHA and VA) and jumbo loans will never be found through private money lender, so it’s a very narrow mortgage menu.
You should always shop with at least three lenders/mortgage brokers. Let each of them know you are shopping around.
Keep in mind the best price may not necessarily be the best deal. If the lender can’t fund the loan because you don’t meet its standards, then the pricing is worthless.
Service levels may be important as well. If you have a short deadline, you might want to go with a lender offering faster service but a higher price.
Reputation matters. Always get recommendations from people you trust — those who have had a good experience with lender X for example.
Freddie Mac rate news
The 30-year fixed rate averaged 6.76%, unchanged from last week. The 15-year fixed rate averaged 5.89%, 3 basis points lower than last week.
The Mortgage Bankers Association reported an 11% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $179 more than this week’s payment of $5,236.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75%, a 15-year conventional at 5.5%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 5.99% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.75% and a jumbo 30-year fixed at 6.625%.
Eye-catcher loan program of the week: A 40-year fixed rate mortgage, interest-only for the first 10 years at 6.75% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.
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