So you've figured out that you can afford to buy a house. Now what? Should you find your realty agent first or your mortgage lender?
Not surprisingly, it depends upon which of the two you ask. Agents say they can suggest good lenders whom they've worked with, while many lenders say the same about agents.
Regardless of which direction you go, you want to make sure to find a trustworthy lender — especially in the aftermath of the predatory lending crisis, which many in the industry say was caused by unscrupulous lenders. Particularly, predatory lenders got home owners into adjustable rate mortgages (ARMs) with little or no money down and didn't make clear that those rates would include more fees and the rates would balloon, making payments nearly impossible.
The good news, lenders say, is that many of the companies that caused problems in the industry have since left and the industry is returning to its more traditional lending practices.
''Many of those who were doing the wrong things have left the state of Ohio, and I say good riddance,'' said Mary Schoenfeld, vice president/manager of American Eagle Mortgage Corp. and chairwoman of the Summit County Office of Consumer Affairs board.
That may or may not feel like good news to a potential home buyer, because the predatory lenders often dangled what turned out to be unrealistic incentives to clients, who eventually couldn't handle the consequences when interest rates skyrocketed or and lost their homes in the foreclosure crisis.
Trust essential in lender
Much like the search for a real-estate agent, the home buyer needs to find a lender he or she can trust, Schoenfeld said.
''They need to interview a lender like they would interview for a job, or a doctor or a minister. They need to have that feeling of trust,'' she said.
You can check with consumer agencies such as the Better Business Bureau, Ohio Attorney General's Office and Summit County Office of Consumer Affairs to see whether any complaints have been filed against the company.
The Ohio Department of Commerce licenses only mortgage brokers and their loan officers. Mortgage brokers act as intermediaries between borrowers and lenders and do not originate loans themselves, unlike a mortgage banker, traditional bank or credit union.
A good place to start would be financial institutions where you already have a relationship — for instance, your bank or credit union.
''If folks don't have a primary financial institution, use the phone book. Call a well-known institution. Don't call Larry the Lender on the second floor of the pizza shop who's got a sign out that he's a mortgage broker,'' said Jack Sarver, chief executive of the TeleCommunity Credit Union, a 75-year-old credit union in the Portage Lakes area that also has a branch in Bath Township.
The Internet has been both a blessing and a curse for the real-estate industry, said Carla Herbert, president of Harvest Home Realty in Munroe Falls and an agent for 24 years. A lot of potential buyers browse for homes online, but a lot are also turning to the Internet for their mortgage.
''The worst thing is when people go online and come to me with a letter from an Internet lender. Ninety percent of those are predatory lenders,'' Herbert said. ''I'd rather they find me and let me tell them people I work with that I can trust. A lot of times, they'll come walking in with a letter from a lender I have never heard of.''
Those ''prequalifications'' sometimes can be meaningless because all the potential lender did was take the person's name and punch out a standard letter that anyone could have gotten, Herbert said.
There's a difference between a ''prequalification'' letter and a ''preapproval'' letter. A prequalification is a general letter given by a lender without any official checks into the person's credit. A preapproval is done after an actual check of the potential buyer's creditworthiness through credit reports and documents to determine his or her ability to borrow. Preapproval is also what real-estate agents say gives a potential buyer a leg up because that means the buyer is serious and able to borrow the money to buy the house.
''There's going to be a little more negotiating power there,'' said Tom Walker, operations manager at the Ohio Housing Finance Agency, an independent state agency that connects potential home owners with lenders.
''Get your loan preapproval before you look for a house or even contact a Realtor,'' said Toya Kelker, a housing counselor with East Akron Neighborhood Development Corp.'s Center for Home Ownership.
''Prequalification means nothing.''
Schoenfeld, the mortgage banker, said she will do prequalifications, but prefers to do preapprovals.
''I like to see the documents — 'You're making $17 an hour, but you didn't tell me you only work 15 hours a week,' '' she said. ''This is the largest purchase of their life. I think they can spend some time meeting with someone.''
As you comparison shop among lenders, ask about not only the rates but other fees associated with the loan. Also, ask whether the lender will be servicing the loan or selling it to another institution (there's no right or wrong to that, but it's something you should ask and determine how you feel about it).
While interest rates are obviously an important factor in deciding which lender you will use, ask questions to find out who best suits you and to get more information about the program. Some lenders may quote you a great rate just to get you in the door, but their loan may not live up to that come-on rate.
Be careful of adjustable rate mortgages, or ARMs, experts say. ARMs are loans with interest rates that can change and are not fixed. Many in the industry says ARMs became very popular in recent years, but the ability to adjust the rate — usually upward — is what got people into trouble.
''The ones that are really in trouble are the ARMs that had an automatic increase regardless of what interest rates did,'' said Sarver with the TeleCommunity Credit Union, which is open to anyone who works, lives or worships in Summit County.
If you're looking at an ARM, find out what the loan is indexed to (in other words, when will it go up or down), the margins of its increase or decrease and whether there are caps on the percentage changes, said Matthew Vargo, assistant vice president at Valley Savings Bank in Cuyahoga Falls. Also, ask whether the ARM is a convertible loan, allowing you to lock into a fixed rate at a future date, he said.
Among the traps by predatory lenders were situations where the lender didn't make clear to customers that their payment did not include common things, such as property taxes and insurance. So customers were not prepared to pay those costs.
Some lenders were also persuading potential buyers to borrow more than they could afford — saying, for instance, ''if you're making $1,000 a month now, if you get a 3 percent raise for the next 10 years, you'll be making $1,300. We'll give you a mortgage because your salary is low now (and then it'll bump up),'' Sarver said. ''But when they lose their job or change jobs, then they're really in trouble.''
Still others were told the value of their property would go up 5 percent every year for the next seven years. ''That's all fine, as long as real estate is going up. If it's on a downturn, that puts people in a bad situation,'' Sarver said.
In general, you should beware of adjustable rate mortgages, though they could be a good choice if you know you'll be selling in two years or less, said Steve Baughman, a housing specialist with the Fair Housing Contact Service in Akron. ''However, you need to realize that in this market, you may have to sit on a house on the market for a lot longer than you anticipated.''
Whatever type of loan you get, make sure you understand the terms, experts said.
A key document in helping you determine your mortgage and closing costs will be a good faith estimate. Every lender should give you one of these documents.
This is a breakdown of the fees you should expect at closing. You should compare whether the fees on the good faith estimate are what appear on your closing documents.
It will also be a good way to see whether there are any red flags, such as prepayment penalties or balloon payments.
''If somebody is trying to finagle them into getting involved in something without explaining anything to them, or seems to be in a hurry and doesn't have time to spend with them, to me, that's a red flag,'' Schoenfeld said.
As you look through the good-faith estimate, if you don't understand a fee, ask about it.
''People have to look to see what they're being charged and why. If it's wrong, do not sign the papers,'' Schoenfeld said.
Don't sign a blank loan application or mortgage agreement, or let a lender convince you that he or she will fill it in later, said Cynthia Sich, director of the Summit County Office of Consumer Affairs.
An attorney may be helpful in looking over the mortgage documents to find hidden fees or other red flags, said Cindy Flaherty, director of special projects for the Ohio Housing Finance Agency.
Also, don't rely on verbal promises; get everything in writing, Sich said.
''Verbal is great, but it's the written word you're going to be bound by,'' she said.
Betty Lin-Fisher can be reached at 330-996-3724 or firstname.lastname@example.org.
Mary Beth Breckenridge can be reached at 330-996-3756 or email@example.com.