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One of the most critical parts of buying a home is choosing a mortgage lender that best suits your circumstances. The right lender can save you thousands of dollars, just like the wrong one can unnecessarily cost you a lot.
There are thousands of lenders, making the task even more daunting if you are ready to purchase your first home. Here are some things to consider to make the task easier and ensure you get the best possible terms through the most appropriate lender.
Before You Start Looking for a Lender
You should do a couple of things before reaching out to potential lenders.
The most important is to review your financial situation by checking your credit score and credit reports. Look for inaccuracies and clear them up immediately.
You can get a free credit report from the three main reporting bureaus–Experian, Equifax, and TransUnion–or through AnnualCreditReport.com.
Use this as a time to pay down high outstanding balances. Your target should be below 30% of your available credit line for credit cards.
Another thing lenders look at is your debt-to-income (DTI) ratio. To determine your DTI, lenders add all your monthly debts and divide that by your gross monthly income to get a percentage. For example, if you have $4,000 in monthly debts and an income of $10,000, your DTI is 40%.
Many lenders require a DTI ratio below 43%, though some are more lenient. Keep your DTI in an acceptable range by taking on no new loans or making large purchases on credit cards for at least three months before applying for a mortgage loan.
Also, start thinking about how much house you can afford. Lenders determine a preapproval amount based on gross income, outstanding loans, and revolving debt. They don’t consider other monthly bills like utilities, groceries, daycare, various types of insurance, and other related expenses, but you should.
Types of Mortgage Lenders
Countless lenders are vying for your business, but the one that works best for you starts by learning the different types of lenders you could use. They are categorized into six types of lenders, each with pros and cons.
Banks, credit unions, and others provide mortgages directly to borrowers. They fund mortgages and service them or outsource servicing to a third party.
These are independent professionals not tied to a single provider. Instead, they are matchmakers between borrowers and lenders who charge a small fee for their services.
They don’t fund loans or make lending decisions. Brokers have established relationships and may be able to get you terms and rates not available to borrowers off the street.
The tradeoff is that you’ll probably see higher rates to compensate for a broker’s efforts.
These lenders originate and fund their loans but quickly sell them to larger lending institutions shortly after closing. They offer a wide range of products and generally have low rates, but you will deal with a new loan servicer at some point.
These lenders work with mortgage brokers and other third parties to offer their loan products at discounted rates. They provide easier approvals and favorable loan terms, but you need to work with a broker to get a loan from a wholesale lender since they don’t work with individual borrowers directly.
These lenders originate and fund loans from their clients’ bank deposits and hold the mortgages instead of reselling them. Portfolio lenders typically include community banks, credit unions, and savings and loan institutions.
Hard Money Lenders
These are private investors that provide short-term loans secured by real estate. Traditional lenders scrutinize your ability to repay a mortgage, but hard money lenders are more concerned with the property’s value to protect their investment.
They require repayment in a short timeframe, charge steeper fees, and tend to work best when you don’t fit conventional borrowing criteria.
» MORE: See today’s refinance rates
Trust and Reputation are Primary Factors
If your mortgage lender isn’t trustworthy, you can’t be confident you’re getting a great deal. If you’re not comfortable with the lender, you’re going to add to your anxiety levels on top of what is already a stressful experience.
Ask people you know for recommendations, and do your online homework to see reviews or complaints lodged against a lender. Use your gut instincts on top of what you uncover.
Are you getting clear and concise answers to your questions? Are they patient and responsive to you? Do they appear ethical? Are they pushing you into a particular loan package from the outset? Do you feel pressured?
As you drill down more, ask the lender these questions as part of your due diligence.
- How long do you anticipate the loan process to take?
- Who will be my primary contact, and will they stay the same throughout the process?
- Which steps take place online, and which ones occur in person?
- How long of an interest rate lock do you recommend? If the closing doesn’t occur before that date through no fault of my own, will I have to pay for an extension?
- What fees and commissions do you charge and who pays for them?
- Can you help me find any down payment assistance programs for my area?
Finding the Best Mortgage Deal
This step starts with deciding what type of loan is best for you. It may be an FHA, VA, USDA, or Jumbo loan, among others.
The length of the loan, APR, closing costs, points, and fees are also factors that can significantly impact the final cost of your loan.
The best way to find a lender who best meets these conditions is to do the legwork, contact several possible candidates, and start to drill down by asking questions about these factors.
Try to get quotes from different lenders on the same day because interest rates change daily, and this is the only way to get an accurate side-by-side comparison.
You can apply for a loan at several lenders. When you do, you’ll receive a loan estimate that spells out essential details about your loan, including the interest rate, monthly payment, fees, and estimated closing costs.
Compare loan estimates from at least three lenders and closely read each line to ensure the details match your expectations. Also, ask questions about anything you don’t understand. You can compare costs and terms to choose the best deal.
Convenience and Personal Preferences
Convenience and personal preferences are another factor to consider. Many lenders allow you to research and apply for mortgages online. Some, such as Quicken Loans, function almost entirely online and by phone.
Others, such as major banks like Wells Fargo or Bank of America, provide online banking and mortgage services in addition to regular offices where you can meet with a loan officer face-to-face.
The last thing to consider in seeking a lender is if you have any special circumstances that may make it harder to obtain a loan, such as a low credit rating or seeking financing for a unique property.
The terms offered and a lender’s willingness to make loans in those circumstances may vary widely, so it helps to find lenders who tend to specialize in situations like yours. That is where small, local lenders can be useful.
Big banks may consider those properties hard to sell in the event of default and may be unwilling to finance them, but a small lender familiar with the area may have a better understanding of the property’s true value.
Other circumstances that may turn off some lenders include seeking to buy a home in a depressed area, being self-employed, if you’re seeking a jumbo loan, or working in an uncommon occupation.
Finding the right lender can be a challenge. But if you approach it methodically, you can be confident that your choice is right.