The Good, the Bad and the Ugly: How to choose the loan professional that's right for you
Kevin J. Daum

This article was originally published in the November 2004 edition of Log Homes Illustrated magazine.

Anyone who has a physical address or an email address today is bombarded with introductions to Loan people. Not to mention the constant advertisements on radio and TV from discounters like Ditech and E-loan. And if that isn’t enough, every credit union, investment advisor, grocery store and corner gas station is now offering mortgage services.

So how does a consumer figure out the right company to use? Granted, with the recent refinance boom and low employment, it is likely that many of you reading this column have recently become Loan Officers or have at least thought about it, but that doesn’t mean that all these hoards of low-rate touting point-slingers are capable of getting you a better deal on your mortgage. In fact with more people in the loan business than ever, the true important issues around getting a loan get lost in the noise.

First let’s straighten out some simple myths. Banking institutions do not care whether you are getting a good deal on your mortgage. In fact they are only interested in getting a good deal for their investors. You as a borrower are a liability and not really a customer. The banks and institutions are in the business of funding loans and selling them immediately to Wall Street investors. The banks make a percentage of the loan at sale and sometimes retain a small percentage on an ongoing basis for collecting and processing the payments for your loan. The more loans the banks can process and fund, the more money they make.

Ahhh yes, the old Volume, Volume, Volume, play! The banks make money by funding lots of loans as if you are emptying jars of peanut butter off a grocery store shelf. Here is the problem, your mortgage decision is a bit more complicated then choosing creamy or chunky.

Let’s put things in the proper perspective. For most of you, your home represents your single biggest asset, your single biggest liability, your biggest single payment and your single biggest tax deduction. With appreciation in some places like California it can even be your biggest single income earner. Making decisions about which mortgage is right for you is a serious matter. Making the wrong decision can cost you thousands of dollars even if you think you are getting a great deal.

Here is a brief list of questions you should consider when shopping for a mortgage.

• How much money is in your bank account?
• What is your income tax bracket?
• How much money do you spend each month?
• How much money do you pay in taxes?
• What are your investments, and how are those investments diversified?
• What kind of cash flow do you really have?
• How long are you going to live in this house?
• When will your kids go to college?
• When will your kids get married?
• Will you need to help your kids with a house down payment?
• What is your comfort level with risk?
• What is your opinion of the economy for the next 10 years?
• How fast is my property appreciating?
• How do interest only loans work?
• How do ARMs work?
• How do No Income Qualifiers work?

Notice that rate or points were not among those questions? That’s because you can only compare price if you understand how the rest of the loan products impact your financial situation. So now that you know the questions you really need a skilled knowledgeable professional advisor to guide you through the process of fitting the answers into the proper loan program for your situation.

If you know exactly what you need, and your documentation is absolutely perfect, then you can go out and find someone that will give you the “best price.” Many Loan Officers will work for low pay just to get the deal. But you shouldn’t count on things going perfectly smooth. There is great value in working with someone who has been in the industry for a long time. An experienced Loan Officer can analyze your situation and your loan within the context of your overall financial picture.
They can show you that by taking a different loan, you might end up saving or gaining thousands of dollars. They also might be able to advise you on how to achieve a better financial position for where you want to be later in life.

Part of the problem is the lending industry. They do not put high value on your education therefore the education of Loan Officers is unnecessary. Just because a person can show you a loan officer business card or license, it doesn’t mean that he or she is experienced. In fact in many states Loan Officers with banks are not required to have a license of any kind! Most bank Loan Officers fall into this category. In fact Banking lobbies have fought heavily to prevent legislation that will require more stringent licensing of Loan Officers. Most mortgage brokers are required to have some form of licensing but this is not enough to assure you of working with a professional.

It’s not that most Loan Officers are evil and money hungry. Actually the issue is that most are ignorant. It takes years of underwriting and funding loans to become an expert. Because the loan business is heavily commission based it has a very high turnover. It attracts new people with the promise of big commissions, which sadly most Loan Officers never obtain. Of course everyone has to start somewhere but do you really want the medical intern doing his first surgery on you? These new, untrained, inexperienced people may result in your loan package not being presented properly to the lender. This could ultimately mean you get rejected for the loan or worse that you end up in the wrong loan for your situation. This could cost you tens of thousands of dollars over time.

In special cases where the loans are unique or complex, experience is even more important. Log Homes are still a specialized loan. The Construction Loan process is extremely complicated. If you are constructing a Log Home it is crucial to work with someone who has funded many loans of these types. Since you may only go through the loan process one to three times in your life you need to rely on someone to help you avoid the pitfalls. The more loans a Loan Officer has seen the more they will know how to problem solve.

Why should you trust such an important financial decision to anything less than a qualified professional?! This statement may seem obvious, but you would be surprised how little effort most people make in picking the right Loan Officer. With all that’s at stake you should pick a Loan Officer with the same care and investigation you would apply to picking a doctor, CPA or financial planner.

So how do you find a good Loan Officer? The best way to find someone with knowledge, experience and ethics is by word-of-mouth. It’s nice to know that there may be repercussions for not treating you right. A personal referral can create that responsibility. Ask the other professionals in your life such as your CPA or Financial advisor if they have worked with experienced Loan Officers. Just because they are recommended however does not mean they are professionals.

If no one can refer you then find a company through the Internet that focuses on education. Brokers will offer you a variety of products from various institutions. The Broker is less likely to push a particular program than a bank loan officer since they will have several to choose from. The Bank loan officer is limited to the loans they carry only at their bank. You still need to do your own investigation. Use the questions earlier in this column to engage the Loan Officer in meaningful discussions. Make sure they can explain each of the options thoroughly and can show you on paper how they apply to your particular situation. If they seem to be pushing you a certain direction you should be concerned. A true professional will educate you so you can make your own decisions.

When you find a person of high caliber, willing to share their expertise, you should be prepared to pay them for this service. You should negotiate a fair price up front. This is easy when working with a Mortgage Broker since they have to disclose their fees by law. A reasonable fee for a home loan (purchase or refinance) is somewhere between 1 to 1½ points. One point is equal to 1 percent of the loan amount. Some of this could end up being paid by the lender if rebate pricing applies. It might be more if the broker is doing something extraordinary for you like credit improvement. Other types of loans such as complicated Non-Owner Occupied or Construction Loans may cost more but these are very specialized loans for which strong experience is necessary and well worth paying top dollar.

If you are working with a Loan Officer that is not looking out for your interests you should never feel obligated to continue with that person. This is your home and your finances. You are entitled to be told the truth and to have a Loan Officer that will be your advocate. You are perfectly entitled to cancel the process and start with someone new. You may have to battle about the appraisal but better to pay for a new one then to take the wrong loan. Always stand up for your rights.

Most importantly, do your own homework. Read articles and books on the subject. Ask questions and check out information on the Internet. Be open to new ideas and try not to jump to emotional conclusions. Gathering knowledge and avoiding shortcuts will help you make the decisions necessary to protect your home and your finances.

About the Author...
Kevin Daum is the Founder and CEO of Stratford Financial Services, a Real Estate finance and education company, founded in 1989. Stratford specializes in Purchase loans, Refinance loans and Custom Home Construction finance and has successfully financed thousands of clients. He is the author of "Building Your Own Home for Dummies" (Wiley), as well as "What the Banks Won’t Tell You." Mr. Daum was an Underwriter for Plaza Savings and Loan and Key Bank of New York. He is an INC 500 CEO and has been listed as one the 40 Most Influential People Under 40 in the San Francisco Bay Area. He is the Global Chair for the Edison Innovation Program with the Young Entrepreneurs' Organization (YEO) and is a founding Board member of the Bay Area Chapter of YEO.

Mr. Daum is a frequent contributor to numerous business publications on the subjects of Real Estate and Small Business leadership and speaks regularly on both subjects. He can be contacted at kevin@stratfordfinancial.com.