You are ready to make that next move and purchase a new home. You have already determined that you want to take out a loan to make that purchase. Selecting the lender that is best for you is important. So, how can you narrow down from so many choices? Here are some considerations for you.
Whether you have to take out a loan in order to purchase the home of your dreams or you just wish to borrow someone else's money and keep yours on hand, giving careful thought to the selection of your lender is important. After-all, there are A LOT of options Mortgage lenders are in business to attract home buyers like you, which means that you can often find better terms if you do a little shopping around.
It is worth your time to carefully consider and compare mortgage lenders before making a final decision on who you want a loan from. Most people get turned off here simply because of the amount of information they need to provide to get the process started... no one wants to repeat that multiple times, right?! However, the effort you put into the process will most likely save you considerable money and hassle over the life of your mortgage.
So, in an effort to keep it "simple" many home buyers will just go to one of the big national lenders such as Bank of America, Wells Fargo or others. Although there is nothing wrong
with this, many of these national lenders don’t have the best mortgage programs. Often a mortgage broker will seek out the best lender and program for your specific needs and goals. There are many considerations... interest rates, fees, closing costs, lending requirements, types of lending programs, etc.
Here are some tips on how to pick a mortgage lender:
1. Get your credit score in order.
The better your credit score, the more options you will have to consider with lenders, programs and rates. The higher your score, the more attractive you will be to more lenders. This attractiveness can convert into a willingness to provide you the most competitive rates and terms. Even a single percentage point off your loan rate can easily save you thousands of dollars.
2. Understand the difference between a broker and a lender.
Mortgage brokers and mortgage lenders are not the same things. A mortgage broker works across different lenders to search for and secure mortgages for buyers. They charge a fee for this that is typically paid for by the lender they place you with.
A mortgage lender is an institution (bank, credit union, etc) that will loan you the money to buy your home under their lending programs.
Although Mortgage Brokers are often more competitive because they shop for the best terms and rates and are not limited by what one institution may offer. However, sometimes Credit Unions offer very good rates too. This is why it is important to consider your options.
3. Get a recommendation from someone you trust.
If you know anyone who has purchased a home recently, he or she may be able to give you some perspective on finding a mortgage and the different lenders available.
Your friend, family member or co-worker may have good things to say or bad things to say about the lender they used. Both of these are valuable because they help you get a better idea of what your options are. Your Realtor is also an excellent resource for lender recommendations. If you choose an agent, you trust you can then rely on his or her insight into lenders. Agents help numerous clients purchase homes throughout the year, so they are usually up-to-date on the lender’s clients liked and the ones they didn’t like.
4. Research online reviews.
It is best to back up the advice of those you know with your own research, especially since you may not know how much diligence they did in selecting that vendor. A few days spent checking reviews on different brokers and lenders can give you useful knowledge about how clients have felt about their experiences. Just keep in mind that it is usually the most unhappy clients who are likely to be most motivated to write a review. Take online reviews with a grain of salt. Instead of focusing on any one recommendation, try to get a feel for how borrowers feel overall by reading multiple reports of the same lender.
5. Understand all the costs... not just interest rates
Although the interest rate of your loan is indeed a big concern, there are a lot of other potential costs that can be tacked on by lenders and brokers. Fees are often where it is hard for borrowers to determine what lender is providing them the best terms. Make sure you study all the expenses carefully to make sure you pick the lender who is giving you the best deal.
There are a variety of fees you may encounter, including:
Application fee – The application fee is to cover the cost of getting your credit report and all the other work required to complete your application. Sometimes the application fee can be waived. Other times the charge will have the appraisal fee rolled into it.
Processing fee –This fee is usually to cover the cost of processing the mortgage and is usually a fee you will face when dealing with brokers. The broker may pay a third-party processing company and want you to cover the cost. Processing fees are not something that every broker will demand, so feel free to request that this one is waived.
Origination fee –The origination fee is another fee charged by brokers. It is a fee that goes to the broker to cover the cost of the broker’s time and effort. While you may at first balk at paying a broker when you could go straight to a lender, remember that brokers can often get you a better deal than you would get on your own. Try to weigh the benefits offered by the broker against the origination fee.
Underwriting fee – The underwriting fee is to pay for the costs of closing and funding the loan for the lender. You will find that the underwriting fee is higher or lower depending on what company you choose.
Rate lock fee –Interest rates change regularly. Lenders are willing to lock in the rate that you are offered at the moment, but they may want to charge a rate lock fee. The fee is to help the lender if they miss out on charging you a higher interest rate. Make sure you don’t pay a fee for the lender negligence on doing their job!
Appraisal fee – Every lender will require an appraiser to go to the home you are interested in buying and verify its value. This cost is passed on to the buyer.
Private mortgage insurance – many lenders will charge you for private mortgage insurance if you are providing less than a twenty percent down payment. Make sure you understand this loan cost and when you will be able to stop paying it. There are also ways to avoid paying private mortgage insurance as well. Take this up with your lender.
6. Understand the qualification letter the lender provides.
As a borrower, two mortgage terms you need to understand are pre-approved and pre-qualified. These two mortgage terms can have vastly different meanings. They may have an impact on the attractiveness of your offer with sellers.
The difference between pre-qualification and pre-approval can be boiled down to this:
A pre-approval is more involved and more attractive to sellers when considering an offer on their property. With a pre-approval, the lender will check your credit score, verify your employment and verify your income.
A pre-qualification, on the other hand, can be given by a lender who takes your word for the information you provide them over the phone. Nothing is verified. In other words, the document isn’t worth the paper it’s written on.
Where it can get tricky is some lenders use these two terms synonymously. As a buyer, you need to make sure that if your lender uses the term “pre-qualification” that they have verified your income, employment, and credit score. Sellers will want to know you are qualified to purchase the property.
7. See if you qualify for a specialized loan.
Some loans offer more favorable terms than standard mortgages. If you qualify for any of them, they are often worth considering. These include Federal Housing Administration loans, VA loans, and loans from the Department of Agriculture, otherwise known as a USDA loan. For example, VA loans are an option for veterans and make it possible for you to buy a home at generous rates and with little to no down payment. FHA loans offer low-interest rates and are available with a lower credit score than most other lenders will accept. If you think that you might qualify for any of these specialized loans, do some research and talk to lenders about them.. They may make it possible for you to purchase a home more easily than you could otherwise.
If you need any recommendations for lenders, don't hesitate to reach out to me and I would be happy to provide you options that my customers have been pleased with.