Over the last few years I have caught heat from mortgage brokers who disagree with my opinion in regards to why it is better to work with funding lenders over mortgage brokers. I have also gotten a far larger number of responses from real estate agents who from their experiences, agree completely.
In CE classes I teach for real estate agents, I use the following example to differentiate between loan approval letters from brokers and funding lenders.
Mr. & Mrs. Buyer are looking to purchase a home with a $500,000 mortgage. With my recommendation they contact a loan officer at a local funding mortgage lender. The loan officer runs Mr. & Mrs. Buyer through the system, reviews their documents and pulls their credit. It is then determined that Mr. & Mrs. Buyer is right at the edge of qualifying or not qualifying. So what does the loan officer do next? The loan officer gets out of their chair, walks down the hall and asks the underwriter to review Mr. & Mrs. Buyer’s file. At that point, based on the underwriter’s recommendations one of the following happens:
1) Loan approval is issued for the amount requested.
2) Loan approval is issued for a lesser amount.
3) Loan approval is denied.
4) Loan approval is issued with conditions (closing a credit card, etc.)
If the letter is issued, it has then been reviewed by the underwriter who will ultimately approve the loan.
Now let’s look at what would happen if Mr. & Mrs. Buyer instead went to Bob’s Mortgage and Hair Cutting Emporium, a local (fictitious) mortgage broker with the same scenario.
Mr. & Mrs. Buyer brings Broker Bob the same documents. After careful review Bob has determined that Mr. Buyer is either borderline or even worse. What does Broker Bob do next?
1) He issues a loan approval letter.
Let’s let that sink in for a second.
This is the reality of what I see on a regular basis in the real world. When does the underwriter get to see the file? I doesn’t happen until towards the end of the process. That is after the Mr. & Mrs. Buyer have paid for:
1) The loan application
2) Escrow / title fees
4) Home Inspection
5) Scheduled and possible paid money to the moving company. And any other expenses and effort to plan the move
6) They may also have given notice to their landlord that they are moving and will have no place to live if this transaction falls apart.
It is also after Mr. Seller has taken their home off the market and made their moving plans. They have also incurred expenses:
2) Repairs requested through the home inspection process
3) Termite inspection
4) Escrow / title fees.
5) They may also have expenses incurred on a replacement property.
Not to mention the waste time and expenses the real estate agents have incurred. All because of a bogus loan approval letter.
As a real estate agent representing buyers, I do not tell my clients who they have to use to get their loan. As a seller’s agent, we have no control over who the buyers choose to work with. There are a few things we can recommend to our clients to avoid they failed transactions caused by this above scenario.
1) If the buyer is using a mortgage broker, have them get a loan approval from the funding lender they plan to work through.
2) Seller’s can either require this or make a condition of their acceptance, that a loan officer from a local funding lender; review the file.
Tip For Home Buyers. The reason I keep mentioning a local lender, is that local lenders have an advantage over out of town lenders.
1) They will be there at the signing. The buyer’s will be signing a stack of complicated documents and they will want the loan officer at the signing to explain what they are signing.
2) They live, work and play in the area and will want future referrals from the real estate agent. For that to happen, their level of service has to exceed what an out of state loan offer would give.
Parting Thought. When a buyer presents an offer on a home, a letter from a funding lender carries more weight with a seller or their agent. Nobody cares about the broker’s opinion. They do not approve the loan, the lender does.
For my local friends and client’s, I keep a services directory of vender’s that I and my client’s have gotten great service from. It is really difficult for a vender to make my list, but they can be removed in 2 seconds.