Don't rule out small lenders for your mortgage


You're foraging for a mortgage lender to finance or refinance a home when you encounter a small lender offering attractive terms. Should you feel at ease doing business with a tiny mortgage company?

Yes, if you've checked on the company's reputation, real estate specialists say.

"It's not so much whether you deal with a small firm or a big behemoth lender. What's important is whether the firm can deliver what it promises and deliver on time," says Gene Gallagher, principal broker at ERA-Gallagher & Co., a Bethesda-based realty firm.

There are thousands of tiny lenders in the country that are perfectly reputable, insists Keith Gumbinger, an official of HSH Associates, a firm that tracks mortgage rates for consumers. In some cases you can even do better with a Mom & Pop mortgage lender than an enormous financial institution, Mr. Gumbinger contends.

"There aren't necessarily any more perils in going with a small firm versus a big local or super regional bank. In fact, the small lender may have more incentives to give you personalized service and to shave its commission for you," Mr. Gumbinger says.

The so-called "secondary mortgage market," which has flourished in this country for more than a decade, has encouraged the emergence of small lenders in the mortgage market. Most of the new entrants are mortgage bankers who originate home loans and then -- almost immediately -- sell their loans to such quasi-governmental agencies as Fannie Mae and Freddie Mac.

Often, a mortgage banker's sole line of business is to originate loans in accord with secondary market standards. The only way it makes money is at the front end of the mortgage pipeline -- selling the loans they originate for slightly more than the cost of their funds.

While a Citibank has many lines of business, thousands of customers, a high public profile and plenty of overhead, your typical XYZ Mortgage Co. -- to cite a hypothetical example of a small mortgage banker -- has little overhead, little or no money for advertising and a vital need for consumers to come through the door, points out Mr. Gumbinger, the HSH official.

"In the hot rates game, the small mortgage banking firm or thrift may be more competitive," Mr. Gumbinger says.

Still, too much is riding on your mortgage to pick a lender on the basis of hot rates alone, realty experts stress. What if the lender offers one set of terms at mortgage application and then surprises you with higher rates or charges at closing? What if the lender botches your paperwork so that your deal closes late and all your intricately prepared housing plans run amok as a result?

There's no reason to automatically rule out an XYZ firm on the basis

of size. After all, an XYZ firm may give you a better rate and friendlier -- even faster -- service than the colossal bank with the local branch. But the reality is that you'll probably have to do somewhat more investigation on an XYZ firm than a well-known behemoth, real estate specialists say.

Here are their pointers:

* Learn about a mortgage lender's reputation by talking to realty agents.

"Homebuyers usually only get to see a lender once every 7 to 10 years on average. But agents use lenders' services daily or weekly. That makes agents the best source of information on who is reputable," argues Gallagher, the Bethesda broker.

In search of new loan business, loan officers are constantly courting agents -- stopping by their offices to hand out "rate sheets" that tout their mortgage programs. Through contact and use, word spreads quickly among agents as to which lenders perform as promised.

If you're buying a home, your agent may step in automatically with recommendations as to the best lenders in the market. Remember that agents you know can also be of use to you when you refinance -- to screen the names of lenders you're considering or offer their own referrals.

Don't be shy about calling an agent for refinancing advice, Mr. Gallagher says. And don't be shy, either, about using the referring agent's name when you approach the XYZ company. Since agents represent the prospect of repeat business for lenders, you can expect to be better treated if your name is associated with an agent's.

* Be suspicious about any mortgage whose come-on seems too good to be true.

"I would be extremely leery of a lender who is way under the current market," says Monte Helme, a vice president with the Century 21 realty chain. While a perfectly reputable little lender might shave his commission somewhat to get a customer, profit margins in the business aren't deep enough to make deep discounts a reasonable possibility, he says.

* Worry about any mortgage company that offers inconsistent answers to your questions or pressures you for money.

If you talk to more than one member of the lender's staff on a particular day and find that answers to your questions vary widely, you have cause for alarm, cautions Mr. Gumbinger of HSH Associates. Inconsistencies may indicate a lending firm is using half-truths to lure customers or that its staff is disorganized. Either way, there could be problems.

There's also reason for suspicion if the lender demands that you pay upfront fees even before he will conduct your loan application interview, Mr. Gumbinger says.

* Get your lender's promises in writing.

You may have cautiously checked out a lender's background and feel assured of your selection. You may also be aware of safeguards against abuse by lenders, provided by government agencies, and know that your lender is licensed. Maryland's commissioner of consumer credit, for instance, licenses and regulates the state's mortgage bankers.

Still, you can't be too safe when it comes to a major financial transaction such as a mortgage, Mr. Gumbinger says. If you've been misquoted rates or your loan doesn't close on time, it could take months to gain relief through the state regulators' office. In the meantime, your plans could have been ruined.

You stand a better chance of things working out right from the beginning if you have your lender's word in writing, he says. "Just because a doctor is licensed, doesn't mean he's competent. The same thing is true with lenders. There are no guarantees."

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