“Never count on making a good sale. Have the purchase price be soWarren Buffett
attractive that even a mediocre sale gives good results.”
What does a loan officer do?
The job of a loan officer is to help you obtain a loan to purchase your property. Loan officers are the intermediary between lenders and borrowers. They can work directly for banks and credit unions, or as independent mortgage brokers.
The loan officer plays arguably the most important role in a real estate transaction with regards to closing escrow on time. The loan officer is the one responsible for telling you up-front whether or not the financing terms can be provided as requested, setting up the proper expectation for what kinds of paperwork you will need to provide during the process in order to qualify, and communicating with all parties in the transaction as to the status of the financing. A good loan officer needs to have knowledge of a wide variety of different loan products and guidelines while also being extremely detail-oriented and having excellent communication skills.
How to search for and choose a loan officer
Due to how close a role your loan officer will play in your real estate transaction, it’s important to build rapport and a good working relationship with the lender you choose. You should ask friends and coworkers for referrals and interview several loan officers before making a decision on who to work with. Another good place to start is your bank and your employer’s bank since a relationship is already established. You can also search Google for “loan officers” in your area because a credible loan officer will have a visible online presence in today’s day and age.
The loan officer you choose should be easy to talk to, readily accessible, and have a positive history of successful loan approvals. A successful loan officer has good relationships with their lenders and will look out for your loan from beginning to end, which is important to both of you.
Working with a loan officer is a mutually beneficial relationship. An independent loan officer is only going to get paid if they make a transaction happen, which is a win for you and a win for them.
When shopping for a loan, try not to get too hung up on the interest rate. Oftentimes the difference between one rate and another won’t have that large of an impact on your bottom line. For example, on a $300k loan, the difference on 1/8th point is only about $20/month. It’s more valuable to you to actually get the property than it is to save $20/month, so obtaining financing that you can confidently close should be a higher priority than the rate itself. Plus, you can always refinance down the road.
Every bank or lending institution has their own set of guidelines and loan criteria. Never assume that what any lender tells you is the standard.
With some exceptions, every lender is looking at 4 criteria for doing a loan:
- Collateral – the value of the home.
- Your Credit – not only your credit score, but also looking at overall credit history to see if you pay your bills on time.
- Assets – what else do you own that could be used as collateral, including cash on hand.
- Debt to income ratio – explained below.
Debt to income ratio is a lender’s way of determining that your cash flow is sufficient to pay them back each month with consideration of your other debts and expenses. Ultimately, this is what the lender is most concerned about. They lend you money and want you to pay them back on a regular basis. Yes, they can always foreclose if they need to, but they don’t really want more properties in their portfolio. Foreclosure is a last resort.
Demonstrating income is critical and is usually done with tax returns. If you’re owner or part owner of a company, they also want to look at corporate tax returns. Wage earners (people with regular jobs that receive a W2) are treated more leniently than a self-employed person. Most lenders criteria require that you be self-employed for more than 24 months before lending to you.
How do you choose the best loan officer for your needs?
First step is do research–look online, go to a bank, talk to a broker. Google “mortgage broker” in your area and you get a list of brokers. Early on, do a little research and talk to a few different lenders.
You should be aware of the differences between working directly with a bank versus an independent mortgage broker. When working directly with a bank, the loan officer is only going to be able to pull from loans available within their bank’s portfolio. However, they may have special programs available only to their banking customers. Whereas an independent mortgage broker is going to have access to a larger pool of loans to choose from.
There are pros and cons to either working with banks or independent mortgage brokers, and we can’t say that one is better than the other. It really comes down to the individual loan officer, as they are not all created equal. We recommend looking into both options.
Whichever route you choose, you need a great loan officer, because if things were to go awry during financing, you need someone who’s got your back and is going to help you solve that problem. And when it comes to financing, plenty can go wrong.
One more note about interest rates
The interest rate is often top of people’s minds when loan shopping. The problem with exclusively rate shopping is that they change. A quote at 1:30pm on Wednesday is not a guarantee and could change anytime. Nothing is locked in until you have the rate applied and the loan registered.
Secondly, getting a good rate is one thing; but closing a loan is everything! You should prioritize working with a lender who can help you reach the finish line over a lender who offers a lower rate but doesn’t have your back when problems arise.
What are Fannie Mae and Freddie Mac?
Most banks do not keep their loans–they sell their loans to the secondary market to recoup cash that they can lend again. Fannie Mae and Freddie Mac represent 80% of the secondary market.
If you go to a bank for a loan, they likely will turn around and sell it afterwards to Fannie and Freddie who set the guidelines for loans. Each bank adds their own overlay on top of those guidelines. For instance, the FHA says they’ll do a loan on a credit score of 620, but Wells Fargo, Chase, or Bank of America may require a higher score. Banks are private companies and can choose to say, “No.”
These guidelines are complicated and there are many of them. That is a big reason to work with a professional, whether a banker or mortgage broker. These guidelines with Fannie and Freddie change and keeping up with them is half the challenge.
Pulling your credit score
Banks use a financial credit score derived from information from the 3 bureaus. Get someone to pull your credit score early in your investment process and review it. Pulling credit does not automatically lower your score. The bureaus see who’s pulling it, how often it’s pulled, and what the purpose. Banks and brokers pulling it 10 times in a week will not lower your credit score. The bureaus see that you are shopping for a loan–not asking each company for money.
Knowing what’s on a report is vital to do early. Problems have to be identified and mistakes fixed – a process that can take 2-4 months . Mistakes easily derail a purchase or refinance.
Nowadays it’s so easy to continually monitor your credit score with companies like Credit Karma, that there’s no excuse for not being on top of your credit.