Many borrowers, especially first time buyers, think that their mortgage terms will be the same no matter who they choose to work with. In reality, this is far from the truth. There’s a reason the 45-day credit shopping rule exists. During this 45-day shopping period, the impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check. Not every lender or broker can get you the same terms on your loan, so utilizing your shopping period can greatly benefit you.
Let’s break it down a little bit. Your loan terms are things like: interest rate, fees, repayment period, incentives, and more. Another thing to consider is that direct lenders (like your bank) often have more red tape than broker – lender overlays.
How Loan Terms Differ
Some people think that interest rates are standard, no matter who the lender is. While interest rates have a standard base rate, the rate you receive will vary from lender to lender based on how the lender weighs their risk and their ability to take it on, as well as loan costs (title fees, closing costs, etc.). Other factors, like the loan program itself, can also impact the interest rate. One of the largest advantages of working with a broker instead of a direct lender is that a broker has direct access to many different products across several lenders and get you the best rate for your situation.
Additional fees that the lender can charge you fall into your APR. If the APR is close to the interest rate, it indicates that that the lender’s fees are low. Oftentimes, you will see a low interest rate and a higher APR, or a higher interest rate and lower APR, and these are all things that can vary from place to place.
The incentives available to you will also be different wherever you go. For example, some lenders provide lender credits for closing. Some waive appraisal fees or closing costs. Sometimes these incentives come with strings attached and you will see them reflected in your APR. It’s important to have a conversation with your Loan Officer after your application has been submitted about the available incentives and the potential long-term cost of utilizing a closing incentive.
Lender Overlays
Lender overlays are common with direct lenders and can greatly affect your ability to get approved. They dictate that even if you meet the general federal lending guidelines for a specific program, you must meet additional lender-set criteria to qualify for the loan. These criteria can apply to your income, your credit score/history, your cash reserves and down payment, and more.
Here’s a situation that really happened to a borrower I know. The borrower was planning on using a down payment assistance program and was working with a well known bank in the area. Just 10 days before closing, she was informed that they could not qualify for the program because she and her spouse’s income was too high. Her Loan Originator informed her that in order to close on the property, she would need to bring a down payment to closing. The borrower did not have the funds and it was far into the purchase process; they had been under contract for 30 days by that point. Just as they were about to give up, her realtor urged her to contact a mortgage broker. The broker was able to complete the loan and they closed on the home. As it turns out, the bank she was working with had an income overlay that was lower than the program’s normal guidelines.
This is just one way overlays can impact your purchase process and it illustrates why it is very important to be informed about.
Who you work with does matter, and could affect you and your financial state for years to come. Research is an important part of the purchase process – consider this your first step.
