COMPARING LOANS SIDE BY SIDE: WHY AND HOW

Comparing loans SIDE BY SIDE: why and how

We sought to determine whether lenders vary in their approach to loans secured by real estate. To this end, we engaged AI to address the question of whether differences exist among various loan providers—including Fannie Mae, Freddie Mac, FHA, commercial real estate lenders, credit unions, banks, private hard money lenders, life insurance policy loans, and CMBS loans. The results were clear: there are significant distinctions among these lenders. The distinction is not only among different types of loans; even lenders offering the same loan type can vary, leading to different outcomes. For example, five lenders arranging the same FNMA loan for the same client at the same time could each provide a different loan approval.

The AI consistently emphasised the importance of carefully comparing formal loan proposals (Loan Estimates) from various lenders, including banks, credit unions, and mortgage brokers.

Conclusion: Borrowers should shop around with different approved lenders to compare rates and approval criteria.

If it is crucial to shop around and carefully evaluate your options when selecting a loan,
four considerations remain:

A. Where to find the lenders

B. How to effectively communicate your loan needs

C. How to obtain a loan quote from lenders without a loan application?

D.
How to compare loan quotes?

Where can I find lenders?

Solution: Lenders are widely available.

• Search online using your loan type and location, e.g., "Lender for refinancing a house in Los Angeles, California."

• Useful portals include:

• yelp.com (lender reviews)

• Lendersa.com (private hard money lenders)

• zillow.com (local lenders)

• bankrate.com (rates and calculators)

• Ask friends, family, or your real estate agent.

• Request help from an AI assistant.

What is an effective method to talk to lenders about my loan needs?

Solution: Aim to reach out to 5 to 15 lenders—the more, the better. The most effective approach is to prepare a written loan request that you can email or text to each lender. In order for a lender to give an initial idea of what kind of loan they can offer, they'll need details about the property, your finances, your credit history, a short explanation of your loan’s purpose, and how you plan to repay it.

If you don’t have this information ready, you’re likely to spend hours on the phone before finding out whether a lender can actually help you.

Lendersa.com offers a free, standard loan request form accepted by most lenders, providing all the essential details needed for them to give you a definite answer. This comprehensive form helps you receive a quick quote and does not require any confidential information, such as your Social Security number. The Lendersa form is simple to use and available at no cost. You have the option to print it as a PDF or send it electronically to your chosen lender. Start a loan request to show your lenders

Warning: Do not fill out any Loan Application

If a lender whom you have just begun working with requests that you complete their loan application immediately, it is advisable to refrain from doing so at this stage. While submitting a loan application is a critical step in the approval process, it is important first to understand the specific type of loan being offered, along with its rates, terms, and the required documentation. Without this information, you risk investing significant time into applications that may not serve your needs, and you may encounter unnecessary follow-up calls and credit inquiries, which can adversely affect your credit score.

How to obtain a loan quote from lenders without a loan application?

Solution: After you deliver your loan request to a lender, request a written loan quote. A loan request is enough for a loan officer to give a soft quote, which you can compare with others. Ensure that you provide the loan officer with precise details regarding the property and your financial circumstances. It is important that the credit score information is accurate; you may obtain this online without affecting your credit. If you are aware of any possible concerns related to your credit, income, or the property, document these issues in your loan request and address them directly with the loan officer to prevent unforeseen complications. Even if a lender can't provide a written quote, they may offer a verbal one. Make sure to ask what verifications and documents are needed for any quote.

How to compare loan quotes?

Solution: Comparing loan quotes can be tricky. It is not only the rate and terms, but all other factors:

Loan duration (Conventional loans typically 30 or 15 years, Private/ Hard Money Loans 6 months to 3 years)

Rate ( most critical on long-term loans could be less important than other factors on short-term interest-only loans)

Amortization ( is the loan interest only or amortized over what period?)

Monthly payments (Different from the rate, depending on the amortization period)

Loan Points (Percentage of the loan amount, Lender discount point, and broker points)

Fees (fixed amount for documents and processing)

Prepay penalty
( Could be more important than the Rate or point if you plan to pay off the loan soon)

Balloon/ Extension (For Private / Hard Money loans and certain commercial loans)

Other Loan Features ( Convertible loans, or loans with fund control or other features that must be compared)

Appraisal (is the lender using a 3^rd party appraisal, an in-house appraisal, or does not even require an appraisal)

Time for approval (Full approval is normally after an appraisal is completed; you may ask for approval, subject to appraisal)

Time to close (Some loans can take weeks between approval and close -find out)

Minimum credit (The better the credit, the better the loan)

Required documents (This could be a killer, e.g., the lender requires 2 years' tax returns and you don’t have it)

The lender's reputation (A very attractive loan quote can become a disaster if the lender is incompetent or, god forbid, a crook)

Start a loan request to find competing lenders

Side-by-side comparison

• You may utilise an Excel or Google spreadsheet to record loan quotes for direct comparison. Alternatively, the Lendersa comparison tool enables efficient analysis of any loan request from any lender within minutes.

• Start your commercial loan request to find competing lenders.

Are there differences among lenders who arrange Fannie Mae loans?

Yes, there can be differences among lenders in loan approvals even for loans intended for sale to Fannie Mae. While all lenders must adhere to the minimum eligibility and underwriting standards set by Fannie Mae, individual lenders have some discretion and can impose stricter criteria or use different processes.

Factors Causing Differences

• Fannie Mae Minimum Standards: Fannie Mae establishes baseline requirements for all loans they purchases, including minimum credit score (generally 620, though this can change with updates to the guide), maximum debt-to-income (DTI) ratio (typically up to 50%), and property standards. Lenders must meet these minimums, but they are free to require more.
• Lender "Overlays": Many lenders impose their own, more stringent requirements on top of Fannie Mae's guidelines, often called "overlays". For example, a lender might require a minimum credit score of 660 even if Fannie Mae's minimum is 620, or demand more cash reserves than Fannie Mae requires. These overlays are a business decision by the lender to manage their own risk.
• Underwriting Methods: Lenders can use Fannie Mae's automated underwriting system, Desktop Underwriter (DU), or conduct a manual underwriting process. While DU provides a comprehensive risk assessment within Fannie Mae's guidelines, manual underwriting allows for more interpretation and subjective decision-making within the lender's internal policies, potentially leading to different outcomes.
• Operational Capacity and Risk Tolerance: Smaller lenders might work with investors or aggregators who handle underwriting and secondary market sales, potentially leading to different approval experiences than working with a large direct seller/servicer. Lenders also have different internal quality control programs and risk management frameworks that can influence how strictly they apply guidelines.
• Product Offerings: Some lenders may offer specialized Fannie Mae programs, like HomeReady mortgages, that not all lenders actively promote or participate in, leading to variations in available options for specific borrowers.

In essence, a loan denied by one lender might be approved by another, provided the loan meets all the baseline Fannie Mae requirements, because the second lender may not have the same "overlays" as the first.

Start a loan request to find competing lenders

Freddie Mac Guidelines

Freddie Mac establishes baseline criteria for the loans it will purchase, known as "conforming" loan standards. These cover various aspects of the loan and the borrower, including:

• Credit Score: There is generally a minimum credit score requirement (e.g., around 620 for conventional loans or 660 for Home Possible loans).
• Debt-to-Income (DTI) Ratio: The borrower's DTI ratio is evaluated to ensure they can afford the monthly payments.
• Property Standards: The property must meet certain requirements for value, condition, and marketability.
• Documentation: Lenders must adhere to specific documentation and underwriting guidelines, often using automated systems like Freddie Mac's Loan Product Advisor.

Lender Overlays (Stricter Standards)

Individual lenders often implement their own additional requirements, known as "overlays," which are stricter than the base Freddie Mac guidelines. A lender might do this as part of their own risk management process.

Examples of lender overlays could include:

• Requiring a higher minimum credit score than the Freddie Mac minimum (e.g., a lender might require a 640 FICO score when Freddie Mac allows 620).
• Setting a lower maximum DTI ratio.
• Demanding larger down payments or higher financial reserves.
• Having additional property condition standards beyond the basic requirements.

Therefore, a loan application that is denied by one lender might be approved by another, even if both plan to sell their conforming loans to Freddie Mac, because of these differing internal policies. Borrowers should shop around with different approved lenders to compare rates and approval criteria. You can find more details on general requirements in the official Freddie Mac Single-Family Seller/Servicer Guide.

Are there differences among lenders who arrange FHA loans?

Yes, there are significant differences between lenders offering FHA loans, primarily in their interest rates, lender fees, and specific underwriting standards (known as "overlays").

While the basic requirements for FHA loans are set by the Federal Housing Administration (FHA), private lenders approved by the Department of Housing and Urban Development (HUD) originate the loans and can add their own criteria and pricing.

Key Differences Among FHA Lenders

• Interest Rates: The FHA does not set the interest rate; private lenders do. Rates can vary "hugely" from one lender to another based on their business costs, market conditions, and desired profit margins.
• Lender Fees and Closing Costs: FHA mortgage insurance premiums (MIP) are the same regardless of the lender you choose. However, other lender fees and closing costs can differ significantly. It is crucial to compare the Annual Percentage Rate (APR) on loan estimates, as it reflects the total cost of borrowing, including fees and interest rate, over the loan term.
• Underwriting Standards (Lender Overlays): Lenders can impose stricter requirements than the FHA minimums, known as overlays.
• Credit Score: The FHA allows a minimum credit score of 580 for a 3.5% down payment, but many lenders require a higher score, such as 620 or even higher.
• Debt-to-Income (DTI) Ratio: While the FHA generally looks for a DTI around 50%, some lenders may have a stricter maximum.
• Customer Service and Process Efficiency: The experience can differ based on the competency and knowledge of the loan officers, processors, and underwriters. Some lenders may offer a faster closing time or a more streamlined online experience.
• Available FHA Programs: Not all FHA-approved lenders offer every FHA program, such as FHA 203(k) renovation loans or specific down payment assistance options.

To ensure you get the best deal, it is important to shop around and compare official loan proposals (Loan Estimates) from several different lenders, potentially including banks, credit unions, and mortgage brokers.

Start a loan request to find competing lenders.

Banks, Private/Hard Money Lenders, Insurance companies, and CMBS Lenders?

There are significant differences between lenders for commercial real estate loans, which can impact interest rates, terms, and the application process. Lenders can be broadly categorized into traditional banks, non-bank lenders (including private and hard money lenders), insurance companies, and CMBS lenders. Each type has its own set of criteria, risk tolerance, and loan products.

Comparison of lender types

What is the difference between traditional banks and credit unions?

There are significant differences between traditional banks and credit unions as lenders, primarily stemming from their fundamental business models. Credit unions are not-for-profit cooperatives owned by their members, while banks are for-profit corporations owned by shareholders.

This difference in structure means credit unions typically return surplus earnings to their members in the form of lower interest rates on loans, higher yields on savings, and fewer/lower fees. Banks aim to generate profit for their investors, which can translate to higher costs for borrowers and customers.

Key Lending Differences

Summary for Borrowers

• Choose a credit union if you prioritize lower loan interest rates, fewer fees, and a more personalized, community-focused service where you are a member-owner.
• Choose a bank if you prioritize a wider range of financial products (especially complex investment or large business loans), extensive branch and ATM networks, and robust digital/mobile banking technology.

In both cases, deposits are federally insured up to $250,000 (by the FDIC for banks and the NCUA for credit unions), providing the same level of security for your funds. It is always recommended to shop around and compare current rates and fees for your specific needs before making a decision.

Start a loan request to find competing lenders

Are there differences among commercial banks' loans?

Yes, there are significant differences among lenders offering traditional commercial bank loans, primarily concerning their specific underwriting criteria, interest rates, fees, loan terms, and customer relationship models.

Key Differentiators Among Lenders

• Underwriting and Eligibility Criteria: While all traditional banks have strict requirements, they vary in their specific metrics.
• Large vs. Local Banks: Large national banks often have more rigid, standardized rules (e.g., specific credit score cutoffs, minimum time in business), whereas smaller community banks or credit unions might offer more personalized underwriting, considering a wider range of factors or existing customer relationships.
• Debt Service Coverage Ratio (DSCR): Banks use DSCR as a critical metric (typically expecting 1.2x or higher), but the exact required ratio can differ by institution and property/business type.
• Collateral: Some lenders might place greater emphasis on the value of collateral (asset-based lending), while others focus more heavily on the business's overall cash flow.
• Interest Rates and Fees:
• Pricing: Due to different operational costs and risk appetites, the interest rates offered by different banks for similar loans can vary.
• Fees: Lenders may have different application fees, origination fees, and prepayment penalties.
• Loan Products and Terms:
• Specialization: Some banks specialize in certain types of commercial lending (e.g., equipment financing, commercial real estate, SBA loans) and may offer more favorable terms or expertise in those areas.
• Amortization and Maturity: Commercial loans often have shorter maturity periods (e.g., 5, 7, or 10 years) with a balloon payment, but the specific length of the term can differ among banks.
• Flexibility: While traditional banks are generally less flexible than alternative lenders, some portfolio lenders (those who hold their mortgages rather than selling them on the secondary market) may offer slightly more flexibility with terms after establishing a relationship.
• Application Process and Speed:
• Documentation: The required documentation can vary slightly, with some banks demanding even more comprehensive business plans and financial statements than others.
• Timeline: The time it takes to process and fund a loan can differ significantly between banks, ranging from several weeks to months.
• Relationship Model:
• Many traditional banks emphasize a relationship-driven approach, providing a dedicated relationship manager and potentially offering better terms or a wider range of integrated services (e.g., treasury management, business checking accounts) to existing, long-term customers.

Ultimately, shopping around and comparing offers from multiple lenders is crucial for a business owner to find the most suitable terms for their specific financial needs.

Start your commercial loan request to find competing lenders.

Are there differences among Credit Union loans?

Yes, there are significant differences in the commercial loan offerings among different credit unions, as each institution tailors its services based on its size, expertise, and community focus. Not all credit unions offer commercial loans, and those that do vary widely in the types of loans, terms, and amounts they provide.

Key differences include:

• Availability: Commercial lending involves different, more complex risks than consumer lending, and not all credit unions have the necessary experience, skills, and resources to manage it. Smaller, community-focused credit unions may not offer the full range of commercial services that larger ones do.
• Loan Products: While most credit unions offer common products like term loans, lines of credit, equipment financing, and commercial real estate loans, the specific variations, terms, and availability can differ. Some may specialize in certain areas, such as U.S. Small Business Administration (SBA) loans.
• Loan Amounts: Larger credit unions can often accommodate bigger loan amounts, while smaller ones might focus on the needs of local small businesses and offer microloans or smaller-scale financing.
• Flexibility and Personalization: Credit unions generally emphasize a relationship-based approach and may offer more flexible underwriting criteria and personalized terms compared to traditional banks. This flexibility can vary from one credit union to another, with some offering tailored repayment schedules (e.g., interest-only payments, seasonal skip-payments) that align with a business's cash flow.
• Rates and Fees: Due to their not-for-profit, member-owned structure, credit unions typically offer lower interest rates and fewer fees on loans than for-profit banks. However, the exact rates and fee structures will vary between institutions.
• Membership Requirements: To access commercial loans, a business owner must first be a member of the credit union, which typically involves meeting specific eligibility criteria related to geographic area, employer, or association. These requirements differ for each institution.

Therefore, businesses seeking a commercial loan should research and compare different credit unions to find one that offers products and terms that best fit their specific needs.

Are there differences among Private/Hard Money Lenders?

Yes, there are significant differences among private hard money lenders in their rates, fees, terms, experience, funding sources, and general business philosophy. These variations can significantly impact the borrower's experience and the suitability of the loan for a specific project.

Key Areas of Difference

• Source of Funds: Lenders may use their own capital, funds from a group of investors, or institutional capital. This affects their flexibility, reliability (especially in market downturns), and the speed of funding.
• Lending Philosophy:
• Asset-Focused: Many hard money lenders base their loan decision primarily on the value and potential resale of the underlying property (the "hard asset"), rather than the borrower's creditworthiness or income.
• Relationship-Focused: Other "pure" private lenders (often individuals or small groups) may prioritize a personal relationship and the borrower's experience and plan, offering more flexible, negotiable terms.
• Loan Terms and Costs:
• Interest Rates and Fees: Rates typically range from 8% to 15% but can vary widely among lenders. Fees, such as origination and appraisal fees, also differ.
• Loan Term Length: Hard money loans are usually short-term (6 months to 3 years) for projects like fix-and-flips, while some private lenders may offer longer terms.
• Flexibility: While hard money loans generally have standardized, less negotiable terms, "pure" private lenders can be very creative with loan structures and may be more willing to revisit terms post-closing if issues arise.
• Regulation and Oversight: Hard money lending companies are often licensed and subject to specific lending laws, offering a level of oversight. Purely private individual lenders may not be licensed, leading to less formal agreements and oversight.
• Experience and Specialization: Some lenders are highly experienced with specific types of real estate investments (e.g., fix-and-flips, new construction) and can offer valuable guidance, while others may be less specialized.

Conclusion

Because of these variations, it is essential for a borrower to thoroughly research potential lenders, understand the source of their capital, and compare their specific terms and requirements to find the best fit for their project. The ideal lender will align with the borrower's specific needs and project timeline.

Yes, there are differences among lenders (insurance companies or third-party premium finance companies) offering loans that use a life insurance policy as collateral. These variations can affect the cost, terms, and conditions of the loan.

Key differences include:

• Interest Rates: Different lenders set their own interest rates, which can be fixed or variable. While the rates on policy loans are often competitive compared to other types of personal loans, specific rates can vary among insurers.
• Loan Terms and Provisions: Lenders offer varying repayment structures, potential penalties (e.g., for prepayment), and other contractual obligations. Some lenders offer standardized loan products, while others may customize terms based on the borrower's needs or the policy's value.
• Maximum Loan Amount: While you can typically borrow a high percentage of your policy's accumulated cash value (often up to 90%), the exact maximum percentage may vary by insurer.
• Collateral Requirements: The specific type and value of collateral required, and how it is valued, can differ between lenders. This is particularly relevant in commercial real estate or premium financing, where the underlying assets are more complex.
• Underwriting Standards: Life insurance companies, especially for large commercial real estate (CRE) loans, are known for having stringent lending standards and are often more selective with underwriting than other lenders like commercial banks or CMBS lenders.
• Servicing Experience: The loan servicing experience, including how loans are managed and how easily you can communicate with the servicer, can differ.

Because of these variations, it is beneficial for borrowers to shop around and compare offers from a variety of lenders to find the loan terms that best suit their financial needs.

Are there differences among originators who provide CMBS loans?

Yes, there are significant differences among lenders (specifically, originators) who provide CMBS loans, primarily driven by their organizational structure, underwriting incentives, and how they manage risk. These differences can lead to variations in loan terms, pricing, and ultimately, loan performance.

Key Differences Among CMBS Originators

• Underwriting Standards: Different types of originators have different underwriting standards. For example, a Federal Reserve study found that loans from balance sheet lenders (like insurance companies and commercial banks) generally performed better than those from domestic conduit lenders, suggesting more conservative underwriting.
• Organizational Structure and Incentives: The "originate-to-distribute" model, inherent in CMBS, can create a moral hazard, as the originator may not bear the long-term risk of the loan after it is sold to investors.
• Balance Sheet Lenders (Commercial Banks, Insurance Companies, Finance Companies): These entities keep a portion of commercial real estate (CRE) loans on their books, which incentivizes them to maintain higher underwriting quality for all their loans, including those for securitization.
• Conduit Lenders: These are typically smaller firms that focus exclusively on originating loans for securitization and minimize the time they hold loans (warehousing risk). Due to this lack of risk retention, their loans historically have shown higher delinquency rates.
• Loan Terms and Flexibility: While CMBS loans generally follow standardized documentation to meet rating agency and securitization requirements, there can be variations in initial offerings. CMBS lenders often compete on factors like:
• Loan Amount: Offering higher leverage or loan-to-value (LTV) ratios compared to some traditional lenders (up to 75%).
• Interest Rates: Often providing very competitive fixed rates.
• Loan Structure: Offering flexible options such as interest-only periods.
• Property Focus: CMBS lenders primarily focus underwriting on the income-generating potential of the property itself, making them a viable option for properties or borrowers who might not meet strict traditional bank requirements.
• Servicing Experience: A major difference for the borrower is the post-origination experience. Once a CMBS loan is securitized, the borrower deals with a third-party master servicer for routine matters and a special servicer in case of default. This can result in less flexibility and a less personal servicing experience compared to working with a balance sheet lender who keeps the loan in-house.

In summary, borrowers should thoughtfully evaluate the type of loan originator, as this choice can have a substantial effect on the underwriting process, loan terms, and the overall borrowing experience. It is essential to shop around, review loan estimates, understand lender-specific criteria and overlays, and assess factors such as interest rates, terms, fees, underwriting standards, and lender types to identify the most suitable loan for their unique requirements.

Start a loan request to find competing lenders