How to Find the Best Mortgage Lender

Expert Elena Lutskina shares common sense advice for potential borrowers.

There's more to finding a mortgage lender than getting the lowest interest rate. Just ask the University of Virginia Darden School of Business professor of business administration Elena Lutskina. "Education is the most important thing if the consumer wants to be protected," he recently told Investopedia.

In the complicated and occasionally perplexing world of home purchasing, Loutskina outlined what consumers need to know, what questions to ask, and how to find the best mortgage lender. Our edited conversation continues.

Key findings

When shopping for a mortgage, it pays to cast a wide net, including local banks, mortgage brokers, and online lenders.

The three most important factors to consider when buying a mortgage are:

• The interest rate
• The size of the loan about the value of the property
• The impact of paying points upfront

Getting pre-approved for a mortgage can be helpful, but it usually only takes about 90 days.

While the law provides some protections for consumers, the best way for borrowers to protect themselves is to learn about the mortgage process and question anything they don't understand.

Lenders come in many forms.

Investopedia: Let's start with the basics. What is a mortgage lender?

Loutskina: The query is both straightforward and intricate. Different players implement different parts of the value chain in the mortgage market. Some communicate directly with lenders, such as banks, mortgage brokers, mortgage companies, or online portals like LendingTree.

Others originate from mortgages and may be the same or a different entity. Various actors finance the mortgage or provide money to the borrower.

Then, some players have mortgages on their balance sheets for a maturity period of up to 30 years.

For example, a bank can fulfill all these roles. You can negotiate with the borrower, originate the loan, finance the loan, and hold the mortgage to maturity. Or there may be a separate entity for each role.

For example, the process may start with a mortgage broker and then move to a loan origination bank. This is the principal lender. The bank can keep the loan on its balance sheet or sell it to Fannie Mae or Freddie Mac. Instead of a bank, the originator may be a finance or mortgage company that borrows money from the wholesale market or other financial institutions.

This is where the concept of who is a lender becomes very vague. Is there someone you can negotiate with to get your loan? Is this someone who subscribes to it? Is it someone who finances it initially? This is where the confusion begins.

Anastopedia: I understand that there may be different players for each step. How can a user understand all this?

Lutskina: I need clarification on why borrowers should go through all the steps of mortgage origination. My mortgage, for example, was transferred between finance companies several times, but I still had to change my financial obligations. Lenders should identify reliable agents, banks, or mortgage brokers who present them with a quote and then zero in on the best terms available.

Problems with poor enforcement and shadow banks

Investopedia: In 2015, you wrote about the 2009 financial crisis and noted the history of inconsistent enforcement of existing regulations before the crisis.

What is the status of the inconsistent application, and how does it compare to the issue of shadow banks? Both influence consumers and how they search for a lender.

Loutskina: We see differences in regulatory exposure and compliance between banks and financial corporations. Financial companies do not make deposits. And because they do not hold deposits and are not insured by [the] Federal Deposit Insurance Corporation (FDIC), they are not subject to the same level of regulation. We call them shadow banking institutions or non-depository financial intermediaries that act like banks.

The Consumer Financial Protection Bureau (CFPB), established after the financial crisis, significantly changed the enforcement equation.

Now, non-banks have a credible threat that regulations can be enforced.

From a consumer perspective, one of the most essential things is awareness. I believe more in educating consumers about the financial markets than enforcing the Home Ownership and Fair Housing Protection Act.

This is because regulations can only change behavior at the margin. Education is paramount if the consumer wants to be protected.

Anastopedia: What are some examples?

Loutskina: Consumers need to invest in understanding mortgage pricing and make sure fair disclosure rules apply, which means they get informed before getting a mortgage. If they're surprised when they sign the mortgage papers, that's probably a bad sign.

And they need to ask many questions: "What will my monthly payment be?" "Will it hold up over time?" "Do I need mortgage insurance?" "How does an escrow account work?

How to find a lender

Investopedia: What should home buyers consider when looking for a mortgage lender?

Loutskina: The most obvious advice is not to borrow from dubious people with names you can't verify. In addition, Bank of America, the University of Virginia Credit Union, BBVA Bank, and LendingTree differ very little.

It is a question of prices. My recommendation for users is to cast a wide net. Contact your local bank, contact online portals, contact local mortgage brokers, and ask what they can offer you. This is a low-cost search and will allow you to understand the market prices better. This wide-net approach will also allow you to trade.

Loutskina: Consumers need to understand the trade-offs available to them in terms of down payment points and mortgage interest rates. Points represent the origination fee borrowers pay as a percentage of the total amount owed.

Some people prefer to pay fees upfront and reduce the interest rate over the life of the mortgage, say 30 years. Others want to avoid paying origination fees and even have the lender cover some closing costs. But this will come at the expense of a higher interest rate.

Loutskina: You should ascertain whether your lender will call for an appraisal or appraisal of the property's value and how much it will matter in the decision to grant you a loan. These days, when you have good credit and a 20% down payment, lenders often don't require an appraisal.

You should be careful when you sign a home purchase agreement with no contingency and then ask for a property appraisal if the review is low and the lender refuses to start your mortgage.

Mortgage pre-approval cost

Investopedia: Is Pre-Approval Beneficial for Borrowers?

Lutskina: I think so. A pre-approval lets you ask if you can afford that amount, given your credit history and income. A pre-approval is an excellent way for the lender and borrower to agree without formal commitment.

Lenders can think of a pre-approval as a temporary confirmation from the lender: "If you're telling me everything is correct and the home is worth what you're willing to pay for it, I can give you this." Loans on these terms today. But in the mortgage market, borrowers often try to figure out how much they can borrow in March to close on a home in July or August. March and July or A lot of time will pass between August. Circumstances can change. Lenders' finances can change. Borrowers' intentions to buy a given home can vary.

Generally, a pre-approved offer (but not a commitment) is suitable for 90 days. A pre-approval indicates to the borrower how much he can borrow and on what terms. But don't be surprised if the bank decides to renegotiate when you're ready to sign an agreement. I recommend that borrowers stay in touch with their mortgage broker (lender) to ensure their March commitment is still valid in June or July.

Borrowers can reserve mortgage terms for an additional fee. However, borrowers should know that the bank may alter the mortgage terms if their credit history significantly declines or the home's appraisal value is lower than anticipated.

However, by securitizing the mortgage terms, the borrower is assured that barring credit history changes or home value changes, they can still get the loan on the pre-approved terms. However, if, for example, they don't sell their old home or their new home fails inspection, they don't need to enter into a mortgage loan agreement.

Is the lowest interest rate the holy grail?

Investopedia: The goal of buying a home is to get the lowest interest rate. Is this ultimately the most important thing when choosing a lender?

Loutskina: No, three factors are working together. Two of the most important are the loan size, the property value, and the interest rate. The risk to the bank is lower the higher the down payment. This is where you can expect a slightly lower interest rate.

The third factor is the points you pay to originate the loan. If you have the money right now to cover the down payment, it's a thing issue. If you don't, that's a different story. Second, commercial borrowers face a higher interest rate over the life of a mortgage.

These are the three most important factors. Others may include that not all banks will be ready to pre-approve you in March and close the deal in August. It would help if you ensured the bank was willing to go with you.

Investopedia: How has the pandemic affected working with mortgage lenders from a consumer perspective?

 We see the migration of people from big cities to the suburbs. We also see a structural shift in what is essential at home: people now want a home office. It's less about the bedroom. It's about having a separate workplace to avoid disturbing family members.

This has put a lot of pressure on housing demand, and housing prices are skyrocketing. By some estimates, in the US [median home prices have risen by 19%].

Most metropolitan areas are experiencing a construction boom, and developers are trying to capitalize on these trends. This smacks of the crash that preceded the 2007 financial crisis.

Banks and home buyers should consider whether this effect is temporary or permanent. If trends reverse, for example, due to companies imposing "back-to-office" requirements, this could change the migration and lower house prices. Some borrowers may find themselves underwater, worth less than their loan obligation.

Final Thoughts

Investopedia: What final advice would you like to give our readers?

Lutskina: When making a significant financial decision in your life, like buying a home and taking out a 30-year loan, my advice is this: Take the time to make sure you understand the basic terms of the house. Loans

Talk to your loan officer if you see or hear something you need help understanding. Even with my education and industry knowledge, the paperwork was overwhelming when I first got my mortgage. It's important to ask questions throughout the process to make sure the product you're getting meets your expectations.