Do you encourage your buyers to shop around for a loan with multiple lenders?

  • Yes (69%, 42 Votes)
  • No (31%, 19 Votes)

Total Voters: 61

Customized loans are growing in popularity, with lenders offering just about any terms requested by well-qualified borrowers. While 15- and 30-year terms remain the most traditional option for home loans, lenders have recently seen 20-year terms take a close third in frequency of use.

Many banks offer an array of fixed-rate loan options starting at ten years then extending in five-year increments up to 40-year arrangements.  In addition to pre-set terms, some lenders accept asymmetrical length preferences unique to an individual borrower’s request.

Personalized loan terms may be attractive to some first-time borrowers, and are particularly prevalent among refinancing homeowners, 17% of whom chose “other length” terms in 2011, according the Mortgage Bankers Association. Those refinancing may prefer an amortization schedule that pays off at the same time the original loan would have. The benefit of a repayment timeline shorter than 30 years for refinanced mortgages includes a lower interest payment, since the length of time the loan principle remains unpaid is reduced.

However, highly customized loan terms, though convenient, often include higher fees or interest rates than incurred by borrowers on readily remarketed conventional 15- or 30-year loans. They are also only available to well qualified borrowers whose customizable loans do not pose an additional risk to the lender. While many lenders offer a variety of loan terms, one-of-a-kind requests are not granted by all financial institutions and may require some searching about on the part of real estate agents.

The increased popularity of untraditional loan terms requires more research and thorough consideration on the part of borrowers and their real estate agents. To present the best possible options for their clients’ circumstances, real estate agents need to inquire into what loan terms are offered by their smaller local lenders, and compare the payments and amortization schedules for each option.

first tuesday take: So, bankers really do want to make loans?  For the first time in 30 years, they are offering to negotiate with borrowers and conform loans to fit what borrowers need and are willing to pay.

Customized loans may have lenders listening and compromising, but buyer’s agents must remain cognizant of the inherently adversarial relationship between borrowers and lenders while guiding their buyers through the loan application process. One of the most crucial points on which agents must verse themselves is what the mortgage rates are as quoted on the open market. Lenders will not offer borrowers information that is unflattering to lenders.

With fewer lenders available, the initial quotes are way above market. Agents need to understand this and know what the rates are from an unbiased, independent source. [For more information on current mortgage rates, see March 2012 first tuesday Current market rates]

The key to these “made-to-order” loans is higher fees and interest rates charged to borrowers. Remember, lenders are in the mortgage business to make money; they will take their pound of flesh from every loan agreement, more so if they are filling a request by appearing to have flexibility. [For more information on guiding your buyer through loan agreements, see the first tuesday February 2011 Forms.]

Agents need to encourage buyers to submit loan applications to a minimum of two different lenders, then wait until the time for closing before selecting their lender of choice. This allows your client to negotiate loan terms and interest rates, as well as clear out the garbage fees all lenders love to charge. Lenders only respond favorably in negotiations when an alternate lender is present, ready to fund during the closing process. Try it just once and be amazed at what a little friendly competition can do.

Secondary backup loan applications also act as a safety net for the homebuyer since lenders will inevitably increase loan charges and rates at the last minute (or simply be charging too much in the first place) if they can blame it on the secondary mortgage market.

With another lender in the pocket standing ready to make the same home loan on more competitive terms, buyers retain the flexibility needed to get the best deal. Then the buyer’s agent can face down the lender with that “gotcha” smile on his face, the product of simply looking out for his client. [For more tips on shopping for home loans, see the May 2010 first tuesday article, Shop, shop, shop until you drop.]

Re: “Loan Terms Made to Order” from The New York Times