In this series of articles (“Beyond Banks”), we explore borrowing opportunities from ALL sources, not just your traditional bank. To access all the volumes in this series, go to our “Series” page here.
You may be looking for a mortgage to purchase a new home. Or, you may be looking to refinance your current home mortgage.
If so, do not make the same mistake that many other borrowers make. Many borrowers apply to only one lender, such as their current financial institution (bank or credit union). In other words, they fail to shop around.
While your bank or credit union is a great place to start, you should know you have additional options.
Even more importantly, if you already applied to your bank or credit union for a mortgage, but were denied, you still have options.
Knowledge is power. Here are 3 items to keep in mind when looking for a home mortgage.
#1: Why is it beneficial for me to shop around at multiple lenders?
According to the Bureau of Consumer Financial Protection (CFPB), many borrowers do not shop around when looking for a mortgage. Specifically, more than 30 percent of borrowers do not comparison shop. And, more than 75 percent of borrowers apply with only one lender.
However, it is in your best interest to shop around for your home mortgage for four main reasons.
First, failing to do so can be costly, averaging approximately $300 per year, according to the CFPB. This can equate to many thousands of dollars throughout the life of the mortgage.
Second, you will receive a loan estimate from each lender you apply to, allowing you to compare the loan products, interest rates, and closing costs.
Third, shopping for a mortgage puts you in a stronger position to negotiate with lenders to get the best deal possible.
Fourth, it is a misperception to think that applying to multiple lenders will hurt your credit score. Not necessarily. Under the credit scoring models, there is a built-in allowance for applying to multiple lenders in a short time period. For instance, multiple inquiries in the same week will be aggregated as one, instead of being treated as separate inquiries, without affecting your credit score. Interestingly, in a government survey, only 15 percent of the respondents knew about that fact, perhaps explaining why the vast majority of homebuyers are hesitant to apply to more than one lender.
Therefore, it is fiscally wise to “kick the tires” and apply to as many potential lenders as you can.
#2: How do I shop around for mortgages exactly?
Now that you know it is crucial to shop around at different lenders, the question becomes, “How do I shop around exactly?”
You have two main options. Go it alone. Or, work with a mortgage broker who will do the shopping for you.
The “go-it-alone” option may work well if you have free time. You can start with your bank. Then, read your local newspaper and browse the Internet for other lenders to contact. To help keep track of your conversations with the different lenders, the Federal Trade Commission has created a helpful “Mortgage Shopping Worksheet” that you can access here.
The “mortgage broker” option enables you to cast as wide a net as possible. A mortgage broker acts as an intermediary between you and dozens of lenders. As such, a broker can save you a lot of time and frustration by doing the shopping for you and matching you with lenders who offer programs tailored to your needs.
Additionally, working with a broker gives you access to lenders you otherwise would not even know exist. Many lenders (such as wholesale lenders) do not advertise widely or work directly with borrowers. Instead, they exclusively rely on mortgage brokers to refer them potential borrowers like you.
For more information about the differences between visiting a bank versus working with a mortgage broker, click here.
To get the best of both worlds, you can shop around on your own while working with a mortgage broker.
#3: What types of loan programs are available to me?
Whether you are shopping for a mortgage on your own or through a mortgage broker (or both) you may be frustrated or confused to learn that you may not satisfy a particular lender’s requirements.
Each lender has its own “checklist” of requirements that a potential borrower must satisfy to qualify for a mortgage.
Of the different kinds of lenders, banks tend to have the strictest guidelines, which are known as “bank overlays.” The federal government sets official minimum standards, but most banks are more conservative and therefore apply additional guidelines on top of the official standards, hence the term “overlays.”
Therefore, if you are having trouble getting approved by your bank or other banks, the key is finding a lender who imposes fewer restrictions or overlays than your bank, which will boost your chances of getting approved.
Wading through the guidelines and overlays of multiple lenders and contacting them directly is difficult, if not impossible. As a practical matter, lenders typically do not publish their overlays, but instead distribute them exclusively to mortgage brokers.
Curious to see what the general parameters may be when applying for a conventional loan and providing full documents, including tax returns? The following chart compares what you may expect to encounter with a traditional bank, a nonbank wholesale lender, and a nonbank non-QM lender:*
|Traditional bank||Nonbank wholesale lender||Nonbank non-QM lender|
|What is the minimum FICO score that I have to have?||Down to 640||Down to 620||Down to 500|
|What is the maximum loan-to-value ratio (LTV) the lender may offer me?||Up to 90%||Up to 97%||Up to 97%|
|What is the maximum debt-to-income ratio (DTI) the lender may accept?||Up to 43%||Up to 50%||Up to 55%|
*A non-qualified mortgage (non-QM) does not comply with the CFPB’s requirements for qualified mortgages. The chart is for illustrative purposes only and does not constitute a commitment to lend. All program terms, rates, and conditions are subject to change without notice. Loan approval is dependent on borrower credit, collateral, financial history, and program availability at the time of origination. Other restrictions may apply.
As the chart shows, compared to banks, the nonbank lenders have more lenient and accommodating overlays regarding credit scores, LTVs, and DTIs.
Keep in mind that these parameters are sliding scales that work in tandem together, based on the lender’s particular risk appetite. For example, while a nonbank non-QM lender may be willing to accept a borrower with a FICO score as low as 500, the lender may likely compensate for the added risk by lowering the LTV from 97% to around 70%. However, the tradeoff is that the borrower actually has a chance of being approved; with a credit score of 500, the borrower would not even get in the door at the traditional bank or the nonbank wholesale lender.
In other words, there is a loan program out there for all types of borrowers. A good mortgage broker with strong connections will have a firm understanding of each lender’s overlays and requirements. This allows the broker to quickly and simultaneously shop your loan at several different lenders to help you find the needle in the haystack.
You likely will do yourself a disservice if you do not shop around for a home mortgage and only apply at your current bank. Instead, broaden your possibilities by applying to multiple lenders on your own and by working with a mortgage broker.
Continue exploring our “Beyond Banks” series:
To access all the volumes in this series, go to our “Series” page here.
David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation.