Mortgage Lenders
Looking for a mortgage? Congratulations! You must be a homeowner.
Many types of companies are mortgage lenders. They include:
While the seller of a property might be willing to do a 'vender take-back mortgage', there is no way of knowing this in advance. Therefore, you always need to go through the process of 'pre-approval' with a bank or other mortgage lender. It's a good process regardless: Your pre-approval confirms your credit rating; it also confirms the kind of interest rate you might expect to pay; and finally, it confirms how much you can afford to spend!
As for the differences between a bank or a credit union or a finance company, it mostly comes down to the interest rate you will get, the services that are included and whether you will qualify with the lender for a mortgage. It's worth checking out both big and small lenders in your hunt for a mortgage. It's also worth being pre-approved by more than one type of lender, in order to compare the kinds of services and interest rates you could get. Even a difference of ? percent could save you hundreds if not thousands over the life of a mortgage.
Why else get pre-approved? Well, probably the best reason is that a pre-approved mortgage helps you to set your house-hunting budget. Your lender will consider your credit history, income and payment history (as well as other factors) and then tell you how big a mortgage they will be willing to approve. Add to that number the amount of down payment you have and now you know your price range!
Alternatively, you might look at the amount that you've been pre-approved for and figure out how big a monthly payment that is. This might even give you a better idea; not everyone wants to have as much as 40% of his or her take-home pay tied up in mortgage payment.
So, once you know how much you can qualify for, you might want to take the time to work out payments, and then decide if that works for you. If not, consider lower mortgage amounts until you get a payment amount you are comfortable with. That lower mortgage amount becomes your key information in house hunting.
Bank Mortgages
The first place most people think of when they think "mortgage" is "bank".
Bank mortgages generally require the purchaser to have a quite reasonable credit history and reliable income. Of all mortgage lenders they are likely to have the most rigorous requirements for credit history. However, banks are also likely to be the most stable organization with which to get your mortgage.
For that stability, you can pay a price. Banks may not give you the best interest rate on your mortgage. It's extremely important to shop around. The best thing to do is get pre-approved with a number of banks and other financial lenders. Then you can negotiate more effectively with them for the best possible rate.
Don't be intimidated just because you are dealing with a bank for your mortgage. What you need to remember is that you are doing them a favour. If the banks don't loan out money then the banks don't make money. Since the bank mortgage lender is going to make money from your business, you should treat the negotiation of your mortgage the same way you would anything you buy:
- Shop around for the best mortgage
- Compare mortgage 'prices' - in this case, mortgage interest rates
- Know yourself - you know what you are prepared to 'pay' in terms of interest rate for the options the bank can offer; like the ability to make lump sum payments on your home mortgage, without penalty
Finance Company Mortgages
Finance companies will also give mortgages, but you may be looking at higher interest rates. Also, some companies may not have the same stability as a bank. These are things to be aware of if you are considering a finance company as your lender.
Having said that, there are finance companies that deal with people with less-than-perfect credit. Most banks will exclude such clientele. Some small lenders like credit unions will also exclude folks with problematic credit reports. This can start to limit your choices. So, if you are dealing with a credit rating that isn't quite what the bank would want, don't despair. Check what a finance company can do for you.
Some finance companies actually specialize in "credit repair". This means that they will work with you to help you to improve your credit rating. In addition, while you may start out with a higher interest rate at the beginning, you can usually negotiate a lower rate on renewal if your payment history is good.
Another route if you are having trouble because of credit rating is a small mortgage lender. While not technically a "finance company", they are also not a bank or a credit union. These folks compete almost strictly for mortgage business. Some small companies are very competitive, even with those with credit problems of one kind or another, because they want to get into this business. (It is very lucrative, and gives investors in such companies a much better return than they would get if they left their money in a bank on deposit.) However, the issue is getting a reputable lender, and a stable lender. If your lender goes bankrupt in the middle of your mortgage, there could be problems for you.
How will you know if your lender is stable? One place you can go to check is the large rating companies. Six major credit agencies will give you information about financial strength. You can do this online:
- A.M. Best Co. - www.ambest.com
- Duff & Phelps Inc. - www.duffllc.com
- Fitch, Inc. - www.fitchratings.com
- Moody's Investors Services - www.moodys.com
- Standard & Poor's Corp. - www.standardandpoors.com
- Weiss Ratings, Inc - www.weissratings.com
These rating companies look at a broad range of factors concerning the financial performance of an organization. Note: a high financial rating is not the same as a high consumer satisfaction rating. Just because your finance company mortgage lender is very stable doesn't mean you will like doing business with them.
What do you do if these rating companies haven't rated your small lender? You'll have to do some local footwork. Talk to other clients if possible. Even check with your local Better Business Bureau to see if there are complaints.
While the best interest rate is always good, you also want a lender you can put your trust in. After all, they are holding your home in their hands. If something goes wrong with them, you could be in foreclosure. A little homework now can save you a lot of hassle and heartbreak later.
Vendor Take-Back Mortgages
A vendor take-back mortgage is a unique situation. It can work in your favour; but it can also be very complicated.
If you consider this option, be sure to use a lawyer who is aware of the intricacies of a vendor take-back mortgage. You need to plan ahead for all sorts of situations: if the vendor dies, and their estate (including your mortgage) needs to be 'liquidated'; if the vendor becomes insolvent; if you want to make lump sum payments in addition to your regular payments; if you would like to renegotiate the mortgage (including penalties, if any). And these are just a sample of the items which should be specified in the mortgage agreement.
If you know the vendor remember that it can be difficult to deal with a friend or relative if something goes wrong. This can be a serious drawback to this kind of arrangement.
However, the pros for vendor take back mortgages are often worth the hassle. Sometimes vendors may take a lower interest rate than a bank. They may not require the same kind of credit check. They may also be more flexible regarding repayment terms.
It's important to weigh the pros and cons. Understand your own unique situation. Consult a real estate lawyer who has handle vendor take back mortgage transactions before. Be sure the constraints of the mortgage agreement will work in your favour - and are more advantageous than using another type of lender, such as a bank mortgage or a finance company mortgage.
Mortgage Brokers
Mortgage brokers make their living by bringing lenders and borrowers together. In that way, they are somewhat similar to a real estate broker, who brings buyers and sellers together.
In the same way that you need to be clear that the real estate agent is working on your behalf (and not just for the highest commission), you'll need to be sure that the mortgage broker is working on your behalf. The borrower usually pays the broker in the US, so the temptation for the broker is to take an approach that will increase the fee. In some cases, the broker may approach lenders that are charging a higher interest rate (which will mean a larger fee to the broker). Obviously, these lenders may not be the best bet for you.
So why would you use a broker? A broker's access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application. If you have contracted with the broker to act as your agent, the broker is obligated to find the best deal. However, if you have not contracted with them, they are under no such obligation. As a result, in the absence of a contract, you should consider working with more than one broker for mortgage quotes, in order to be sure that you are really getting a good assessment of the lenders interested in your business.
Brokers also make money based on the size of the loan. Why does this matter? It may mean that the broker will try to talk you into taking a larger mortgage than you need, and using the extra money for extras for the house. Be aware that the rationale for the broker is a bigger commission and that you are ultimately responsible for the size of the loan. Don't be talked into something you can't afford.
How much can you expect to pay a broker? The average fee in 2004 was 1.7 percent of the loan amount, according to a national survey of the industry by Wholesale Access. Customers who want to pay a smaller broker's fee can ask the broker to increase the interest rate on the loan. In exchange, the lender will pay some or all of the fee. This is called a "yield spread premium."
There are unscrupulous brokers out there. Be aware that they can also increase the interest rate without a request from the customer. The broker will still get the fee from the lender, but won't pass it along to the customer.
How can you protect yourself from this kind of dirty dealing? Watch for any extra fees paid by the lender and listed on closing statements. Fees paid by the lender to the broker will appear as "paid outside closing" or "POC." Check your closing statement for such fees, which often are listed in a different place than other closing costs. Also, ask if your broker is receiving any such fees in exchange for raising your interest rate. If so, the fee you pay the broker should be reduced by the same amount as any "POC" fees.
Source: mortgageguide101.com
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