Expert: Jim Root - 6/23/2009

Question
Hello Mr. Root, I have actually three questions if you don't mind responding:

1. what are the pros and cons of obtaining a mortgage from a bank vs. a direct lender?  Please include the application process and the resulting mortgage as considerations.

2. What is a FHA mortgage?  How does one apply/qualify for it?  What are the pros and cons of the FHA mortgage vs. a conventional mortgage?

3. Are there any consequences (ethical, legal, and/or financial) for applying for mortgages from more than one source (banks, online lenders, etc.)?

Answer
Hey Karl--

Thanks for the questions-- I Certainly don't mind responding; that's what I'm here for!

1.BANKS vs. DIRECT LENDERS--Pros/Cons?

I'm assuming that by "Banks" you are including not only Banks per se, but Savings & Loans, Credit Unions, etc, AND by "Direct Lenders" you're speaking of Mortgage Companies (which can be either Mortgage Banker or Mortgage Broker-operated.)

Those you refer to as "Banks" usually do NOT place HIGH PRIORITIES on their Home Loans!Their priorities are in Checking/Savings Accounts, CD's, etc. They typically have Real Estate Loan Departments simply to be able to provide "Full Service" to their Clients.Many times, their Loan Officers (LO)s and Processors (LP)s are not as knowledgeable & skillful as they should be to effectively and efficiently bring a Loan Application all the way through the "system" to the Closing Agent(CA)s!The Home Loan folks at the "Bank" many times are "on salary"? and get paid as much for closing 1 loan a week as they do for closing 5, so some of them don't work as "hard & fast" as their counterparts at a Mortgage Company. And they usually have a smaller variety of types of Home Loans to offer!Loan Approvals at a "Bank" may be done by a " General Loan Committee," rather than a highly-trained Mortgage Underwriter!

The "Direct Lenders," the Mortgage Bankers & Brokers operating Mortgage Companies have making Home Loans their TOP (and only) PRIORITY! Their LOs,LPs and CAs get paid Commissions, Bonuses and
other rewards/awards based on how many Home Loans they successfully close each Month! It usually makes them work "hard & fast" to get the Loan Applications they're working with processed, approved & closed QUICKLY & EFFICIENTLY. Typically Mortgage Companies have a
H-U-G-E inventory of different LOAN PROGRAMS to offer.They usually have a Mortgage Program that fits one's specific situation! The Mortgage Company LO and LP work together  to prepare a Loan Package that will be APPROVED by their In-House FHA/VA-Approved Underwriter and actually will "argue your case" with the Underwriter if necessary!
  
Loan Costs/Fees and Interest Rates for FHA,VA and Conventional Mortgages are pretty much the same at the "Bank" as the "Direct Lender!" Some of the "Special Loan Programs" offered by the Mortgage Banker/Brokers are SLIGHTLY higher than their FHA,VA & Conventionals.

2. ABOUT FHA MORTGAGES.

Your asking about what's actually called an FHA-Insured Mortgage.FHA does NOT make loans; they insure HUD-Approved Lenders against default and foreclosure losses if a Loan is registered with them and the Lender ensures that the Loan Package meets their requirements for issuance of a Mortgage Insurance Certificate to the Lender!The HUD-Approved Lender must meet certain financial and facilities standards and the LOs, LPs and CAs must be trained in FHA requirements.

The Appraiser used must be on FHA's Roster of Approved Appraisers and the Underwriter must have been trained by FHA and HUD-certified to "Supervise & Oversee" every "FHA Loan" File being worked by the Company (Many Mortgage Companies have more then one Underwriter for FHA and VA work).

The "Standard" FHA-Insured Loan is called the FHA 203B--this is the one of many FHA Loan Programs available, but the one MOST used--requires only a 3%  downpayment, puts a limit on loan/closing costs and requires the Seller to make repairs to any serious problems found by the Buyer's Home Inspection and/or the FHA Appraisal.I suggest that you go on-line to: ( www.hud.gov ) OR  ( www.fha.gov )
and get "the rest of the story" about FHA.

Conventional Loans require 20% Downpayment--OR less if the Borrower buys costly PRIVATE MORTGAGE INSURANCE(PMI). One can get a "Conventional" for as little as 5%, 10% or 15% Down, but PMI Costs are higher with each lowering of the Downpayment)Conventional mortgages don't have to comply with FHA standards or VA requirements (FHA & VA Loan are called the "Govvies" in the "Mortgage World" as they're backed by the US Government) They DO have to follow the rules set by "Fannie Mae" and/or "Freddie Mac, non-governmental purchasers of Mortgage Loans! (Info on "Fannie" & "Freddie" is on-line, too)

To apply for an FHA-Insured Loan,I suggest you find a MORTGAGE COMPANY that is HUD or FHA-Approved.(Or a "Bank" if that's your choice. My preference due to 5 years as a Mortgage Banker/Broker is showing isn't it?) Make an Appointment with an LO an d he/she will help you determine the best loan for you and work with you and an LP to get your Mortgage successfully closed in a minimum of time and with as few "bumps in the road" as possible.


3. APPLYING FOR MORTGAGES FROM MORE THAN ONE SOURCE?

There's nothing illegal or immoral about SHOPPING for the BEST PRODUCT! It is suggested that you interview at least 3 LOs about themselves, their loan products, their interest rates, their costs/fees,and their company.

If you make a out a formal Loan Application with more than  one of several Lenders,there's a question of ethics. Should you tell them all of your other Applications? Some say you should, as it's ethically the right thing to do--and it may help you in terms of their competing to provide you with he BEST Loan in  terms of interest rates,loan costs and miscellaneous fees.

The problem with applying for a Mortgage with more than one Lender at a time is FINANCIAL. All of them will want advanced funds for a Special; Mortgage Credit Report on both H & W & MERGED from  all 3 Credit Reporting Agencies. This is NON-REFUNDABLE. Some will want APPLICATION/ORIGINATION FEES upfront, non-refundable if you go with another Lender. If more than one Lender is working up a "Package" for submission to their Under writer, you WILL be asked by both for advanced payment, again non-refundable, for the required FHA Appraisal (My 12 years as a Realty Officer with FHA is showing here, too, isn't it?) If a Conventional rather than an FHA that you opt for, they too need Appraisals done & prepayment!

As for "on-line" Lenders,  I think it's better for a First-Time Homebuyer to be able to walk into the LOs Office, sit across the Desk, from him/her! There ARE good, honest and trustworthy on-liners," but there are some predators on-line, too!BE CAREFUL!

Assuming you ARE a "First-Timer," one more word of advice. FIND A REALTOR WITH THE PROFESSIONAL DESIGNATION "ABR," This stands for "Accredited Buyers Representative! He or she has EARNED this designation  through education, training and experience as a Buyer's Rep and will help you with the finding ,offering, negotiating and processing of all of the activities involved in closing into your NEW HOME! Without the ABR,your homebuying actions MAY become your worst nightmare. With the ABR it'll be sweet dreams! If you connect with an ABR he/she can probably help you find the BEST LO to work with, too!

GOOD LUCK!

--JIM ROOT

PS. If you need to contact me directly, I'm at
( real-t-pro@comcast.net  )