Choosing a Lender (Part One)
Why You Should Shop Your Loan
A homebuyer’s choice of lender is so much more important than even many veteran buyers realize. I cringe when I see lenders actually counting on buyer laziness in their advertising. Truth: if your choice of lender will depend on being “prequalified” in five minutes via an app, you may not be ready for the challenges of a serious home search. And as with anything else in real estate, there is no substitute for doing in-depth, local homework.
A little insight into the law might help explain why. Mortgage lenders in the U.S. are primarily regulated by federal law, so it’s easy and cost-effective for them to advertise nationally and cast a wide net. Meanwhile, real estate transactions are governed by state contract law, various state statutes, and local custom within regional markets. So it’s crucial for buyers to consider how well a particular lender will perform in the real estate environment in which they will be making their purchase.
In the Texas market, not properly vetting a prospective lender can produce a range of negative outcomes. For example, an unresponsive loan originator might not return the listing agent’s call to verify a pre-approval letter, disadvantaging their buyer client in a multiple-offer situation. Or a disorganized or overwhelmed operation might miss one of several deadlines, making it impossible to close by the contractually agreed-upon date.
And although failure to close on time would be an inconvenience anywhere, in Texas, a lender-caused closing delay can be considered buyer’s breach of contract, and sellers are not required to amend the closing date to accommodate it. As a result, a lender’s failure to be ready for closing can cause buyers to forfeit their earnest money (typically 1% of the purchase price) and lose their new home, even after they’ve already sold or moved out of the previous one. And the damage may not end there. Read the comments at the above link for some real horror stories.
Other unvetted-lender issues can include closing with a rate well above market, astronomical fees, or both.
On the other hand, be wary of lenders with below-market rates and fees — if fees are so low that the lender can only turn a profit by doing massive volume, that lender may not be the right fit for a client who is accustomed to individualized service and responsive communication.
Put simply, it’s best to work with a loan originator who cares if your deal closes or not and is in a position to do something about it. So, shop your loan for rate, fees, responsiveness, and local reputation for timely closing, ideally with three different lenders. And please keep in mind: it all counts as a single credit inquiry as long as you complete your shopping within 45 days.
Stay tuned for next week’s article, Choosing a Lender (Part Two): How To Shop Your Loan.