The process of obtaining a home loan is one that can be confusing and quite stressful. If gone about the right way it can be surprisingly smooth. Dialing in your financing early is important because it will help you get a sense for your budget, the maximum amount of loan you qualify for, and give you a leg up in a competitive offer situation. If you’re planning to pay cash, it’s as simple as wiring your funds and closing the transaction in seven to 10 days.
There are four general steps in the financing process:
1. Pre-qualification (almost useless)
2. Pre-approval (helpful, good to have)
3. Conditional underwriting approval (waving my magic wand...what all homebuyers would have in advance of shopping for a home)
4. Full approval (comes after the offer is accepted and midway through the escrow process)
I’m going to share with you what I’ve learned over 15 years of helping hundreds of nice people buy and sell homes in Burlingame, Hillsborough, and all throughout San Mateo County so that you have a smooth, stress-free experience navigating a process that many feel is overwhelming (understandably so). If you get your financing right, the process should be pretty chill. Yes, you do need to submit tons of (annoying detailed) paperwork and documentation to your lender, but if you do it all upfront you’ll have fewer or no issues later. Kind of like “measure twice, cut once.” There are two common ways to obtain a loan - through a mortgage broker or a direct lender. Let’s start with the former.
Why I Don’t Recommend Mortgage Brokers
One of the best professionals I ever worked with was a mortgage broker named Scott. Scott was friendly, down to earth, super sharp, a good communicator, and took good care of my clients. I’d refer my clients to Scott, they’d have a chat and submit some documents to Scott showing cash they had available for the purchase (think W2s, tax returns, and bank statements). Scott would then spend a half-hour or an hour (or maybe a little more) reviewing the docs with his experienced eye and say to my clients, “based on a preliminary review of your numbers you qualify for a loan of $1.4 million dollars”. This was helpful to my clients and he’d help them get pre-approved for a loan. However, Scott couldn’t with certainty assure my clients they would get their loan, only that it looked very promising.
Why was that? Scott’s firm wasn’t actually the company lending the funds to the borrower - they were acting as middlemen. So, the lender doing your loan wouldn’t actually review any of your paperwork until after your offer was accepted. In my view, this is a little late to the party. By that point, you’re trying to schedule moving trucks, giving your 30-day notice (if you’re renting), measuring the house for what furniture you want to order, etc. Beginning the financing process with your actual lender after the offer is accepted is later than necessary as it could’ve all been done upfront through a conditional underwriting approval via a direct lender. Plus, it also introduces unnecessary risk because the seller knows that you haven’t yet been approved for a loan, and they could choose a competing offer from another buyer who is farther down the approval process than you.
That being said, mortgage brokers around the country I’m sure are fantastic and provide amazing service and rates to their clients. More locally, they can be also fantastic for doing refinances as the time period is less impacted than it is for buying in our hyper-competitive local market, and occasionally, help with an out of the box scenario that perhaps a bank could not.
Why I recommend working with a direct lender
By working with a direct lender (like Wells Fargo, PNC Bank, or First Republic, for example), you’re essentially removing the middleman (the mortgage broker) and working directly with the bank that will be giving you your loan. That’s one less cook in the kitchen. The idea is things can get done quicker and your loan approved faster. Working with a direct lender is another way to stack the deck in your favor. Every year, I have more than a handful of situations where buyers reach out to me about a specific property and excitedly decide a few days later that they want to write an offer. The most important thing during that window, aside from evaluating the home itself, is nailing down financing. It’s super tough to even get a conditional approval within a few days but with the right lender, it is possible. Many of my clients receive great service on short notice. As a buyer, it’s worth jumping through the hoops to gather your documentation as quickly as possible because an offer with underwriting done upfront is stronger and can close quicker. The faster the close of escrow, the sooner the seller gets their proceeds, the more attractive your offer can be.
Working with a mortgage banker
A hybrid approach to mortgage brokers and direct lenders is working with a mortgage banker. A mortgage banker typically lends their own funds, like a direct lender, and usually sells the loan in the secondary market after closing. Mortgage bankers can also work with lenders in the wholesale market similar to mortgage brokers if they need to.
What is underwriting exactly?
It means that an employee at the lending institution will spend a few hours poring over your documentation verifying everything, making sure nothing is missing. Given how eagle-eyed banks are nowadays, and for good reason, this takes a bit of time. While it may take only a few hours of actual time, there’s always a queue, and as banks are handling unprecedented volume right now, priority is focused on actual purchase transactions and refinances over initial approvals. This process can easily take a couple of weeks. Very few lenders can complete underwriting in as fast as a few days given the resources required to work so quickly. Another note - there is less of an incentive for banks to voluntarily offer underwriting upfront to the client as there is a hard cost to underwriting given the underwriter is a salaried employee of the bank vs the client-facing lender who is usually paid either 100% commission or a base salary plus commission. That’s why we see tons of pre-approvals out there because there is minimal dollar cost to the bank to issue one, some of which may not result in loan approvals. It only makes business sense for the bank to put the client through underwriting if the bank believes the client will engage the bank to do their loan. Again, there is no upfront cost to be pre-approved or to go through the conditional underwriting process.
Why is a conditional underwriting approval important to have?
Going through the underwriting process when you start your home search and being conditionally approved is a no brainer and minimizes risk. There is no cost to do it and should be done prior to submitting your offer. Not only is this beneficial for you to have more confidence in your ability to get the financing you want, it also helps in the negotiation process. If the listing agent is doing their job, they may call your lender to verify the approval letter submitted with your offer. As a listing agent representing my sellers, I often call the buyer’s lender to check them out and make sure they can do the close of escrow the buyer has committed to (we don’t want to close the deal late because the bank is backed up resulting in unhappy sellers and buyers) and make sure they have no concerns about the buyer’s ability to obtain financing. I also like to make sure that the lender on the other end is confident and organized.
Side note: due to a federal law called the Real Estate Settlements and Procedures Act (RESPA) agents are not allowed to receive compensation or kickbacks from lenders for referring clients to them, which is how it should be (similar to pharma reps and their relationships with doctors, though we do get nice holiday cards!). As a fiduciary to you, it’s my goal to make sure you have a great lender on your team who will give you attractive financing terms and a seamless experience. Many of our clients have pre-existing relationships with lenders either from past purchases for themselves or for family members or through their wealth manager. Should you need a referral or two, the lenders we recommend to our clients are local lenders with strong reputations. Our previous clients have had positive experiences working with these lenders and therefore we continue to refer them to our clients.
Why is a pre-approval less helpful, and should I work with multiple banks?
A pre-approval is a great thing because it gives you a good idea about your borrowing capacity and what the bank will lend you based on your income, assets, and credit score. But since it’s literally a “pre” approval, you’re not actually approved. Getting your loan underwritten upfront is the ideal situation, rather than underwriting starting after your offer is accepted.
Is it good to work with multiple banks? I think it’s a good thing to chat with multiple lenders in the beginning to get a sense of what offerings are out there and who you may click with. Many of our clients like to have a couple of pre-approvals going which is great, as there’s no cost or obligation. However, what you really want is the conditional underwriting approval so one or two is plenty sufficient. The main thing aside from knowing you will be offered a competitive interest rate (interest rates are typically locked shortly after your offer is accepted, but a general one can be quoted in advance) is that your lender will get the loan done as efficiently and quickly as possible. We have a list we keep of lenders we recommend based on past clients’ experiences and share this with our clients.
This depends of course on your personal situation. Less than 25% of all transactions in San Mateo County are cash, so being able to write a check and close quickly can help stack the deck in your favor against competing offers. With interest rates being so low, on my cash deals, I’ve seen clients use their cash to win the home, and then some will do a cash-out refinance post-closing.
We know that entering the real estate market as a buyer can seem overwhelming, but we are here to help. Call us at 650-822-7088 for a no-obligation consultation. You can also email us at firstname.lastname@example.org