Homeownership is a long-term commitment, with mortgage payments spanning 15, 20, or 30 years. Selecting the best mortgage lender can mean the difference between securing a low interest rate, obtaining loan approval, and enjoying a smooth application process versus facing high rates, potential denials, and a never-ending stream of paperwork. Understanding how to locate the best mortgage lender can save you both time and money, ultimately reducing the stress associated with buying a home or refinancing.
Knowing your needs is key to finding the mortgage lender that suits you best. It’s important that you know how to shop for a mortgage lender to explore various options. Here’s our guide on how to do it.
Different Types of Mortgage Lenders
While traditional banks are the usual choice for obtaining a mortgage, there exists a multitude of options beyond traditional banks. Exploring alternative mortgage providers can open up a broader spectrum of choices to suit your specific financial needs and preferences. Here are some of the mortgage sources to choose from:
- Mortgage Brokers. Consider a mortgage broker if you prefer someone else handling the legwork for you. Mortgage brokers, similar to independent insurance brokers, are licensed professionals who connect borrowers with lenders but don’t fund loans or set terms. Keep in mind that brokers earn a commission, potentially influencing their lender recommendations, which may not always align with the borrower’s best interests.
- Direct Lenders. Homebuyers often start with direct lenders like traditional banks, credit unions, or online-only lenders who provide mortgages directly to borrowers. When dealing with a direct lender, you typically interact with the same loan officer and organization from start to finish. While rates and terms can be competitive, they vary among lenders, so be prepared to research and compare to find the best direct lender for your needs.
- Wholesale Lenders. A wholesale mortgage lender partners with mortgage brokers and other loan providers rather than borrowers, potentially offering discounted rates but possibly adding extra fees through intermediaries. Wholesale mortgage lending may also provide more flexible terms, which can be beneficial for borrowers who don’t meet traditional criteria, and typically sell loans on the secondary mortgage market after closing to continue funding new loans.
- Hard Money Lender. A real estate hard money lender, often a private mortgage lender or group, focuses on the property’s value and potential appreciation rather than your creditworthiness. This option is particularly beneficial for those with credit issues or real estate investors and flippers. However, it typically comes with shorter loan terms (six months to five years), faster approval and disbursement, but higher fees, interest rates, and closing costs compared to traditional lenders.
- Portfolio Lenders. Portfolio lenders use their assets to fund and service loans, potentially leading to higher fees and interest rates. However, they may offer flexibility in terms of down payments, loan amounts, and the chance to avoid mortgage insurance, making them worth considering for borrowers with bad credit, real estate investors, or the self-employed.
- Correspondent Lenders. Correspondent lenders assist in originating and funding your loan but sell it on the secondary market after closing. While they offer diverse loan options and potential cost savings, it may be challenging to anticipate your loan servicer, leading to potential difficulties in ensuring a seamless transition and avoiding missed mortgage payments.
How to Choose a Mortgage Lender
When it comes to choosing a mortgage lender, it’s important to understand how to choose a mortgage lender. Finding the best mortgage lender requires diligent shopping. So, before delving into the selection process, take a few essential steps to ensure you make the right choice.
STEP 1: Fix Your Credit Score
Conduct a financial analysis before looking for a mortgage lender and submitting a loan application. Start by checking your credit score and reports, which you can obtain for free from Experian, Equifax, and TransUnion through AnnualCreditReport.com. Address any errors, late payments, or delinquent accounts on your reports. Focus on reducing high outstanding credit card balances to below 30% of your available credit, and make on-time payments to boost your credit score.
Lenders also assess your debt-to-income (DTI) ratio, aiming for a ratio below 43%, although some programs allow up to 50%. To maintain a manageable DTI ratio, avoid new loans or major credit card purchases for at least three months before applying for a mortgage, as lenders can review your credit report at any point until closing.
STEP 2: Know How Much You Can Afford
When determining how much house you can afford, don’t rely solely on the lender’s pre approval amount, which is based on your income, loans, and debt but excludes other monthly expenses like utilities, childcare, and insurance. To avoid becoming “house poor” and leaving no room for essential costs, include these expenses and consider your savings and investment objectives when calculating your mortgage affordability based on your monthly net income.
STEP 3: Know Your Mortgage Loan Options
When looking for the right mortgage lender, it’s important to know about different types of mortgages. There are various types of mortgages, including conventional loans, jumbo loans, government-backed loans like FHA, fixed-rate mortgages, and adjustable-rate mortgages. When you need a mortgage that traditional banks cannot easily provide, Fairmount has real estate loan products such as bridge loans and fix and flip financing that make real estate investment more accessible. Depending on your needs, scope of work, and timeline, you should choose to focus on the lender that’s right for you.
STEP 4: Compare Rates and Terms
Don’t settle for the first lender you find. Instead, compare rates and terms from various lenders, including banks, credit unions, online options, and local independents. Look beyond just interest rates and ask about APRs, loan terms, down payments, mortgage points, insurance, closing costs, and fees. Find a lender who communicates in your preferred way, whether online, by text, or in person. Remember, not shopping around could cost you thousands over a 30-year mortgage, as shown by studies from the Consumer Financial Protection Bureau and Freddie Mac.
STEP 5: Get Mortgage Pre-approval
Getting mortgage preapprovals from three or four lenders is the best way to determine your loan eligibility. During pre-approval, lenders review your credit and finances, typically requiring documents such as IDs, pay stubs, tax returns, financial statements, debt details, employment history, and down payment information. Remember, pre approval doesn’t guarantee the loan; final approval occurs when you apply for a mortgage on a specific property. Lenders can reevaluate your finances during this process, so avoid new credit, additional debt, account changes, or job shifts before and during your mortgage application to maintain your eligibility.
STEP 6: Read the Fine Print
Financial documents can seem daunting, but overlooking them could lead to regret down the road. It’s important to carefully review the loan estimate form, which lenders are required to provide within three days of receiving your mortgage application. Focus on key details like the interest rate, monthly payments, lender fees, closing costs, and the down payment, as these should remain relatively consistent if your financial situation remains unchanged.
When comparing loan estimates from different lenders, you’ll encounter various third-party costs like title insurance, appraisal fees, and recording fees. While you can negotiate some closing costs, remember that lenders don’t control fees for third-party services, only their own. If you come across unfamiliar fees or spot errors in the paperwork, don’t hesitate to ask questions. Addressing issues early can help you avoid future complications and hassles.
Questions to Ask Your Mortgage Lender
It’s important to inquire about the process and available loan choices. Some questions to ask your lender include:
- What documents are required for the application?
- How long does their rate lock period last, and are there any associated fees if the closing extends beyond that period due to circumstances beyond my control?
- What is their track record for on-time loan closures?
- Could you outline the steps in your underwriting process, and can the application and documentation be completed online, by mail, or in person?
- Will you be my main point of contact throughout the process, including during underwriting, and how will we maintain communication?
How can I compare mortgage loan offers?
Comparing mortgage loan offers is a critical step in finding the best mortgage lenders and the right financing for your home purchase. Here’s how you can effectively evaluate these offers:
- Interest rate. While interest rates are a consideration when choosing a lender, they should not be your deciding factor. Rates affect your monthly payments and overall loan cost, making a lower rate beneficial. When comparing offers, prioritize the interest rate’s impact on your budget and also ask about points, fees that could lower your rate, weighing their cost and necessity for your situation.
- Mortgage loans come with various fees, and they may not always be transparent. Lenders might present fees individually or grouped together. Inquire about all associated costs, such as application fees and underwriting expenses, especially those due at closing. When comparing lenders, aim to negotiate and minimize as many fees as you can.
- Down payment and mortgage insurance. Down Payment and Mortgage Insurance: The down payment requirement can vary between lenders and loan programs. A larger down payment can lead to a lower interest rate and reduced monthly payments. Additionally, if your down payment is less than 20% of the home’s purchase price, you may need to pay for private mortgage insurance (PMI) or mortgage insurance premiums (MIP) for certain government-backed loans. Be sure to consider these factors when comparing offers, as they affect your upfront and ongoing costs.
Mortgage Lender FAQs
Where can I get a mortgage?
You can obtain a mortgage from various sources, including traditional banks, credit unions, online and private lenders, mortgage brokers, and government agencies like the FHA or USDA.
What is the difference between a mortgage lender and mortgage broker?
A mortgage lender directly provides loans to borrowers, while a mortgage broker acts as an intermediary, connecting borrowers with various lenders.
Do I need mortgage insurance before applying for a real estate loan?
Most loans with a down payment below 20% typically mandate mortgage insurance, which varies by loan type and lender. Private Mortgage Insurance (PMI), for instance, may incur annual costs ranging from 0.5% to 1%.
Mortgage Lender Selection and Why It Matters
The choice of mortgage lender can significantly influence the type of home you can afford. Lenders differ in terms of interest rates, fees, customer satisfaction levels, and specific loan requirements. Additionally, some lenders may not offer the type of mortgage that aligns with your home buying needs and preferences.
Starting your mortgage lending research early can set you on a path to success and provide insights into the diverse landscape of mortgage lenders. Since mortgages are not one-size-fits-all, it’s essential to understand how different lenders operate and the distinctions between them. You must also grasp your responsibilities as an applicant and the necessary steps to secure the best mortgage lenders for your dream home.
KEY TAKEAWAYS
- The search for the best mortgage lender demands diligent effort for optimal results.
- Checking out different mortgage providers gives you more options to find the one that fits your financial needs and preferences.
- Knowing what you need helps you find the right mortgage lender for you.
