There’s more to finding a mortgage lender than simply securing the lowest interest rate. Just ask , professor of business administration at the University of Virginia’s Darden School of Business. “If the consumer wants to be protected, it’s the🔯 education that’s the most important thing,”♊ she told Investopedia.

Loutskina spoke a🤡t length about what consumers need to know, what questions to ask, and how to find the best mortgage lender in the complicated and sometimes confusing world of home buying. Our edited conversation follows.

Lenders Come in Many Forms

Investopedia: Let’s start with the basics. Wh♓at is a mortgage l🦋ender?

Loutskina: The question is simple and complex at the same time. We have different actors implementing different parts of the value chain in the mortgage market. Some interact with borrowers directly—such as a bank, 澳洲幸运5官方开奖结果体彩网:mortgage broker, 澳洲幸运5官方开奖结果体彩网:mortgage company, or an online portal like LendingTree.

Others 澳洲幸运5官方开奖结果体彩网:originate mortgages, and it could be the same or a different entity. For example, mortgage brokers do not originate mortgages. Different actors finance mortgages or provide the money🦹 that flows to th🤡e borrower.

Then there are actors that hold mortgages on their 澳洲幸运5官方开奖结果体彩网:balance sheet for the duration or the maturity of that debt, up to 30 years.

A bank, for example, could fill all these roles. It could interact with the borrower, originate the loan, finance the loan, and hold the mortgage ’til maturity. Or there could be a different entity for each role. For example, the process can start with a mortgage broker, then go to a bank that originates the loan. This is the original lender. The bank may keep the loan on its balance sheet or sell it, say to 澳洲幸运5官方开奖结果体彩网:Fannie Mae or Freddie Mac. Instead of a bank, the originator could b꧙e a financ🅠ial or mortgage company that borrows money in a wholesale market or from other financial institutions and originates the mortgage.

This is where the notion of who the lender is becomes very fuzzy. Is it someone you interact with to get your loan? Is it someone who 澳洲幸运5官方开奖结果体彩网:underwrites it? Is it someone who initially funds it? This is wheౠre the fuzziness b🐈egins.

Investopedia: I understand there can be different actors for each step. How can the consumer sort it all o🅰ut𝓰?

Loutskina: It is not clear to me why borrowers need to♐ sort out all steps in a mortgage origination process. My mortgage, for example, was transferred between financial companies multiple times, yet it did not change my financial obligations. Borrowers need to focus on identifying credible agents, meaning banks or mortgage brokers, that will offer them a quote and then focus on the best terms available to them.

Problems With Poor Enforcement and Shadow Banks

Investopedia: In 2015, you wrote about the 澳洲幸运5官方开奖结果体彩网:financial crisis of 2009 and mentioned the history, before the crisis, of inconsistent enforcement of existing regulations. What is the status of inconsistent enforcement, and how does that compare to the problem of 澳洲幸运5官方开奖结果体彩网:shadow banks? It seems both of these could impact consumers and how they s🌳hop for a lender💛.

Loutskina: We definitely observed differences in regulatory exposure and enforcement between banks and financial corporations. Financial corporations do not carry deposits. And since they do not carry deposits and are not insured by [the] 澳洲幸运5官方开奖结果体彩网:Federal Deposit Insurance Corporatio✨n (FDIC), they are not subject to the same level of regulation. We call them shadow banking institutions or non-depository financial intermediaries that implement the same functions as banks do.

The 澳洲幸运5官方开奖结果体彩网:Consumer Fi♊nancial Protܫection Bureau (CFPB) that was established after the financial crisis significantly changed the enforcement equation. Now there is 🎃a sufficient credible threat aimed 🔯at nonbanks that regulations can be enforced.

From the consumer’s perspective, one of the most important things is to be informed. I’m a much bigger believer in consumer education about financial markets than the enforcement of something like the Home Ownership and Equity Protection Act. That’s because regulations can only change behavior on the margins. If the consumer wants to be protꦗected, education is the most important thing.

Investopedia: What are some examples?

Loutskina: Consumers need to invest in understanding the pricing of the mortgage and make sure that fair disclosure regulations apply, meaning they get the 🧔information in advance before they get a mortgagꩵe. If they are surprised at the point of signing mortgage paperwork, this is probably a bad sign.

And they need to ask a lot of questions: “What is going to be my monthly payment?” “Is it going to remain fixed over time?” “Do I need 澳洲幸运5官方开奖结果体彩网:mortgage insurance?” “How will the 澳洲幸运5官方开奖结果体彩网:escrow account work?” This is something that is the best protection 🍨for the consumer on a front end.

How to Search for a Lender

Investopedia: What are the sorts of things homebuyers should be thinking about when t🍰hey’re searching for a mortgag𓂃e lender?

Loutskina: The most obvious advice is, don’t borrow from sh꧂ady individuals with a name you cannot verify. Other than ✃that, there is very little difference between Bank of America, University of Virginia Credit Union, BBVA bank, or LendingTree. 

It’s a matter of pricing. My recommendation to co🐼nsumers is to cast a broad net. Reach out to your local ♓bank, reach out to online portals, reach out to local mortgage brokers, ask all of them what they can offer you. It’s a low-cost search, and it will allow you to better understand the prices that are available in the marketplace. This broad-net approach will also allow you to negotiate.

Investopedia: Anything else consumers should be aware of?

Loutskina: Consumers need to understand the tradeoffs available to them in terms of up-front points and the mortgage interest rate. Points represent the up-front fee borrowers pay for the origination as a percent of the total amount. Some prefer to pay a fee up front and lower the interest rate for the duration of the mortgage—for example, 30 years. Others want to avoid paying the 澳洲幸运5官方开奖结果体彩网:origination fee and even get the lender to cover some of the 澳洲幸运5官方开奖结果体彩网:closing costs. But that will come at the expense of a hig🦄her interest rateꦫ.

Investopedia: What a🐓bout the appraisal 🎐of the property you want to buy?

Loutskina: You need to find out whether your lender will require an assessment or appraisal of the property value and how much that weighs into a decision to lend you the money. These days, when you have a 澳洲幸运5官方开奖结果体彩网:good credit history and a 20% down payment, lenders frequently do not re🔜quire an appraisal🦩.

You shouldn’t be caught 𝕴off guard when you sign a contract to buy a house without any contingencies෴ and then go for an assessment of the property value, and that assessment comes in low and the mortgage lender refuses to originate your mortgage.

The Value of Mortgage Pre-approval

Investopedia: Is 澳洲幸运5官方开奖结果体彩网:pre-approval an advantage for the borrower?

Loutskina: I think so. Pre-approval provides an opportunity to ask if you can actually get this much money given your 澳洲幸运5官方开奖结果体彩网:credit history and 🅠income. Pre-approval is a great way for thꦓe lender and the borrower to come to a consensus without a formal commitment.

Borrowers can think of pre-approval as a tentative confirmation from a lender: “If everything ♒you’re telling me is correct and the house is worth as much as you are willing to pay for it, then I will be willing to give you this loan on these conditions today.” But in the mortgage market, borrowers are frequently trying to figure out how much you can borrow in March to close on a house in July or August. Quite a bit of time is going to pass between March and July or August. Situations can change. Lenders’ finances can change. Borrowers’ intent to buy a given house might change.

Typically, a pre-approval offer (but not commitment) is good for 90 days. Pre-approval is a solid ind🍸ication to a borrower on how much they can borrow and on what terms. But don’t be surprised if by the time you are ready to sign a contract, a bank might decide to renegotiate. I suggest that borrowers keep in touch with their mortgage agent (lender) that the commitment they received in March is sꦕtill good in June or July.

Borrowers can lock in the mortgage condit꧟ions for an extra f♉ee. But borrowers need to be aware that if their credit history significantly deteriorates or house appraisal value comes in below original expectations, the bank can still change the mortgage conditions.

However, by locking in the mortgage conditions, a borrower is assured, barring any changes in credit history or house value, they still can get a loan under the pre-approved conditions. Yet if, for example, they don’t sell their previous house or if their new hou🎃se does not pass the inspection, they don’t have to enter a mortgage loan contract.

Is the Lowest Interest Rate the Holy Grail?

Investopedia: The goal in home buying seems to be to get the lowest inte꧟rest rate possibl🌜e. Is that ultimately the most important thing about the choosing [of] a lender?

Loutskina: No. I think there are three factors working in concert. The two most important are the size of the loan relative to the property value, and the interest rate. The larger the down payment, the less risk for the bank. This is where you can eꦍxp♏ect slightly lower interest rates.

The third factor is the points that you pay for a loan origination up front. If you have the money right nowꦫ for a down payment and to cover the points, that’s one thing. If you don’t, that’s a different story. So the second tradeoff borrowers face is higher points up front vs. a higher interest rate💜 over the life of a mortgage.

Those are the three most important factors. Others could include the fact that not every baღnk would be willing 🙈to give you pre-approval in March and close the deal in August. You must make sure the bank is willing to stick with its original terms.

COVID-19: Lessons Learned

Investopedia: How♑ has the pandemic affected, from a consumer’s point of view, working with moꦍrtgage lenders?

Loutskina: The pandemic definitely changed the real estate market. We see an exodus of people from big cities to suburbsไ. We also see a structural shift in what is a must-have in a house: People want to have a home office now. It’s less about bedrooms. It’s about having a separate space to work to avoid any disturbances by♛ family members.

This has created enormous pressure on housing demand, and house prices swelled. By some estimates, [the median house price has risen as much as 19%] in the U.S. A majority of metropolitan areas are going through a building boom, with developers trying to capitalꦛize on these trends. It smells an awful lot like the boom pre-2007 financial crisis.

What banks and homebuyers should care about is whether this effect is temporary or permanent. If the trends reverse—say, as a result of companies imposing “back to office” requirements—this can reverse migration and cause house prices to decline. Some borrowers might find themselves 澳洲幸运5官方开奖结果体彩网:underwater, 💮holding a ♐property valued at below their debt obligation.

Final Thoughts

Investopedia: What final advice would you like to leave o𒐪ur readers with?

Loutskina: When you’re making such a huge financial decision in your life, like buying a house and getting a loan that you will be paying off for 30 years, my bigge💮st advice is: Spend time to make sure you understand the basic terms of mortgage lending.

If you see or hear something you don’t understand, talk with your lending agent. Don’t be afraid to ask questions at any point in the process. Even with all of my education and knowledge of the industry, when I first got my mortgage, the volu𒈔me of paperwork was overwhelming. It’s key to ask questions all the way through to make sure that your expectations about the product you’re getting are met.