From whom should I borrow?

(Sorry for the obnoxious headline… my inner grammarian wouldn’t allow me to end a headline with a preposition.)

Had a friend call me today asking that simple question. Turns out a broker has been pushing her to use a particular loan broker and my friend wanted to know if that was good advice or not.

So, without any further pre-amble, here’s my advice re borrowing:

1. If you are buying a single family home in relatively good condition and have good credit, go directly to a bank, preferably Wells Fargo or Bank of America, rather than a loan broker. Why? The big banks get their capital incredibly cheaply (something like 70% of the money deposited at Wells Fargo is in non-interest-bearing checking accounts). So, those banks can offer loans at rates which are materially cheaper than those offered through the small banks that work through loan brokers (and which have to pay high interest rates to attract deposits).

2. If you are buying an apartment building in LA, go with a loan broker. It’s really hard to find good deals on LA apartment buildings. When you do find one, it almost always has something wrong with it (mold, foundation settling, etc.). Big banks have zero interest in making problematic loans, so, when a problem crops up, they run for the hills. Loan brokers, on the other hand, only make money from slamming loans through smaller banks. So, when you’re buying something with issues and you absolutely, positively need someone to get the deal done, go with the guy / gal with skin in the game… eg the loan broker.

3. If you are buying something which is uninhabitable or you have terrible credit, then your only option is to work with a private money lender (eg a loan shark). These guys are willing to take on all kinds of risk, but they get paid exorbitant interest rates to do so (usually 8-10% once all the fees are factored in).