By Ken DeLeon, Founder
Many buyers will wisely interview three or four potential buyer agents before selecting one to represent them with their purchase. Conversely, many buyers stumble into the lender they choose, often relying solely upon a single recommendation or perhaps using a familiar lender they worked with in the past.
Most buyers underestimate the great disparity lenders can have in not only their mortgage rates but also their underwriting criteria. DeLeon Realty prides itself in being able to direct you to the optimal lender with the best loan program and lowest mortgage rate to help you achieve your goals when purchasing or refinancing.
Unlike some other brokerages, we do not have an “in-house” lending arm, nor do we strike other “arrangements” with one particular lender. Instead, we know the lending market well and make recommendations based on what is in our clients’ best interests, not ours.
Choosing the Right Loan Program
Generally, buyers choose their lender first, and then select from that lender’s limited loan programs. This sequence is actually inefficient and incorrect. Ideally, buyers should first determine their optimal loan program, and then choose the best lender given their goal. This is much more efficient. Rather than being wedded to one lender’s set of loan programs and limited wheelhouse, buyers may utilize the entire marketplace for their tailored loan program to find the best provider, and then start the process. Reversing this order can save hundreds of thousands of dollars over the lifetime of a loan.
For example, if a buyer is looking for a 15-year fixed mortgage, one very large lender has a published rate of 4.25 percent, their least competitive loan product. Other lenders DeLeon Realty works with offer a 15-year mortgage for 2.75 percent. This astounding 1.5 percent difference in mortgage rate on a two-million-dollar mortgage amounts to an extra $30,000 per year in interest!
Understanding and Optimizing Variability of Underwriting Criteria
Buyers are often surprised at how much variability there is between underwriting criteria of different lenders. Consider the following questions:
1) Does a lender give income credit for RSUs (restricted stock units)?
2) Does a lender consider assets in a retirement account when determining an applicant’s financial reserves?
3) When trading up, does a lender count the mortgage debt and property tax of an applicant’s current home when determining how much to lend?
Surprisingly, the answer is, “It depends.” While the federal government does have mortgage regulations, these are focused on lending procedures and rules whereas underwriting criteria is determined by each bank. This makes sense because the banks are providing the loans, and thus the banks get to determine to who and how much they will lend.
Now, to answer each of the above questions:
1) Banks range from giving no credit to RSUs, to credit being provided if there is a record of RSUs being given for two years or more, to credit for all RSUs even if received for less than two years.
2) The percentage of credit that banks will give to an applicant’s retirement account generally varies from zero to 50 percent.
3) Most banks will count the debt of an applicant’s current home, but both First Republic Bank and Citi have programs where this debt loan can be relatively ignored. Consequently, these are excellent banks for trade-up buyers as they can get pre-approved for a higher amount while still residing in their current home, which they plan on selling later.
For some buyers, these inconsistencies in underwriting policy can result in a large variation in the amount of pre-approval. For a buyer who has large retirement assets, receives the majority of overall income in RSUs, or is trading up homes, an optimal matching of one’s assets and situation with the ideal bank’s underwriting criteria will make a large difference in the pre-approval amount. This perfect pairing between a buyer and a lender can mean the difference between being pre-approved at $1.8 million by one lender and loan program, and $2.3 million with another lender and a better loan program.
With mortgage rates near historic lows and generally tax-deductible, most wise buyers will want to have the option of borrowing more if and when the ideal property is found. In a high-end city like Palo Alto, often this increased pre-approval can mean the difference between purchasing a nice townhome at $1.8 million, or a single-family home for $2.3 million that is in good shape but needs cosmetic updates. The greater equity a buyer makes in this first housing investment may fuel a continuously successful upward climb in housing, all while generally making a large tax-exempt gain.
In summary, finding the best lender to evaluate you for a mortgage can provide financial benefits that last a lifetime. At DeLeon Realty, we strategically advise clients on what lender and loan program is the best fit for their goals. There is no uniform best lender, but knowing our buyers’ situations, assets, and goals helps us efficiently tailor the match to ensure our clients get the best rate, the best service, and the pre-approval amount they want.
Beware of real estate brokerages that have an in-house lender. This lender is effectively giving the brokerage a kick-back for referrals, and the client pays indirectly through either a higher rate or a lack of choice. At DeLeon Realty, we get the latest weekly rates from mortgage representatives, know their underwriting criteria, and then match up our clients so all savings and advantages flow directly to our buyers. Agents who only have a few buyers a year will likely have one favorite lender they use. Because our entire team works collaboratively and shares resources and insights, we can provide our clients with tailored recommendations.
DeLeon Realty advises all of its clients on optimizing all facets of their home purchase, including finding the best rate and lender. Regardless of what loan program you choose to purchase or refinance your home, coupling excellent advice on what mortgage lender to choose with historically low interest rates makes for a very attractive combination.