Looking for your dream home is a great challenge–finding the best mortgage lender even more so. Finding the perfect lender is the first bridge you have to cross before starting your hunt for a new home. There are plenty to choose from, but not all of them will be able to meet your needs to a T.
All that said, let’s answer this tough yet necessary question: how do you find the best mortgage lender for you?
Factors to Consider When Choosing a Mortgage Lender
Before we delve into the process of finding the best mortgage lender for you, let’s talk about the factors that you should consider when in the market for a home loan.
Loan products and terms
First things first, does the mortgage lender offer loan products and terms that match your goals? This question alone can help narrow down your choices from a plethora of mortgage lenders in your area. The right lender should offer the loan product you are looking for along with terms that are suitable to your needs and financial capabilities.
Home loan products range from reverse mortgages to jumbo loans to traditional forward mortgages. Each type of product has different qualifications, requirements, costs, advantages, as well as disadvantages–and the same goes for lenders themselves.
For instance, if you want to buy a home but cannot make a 20% down payment, you would need to find a lender with more flexible down payment requirements. Or if you want to pay your loan off as fast as possible, you would need to look for a lender that offers short-term loans with interest rates that match your needs. By simply browsing through a potential lender’s website, you can see if they offer the loan product you’re looking for. If you don’t find exactly what you’re looking for, it won’t hurt to ask.
Next comes one of the biggest concerns of aspiring homeowners: interest rates. The interest rate on your mortgage will heavily affect the overall cost of your home over the course of the loan. Looking at the rates that various mortgage lenders offer can give you a feel of what the current market looks like. Ultimately, it can help you decide if it’s the right time to buy a home or not.
Nevertheless, the loan programs and interest rates you will be eligible for will depend on your credit score, debt-to-income ratio, down payment capacity, and other financial factors. Still, comparing interest rates from lender to lender is a great place to start.
In general, there are two mortgage types based on interest rates:
Fixed-rate mortgages. The interest rate on a fixed-rate mortgage will remain unchanged throughout the entire loan. The amount of interest and principal on the mortgage bill can vary, but the total loan payment stays the same.
A fixed-rate mortgage can protect you from sudden changes in the market that cause interest rates to rise. Furthermore, having a similar mortgage payment every month can make it easier to budget your income. On the flip side, it can be difficult to qualify for a home loan if you apply while interest rates are high. That said, it is wiser to apply for a fixed-rate mortgage while interest rates are affordable.
Adjustable-rate mortgages. As the name suggests, the interest rate on an adjustable-rate mortgage (ARM) varies. Initially, lenders set the interest rate on an ARM below the market rate on a similar fixed-rate mortgage. Then, the interest rate rises over time.
The period where the initial interest rate remains fixed varies from lender to lender. Some lenders offer ARMs with fixed-rate periods that last a month, while others can extend it for up to ten years or longer. In any case, the interest rate changes when that period is up based on current market rates.
What makes ARMs attractive to homebuyers is that they are significantly cheaper than fixed-rate mortgages, at least until the fixed-rate period ends. They also usually require low initial payments, which makes it easier for aspiring homeowners to qualify for larger loans.
In a high-interest market, however, a homeowner with an ARM can experience higher monthly payments when their loan resets. With this risk in mind, it is important that you crunch the numbers if a worst-case scenario were to happen. If you can still afford to pay the loan even if the interest rates are high, an ARM may be suitable for you.
Aside from the down payment, there are other fees that you are responsible for when buying a home. These fees are not insignificant and can impact the overall cost of buying a home, which makes it extremely important for you to consider them before putting down money.
Here are examples of fees that you should be aware of:
- Origination fees
- Credit report fees
- Appraisal fees
Some fees may need to be paid upfront, like the appraisal and credit report fees, while others are included in the closing costs. Read the fine print carefully to see what fees you have to pay and when you have to pay them (either at the beginning of the application or at loan closing). When perusing the quote from the lender, make sure that you understand what each fee is for and ask your lender which fees are negotiable or can be waived.
Quality of service
Never overlook the importance of quality customer service, especially when making such a large financial decision as buying a home. Your lender will have to be communicative, helpful, and reasonably timely with paperwork to ensure that your buying experience will be as smooth as possible–and that you are prepared in the case of any unforeseen expenses along the way.
Look at reviews and testimonials online when considering a potential lender. If you know someone who has recently bought a house, perhaps you can ask for a referral and talk to them about their experience with that particular lender. When you are already in contact with one, ask them probing questions, such as:
- How much of the process will take place online vs. in person?
- What communication channels do you use and how long do responses usually take?
- Who will be my point of contact?
- What is the best home loan for me? (good lenders never take a one-size-fits-all approach)
How to Find The Best Mortgage Lender
Just like home loans, there is no perfect way to find the best mortgage lender. Everyone has different goals, preferences, and financial situations, entailing the need for different approaches and loan programs. Nevertheless, having a guide is extremely helpful when you don’t know where to start, especially if you are a first-time homebuyer.
Here are some basic steps on how to find the best mortgage lender for you:
Step 1. Figure Out Your Finances
Before anything else, figure out where you are, financially. Check your credit score before looking for a lender. Checking your own credit score is a soft inquiry, which will not impact your score, unlike hard inquiries that are done by lenders during the application process.
Then, take a look at your savings. Do you have enough money for a sizeable down payment? What about an emergency fund? Will you have enough cash in your savings account after making the down payment and paying the closing costs? While you don’t always need an enormous amount in your savings to qualify for a loan, you should have enough left to cover unexpected expenses after buying a home.
You also have to determine your debt-to-income ratio (your total monthly debt divided by your gross monthly income). Lenders prefer a debt-to-income ratio lower than 36% with 28% or lower of that debt going towards the mortgage or rent. However, you can still qualify for a loan with a ratio of up to 43%.
Step 2: Determine How Much House You Can Afford
It is a good idea to figure out an estimate of how much house you can afford before approaching a lender. An easy way to do this is by multiplying your pre-tax income by 28 then dividing it by 100, which should give you a total mortgage payment of no more than 28% of your income.
Take a look at this example for a monthly income of $4,000:
$4000 x 28 / 100 = $1,120
$1,120 is the maximum amount that you can put towards the mortgage in order to stay below 28%
If you want to consider the total cost of the house, the general guideline is that most homebuyers can afford a property with a mortgage that is 2 or 2.5 times their gross annual income.
Keep in mind, these calculations will only give you rough estimates. However, they can help you choose a lender that can offer the kind of affordability that you are looking for.
For a more accurate estimate, you can choose to get pre-qualified. Pre-qualification will give you a rough estimate of how large a loan you are likely to qualify for based on the data that you give to a lender. The lender that you choose for pre-qualification doesn’t have to be the lender that you submit the actual application to.
Pre-qualification is quick and usually cost-free. Moreover, it does not involve any hard inquiries on your credit report.
Step 3: Make a List
There are many ways you can go about this step. The easiest way is to research the best mortgage lenders in your area. Doing so will allow you to come up with a list that you can pare down later on. Include referrals from friends, family, neighbors, and other homeowners as well. Furthermore, consider different options such as banks, online lenders, private lenders, local credit unions, and more.
Once you have your list, it’s time to shop around. Ask about loan programs, interest rates, down payment requirements, fees, and discounts. Compare the details on every quote. Don’t forget to consider the factors that we’ve mentioned above as well. In doing so, you’ll be able to trim down your list until you have a handful of options that best fit your needs.
Step 4: Make Your Final Choice
Now that you have your list of potential lenders, it’s time to talk to them for the second time. By this point, you already know the basics (programs they offer, down payment requirements, interest rates, etc.). The purpose of the second point of contact is to dig deeper using some well-formulated questions.
Here are a few examples:
- What is my interest rate?
- How frequently is the interest rate adjusted? What is the highest cap on the interest rate? (if you are considering an ARM)
- What is the annual percentage rate?
- Is there a fee for an interest rate lock? (there should not be a charge on a typical home loan)
- Are there any prepayment penalties?
- What other fees will I have to pay at closing?
- How often will you update me about the loan’s progress?
- How long will it take to close the loan?
Include probing questions about their quality of service that we’ve mentioned above, as well as any other question that you may have about the entire loan process.
This second consultation should give you more bases for comparison among your last few options. Sit on the decision for as long as you need. Scrutinize every fine detail or make a third consultation if you have to. After all, it’s a huge financial decision that will impact your life for decades.
Compared to a pre-qualification, a pre-approval involves a deeper look into a borrower’s finances. The lender will perform an extensive financial background check to determine your creditworthiness. During this process, the lender requires a hard inquiry into your credit, which can cause your credit score to drop slightly–but not significantly. That said, it is wise to get pre-approved after you’ve chosen your lender.
After the pre-approval process, the lender will provide a conditional commitment with an exact loan amount as well as interest rate information. With a pre-approval letter in hand, it is easier to look for a house that you can actually afford and avoid wasting time looking at homes that are outside of your budget. More importantly, a pre-approval will give you an advantage over other buyers since sellers prefer buyers that are most likely to afford their properties and close faster.
Looking for a Reverse Mortgage?
If you’re looking to apply for a reverse mortgage, you need a lender that can help you make the best choice and maximize your loan proceeds. Talk to our reverse mortgage experts via phone at (844) 230-6679 or by email at firstname.lastname@example.org today to find out more.