Buying a home is a complex process, and topping the list of most home buyers’ worries is the question of how much it’s going to cost. Any real estate agent worth their salt will have communicated to buyers that the price listed on the contract is only the beginning of the cost: In addition to taxes and insurance costs, there’s the actual cost of borrowing the money to pay for the house. Interest rates, application fees, title searches, and mortgage insurance, plus the mysterious “closing costs” that you’ll hear about can make the idea of finding a lender overwhelming. But one of the most important decisions you’ll make in the home-buying process is your lender—your choice of home loan lenders will determine the different types of home loans available to you, the terms of the loans you can choose, and how the process is handled, so your lender selection will make a big difference in the cost and experience of borrowing. As with anyone you choose to do business with, you’ll want to shop around, and how you present yourself and the questions you ask will help you choose a mortgage lender that will offer the products and support you need to buy a home.
- Before You Begin…
- STEP 1: Prepare by taking care of your credit, saving for a down payment, establishing your budget, and more.
- STEP 2: Know your options and consider the type of lender.
- STEP 3: Prepare questions for lenders.
- STEP 4: Shop around, evaluate loan offers, and compare rates and fees.
- STEP 5: Get preapproved for a loan.
Before You Begin…
The terms “mortgage” and “home loan” suggest that there is only one kind, and nothing could be further from the truth. The same holds true with “lenders.” Before you start shopping, it’s a good idea to familiarize yourself with the different options that may be available to you so that when a lender starts tossing around terms you’ll know what they’re talking about. First, the lenders: Home loans are offered by local banks and credit unions, large national banks, and online banks. These options are ideal for those who would prefer to keep all their financial transactions in one place, and often those who are already customers may get a preferred rate or discounts on fees. If you prefer, you can choose a mortgage lender that only deals in home loans, not other types of banking, both online and in brick-and-mortar companies. These lenders usually offer a wider range of programs that may suit your financial needs, plus they tend to move a little faster than banks because they focus entirely on mortgage products and have dedicated experts in-house for every step of the process. Finally, there are state and federal loan programs that lend money directly or through approved banks and brokers. These programs can offer better rates or assistance for borrowers with lower down payments, lower income, or poor credit. Choosing among the types of lenders will be based on the type of loan you need, among other factors; if you’re overwhelmed, you can find a mortgage broker to help with the process. Mortgage brokers are not lenders—they are more like matchmakers who help borrowers find the right lenders for their situation, and they have tremendous knowledge about the options available to advise buyers on their best options.
What kind of loans might you find during your search? There are two categories of conventional loans: conforming and nonconforming. Conforming loans are what most people think of when they think of a mortgage: These types of loans meet the standards set forth by the Federal Housing Finance Agency (FHFA), so once the loan is processed it can be bought and serviced by Freddie Mac or Fannie Mae, large servicing companies that provide excellent stability. These are generally low-risk loans for the lender, in which the borrower makes a sizable down payment (at least 3 percent, with temporary private mortgage insurance, or 20 percent to avoid mortgage insurance) and has excellent credit. Nonconforming loans don’t meet the FHFA standards, so they’re riskier for lenders and allow the lenders to set their terms independently. Jumbo loans allow borrowers to exceed the top borrowing limits set on conforming loans (the amount varies based on location and market values). These high-dollar loans require outstanding credit and a good-size down payment of at least 10 to 20 percent, but they allow stable buyers to purchase more expensive homes. At the other end of the spectrum are a slew of government-insured nonconforming loans designed to help more people with less spending power get into homes. You’ll hear about Federal Housing Administration (FHA) loans, which are guaranteed by the Federal Housing Administration and are a great option for buyers with lower-than-ideal credit scores or those who have the income to make monthly mortgage payments but not enough to save a large down payment. The United States Department of Veterans Affairs (VA) loans offer great options for active-duty military, veterans, and their families. United States Department of Agriculture (USDA) loans provide options for low-income buyers who are willing to buy in rural areas.
There are other programs on the state and local levels, but as you investigate your options, remember this: Each of these loan programs comes with different terms, rules, and requirements. Signing a mortgage document is a significant commitment, and there’s no easy way out that won’t destroy your credit going forward if you realize you made a mistake. This means that processing a home loan is no time to skim documents; you need to really read and make sure you understand what you’re agreeing to do. Check for items like private mortgage insurance requirements (and how, when, and if you can cancel that insurance), initiation fees for a loan program, additional monthly costs, and, particularly, the interest rate and whether or not it will ever change. If you aren’t sure or don’t understand something, ask, and continue to ask until it’s explained to you in a way that you do understand. Don’t be embarrassed; most people don’t know all these things off the top of their heads unless they deal in mortgages, so find an expert you’re comfortable with and ask until you’re sure.
STEP 1: Prepare by taking care of your credit, saving for a down payment, establishing your budget, and more.
Before you begin talking to mortgage lenders, you have some financial housekeeping to do. First, you’ll want to check your own credit by accessing your credit reports from all three credit bureaus. You can do this for free once a year; while there are many sources to use, you can avoid scams by going directly to the Federal Trade Commission’s website and linking through there. Check the reports (each of them, because they may be different) for errors; make sure that all the accounts listed are yours and that the reporting of payment history is correct. The reports will explain how to appeal or ask for corrections, but those can take a bit of time, so do this early in your home-buying process. Choose the option to access your FICO credit score, because that number will determine a lot about the kind of loan you qualify for and what your interest rate will be. Most conforming loans will require a credit score of at least 620, but programs such as FHA loans will offer loans to borrowers with scores as low as 580, and there are programs for those with even lower scores. Take steps to improve your credit score and reduce your debt-to-income ratio by paying down existing debt and building a history of on-time payments.
Next, look at your budget and begin saving for a down payment. The higher your down payment is, the less likely you’ll have to choose a loan with private mortgage insurance (PMI) or an FHA mortgage with mortgage insurance premiums (MIP). Even if you do need to buy insurance, a higher down payment can reduce your interest rate and make you more attractive to lenders. You’ll also want to set your budget; do some research into the areas where you’re considering purchasing a home, and look at utility costs, association fees, taxes, and homeowners insurance costs, and start balancing those against your income. How much can you really afford to pay each month? This is important for you to know because lenders will base their assessment of how much you can afford on your debt, income, and credit history; things like the cost of actually living in the home and area are not considered, so if you use a lender’s assessment you may find yourself stretched too thin. Be aggressive in estimating how much you spend and conservative on how much you think you can afford to spend to allow a cushion.
Preparing ahead of time will benefit your search for the best mortgage lenders in several ways: you’ll be an informed customer, you’ll know what you’re looking for, and you’ll be able to answer questions from the lender clearly and accurately, helping you look and feel confident.
STEP 2: Know your options and consider the type of lender.
Once you have your credit touched up and a clear plan for a down payment and budget in mind, you’ll be able to consider which type of lender you want to look for. Consider your situation: If your credit and down payment qualify you for a conforming loan, then almost any lender will be able to offer you options. If, however, you’ll be considering FHA or other programs, you may have a better range of options with larger banks or other lenders who focus only on mortgages.
While your first thought may be to search for “how do I find mortgage lenders near me,” it’s important to look at mortgage lenders that are not near you as well. If you’re considering options for a local lender, certainly check out credit unions and local banks, which will offer personalized service and potentially lower rates for members and may be the best bank mortgage option for you. But those lenders may have limited options, so consider national banks and some of the best online mortgage lenders. And if you’re planning to move across state lines, a national lender (bank or otherwise) may be a better choice than a local bank simply because it will be easier to manage your loan from your new location if the lender is accustomed to servicing loans out of the area. You can also consider a mortgage marketplace, which will allow borrowers to input their information once and get rate quotes all in one place from multiple lenders, simplifying the process of comparing quotes from different websites. You’ll still want to read the fine print carefully, but a marketplace can make your initial survey of lenders easier and help you get an idea of what might be available.
STEP 3: Prepare questions for lenders.
Asking lots of questions is one of the most important steps you can take when considering different types of mortgage loans. But what to ask? First, you’ll want to ask what loan programs the lender offers. If you already have a good idea of what you think you’d like, you can say so—and then ask what other programs or suggestions they might have, because no matter how much research you do ahead of time, there may still be programs they know about that you don’t.
When you’ve settled on a few options, you’ll want to ask about the fees and payments required for each program. It’s difficult to really compare how much two mortgages would cost because there are so many variables that you’re very rarely able to compare the same things, but getting concrete numbers about rates, closing costs, taxes, mortgage insurance requirements, prepayment penalties, and other fees will give you a good idea. The lender won’t be able to give you specific details until they have reviewed your financial profile, so there will be rough estimates at first that get more specific as you get deeper into the process, but do recognize that they’ll need your financial information to give you any information at all.
Ask the lender about their qualifications for different mortgage programs: credit, down payment, and debt-to-income ratio. You may not get specific answers for all those questions, but the more information you have, the better prepared you’ll be to decide where to apply.
Finally, ask about interest rates (fixed, which stay the same for the life of the loan, or adjustable, which can change with the market) and about rate locks. A variable rate mortgage can be less expensive at the beginning of the repayment term, but it can explode unexpectedly with a change in the market or in the terms of the loan, so you’ll want to make sure you understand how that will work. Rate locks, on the other hand, can be extremely helpful. Some lenders offer a guarantee to keep the rate they’ve quoted you locked in for a period of time after you prequalify or are preapproved. This provides you with the luxury of shopping for a home that you really want instead of rushing in case the market changes and takes your quoted interest rate with it.
STEP 4: Shop around, evaluate loan offers, and compare rates and fees.
Talk to several lenders and get as much information from them as you can. Try to spread out these conversations across lenders of different types, but as you sit down to compare the offers, you’ll have to do some careful comparison to make sure you’re getting as close to an apples-to-apples comparison as possible. Line up the down payments, the interest rates, the length of the loan, and the additional fees as closely as you can to compare the overall costs of the loan—which can be extra-tricky if the loan offers are for very different amounts.
How do you evaluate which loan offers are the best ones? Do the best you can to consider the total cost of each loan over time, which should give you an idea of which one is the least expensive overall. The least expensive loan isn’t necessarily the best one for you. Consider what your situation is right now: Do you have student loan payments that take up a good portion of your income? Would it be worth paying a little bit more in the long run to keep your monthly payment lower right now while you’re paying those down? Or will you have kids entering college around the 20-year mark in your repayment period where it might be great to have less left on the loan so you can refinance or pay it off? Is it important for you to be able to cancel the PMI you’ll need because of a low down payment so that more of your payment goes toward principal? If so, the best conforming loan may be more appealing than the slightly less-expensive FHA loan, whose mortgage insurance premiums stay in place for the life of the loan.
Last but not least, consider your gut feeling about the lenders. You’ll be dealing with them for a long time (unless they sell your loan to a servicer). What has your experience been like? Were they responsive to questions, or dismissive of your concerns? Were calls or emails in response to your queries timely? You’ll want to choose a lender you’re comfortable working with. Examine the different types of mortgages you’ve been offered from the top mortgage lenders on your list, and choose the one that fits your needs.
STEP 5: Get preapproved for a loan.
Once you’ve chosen your lender, the next step is to get a preapproval. You may have heard the terms “prequalification” and “preapproval” used interchangeably, but there’s a difference in the buying power you get from each. A prequalification shows that a lender has done a quick overview of your financial situation and found that you are likely someone they would extend a loan offer to. Prequalifications are more helpful to you as you determine your budget and figure out how much house you can buy. Preapprovals are the next step, in which the lender checks your credit, does the math on what kind of risk you present as a borrower, determines your rate, and actually gives you a letter stipulating that unless something changes in your credit or income, they will lend you a certain amount of money. In a hot buyer’s market, a preapproval letter will give you a leg up over offers from buyers who don’t have that promise in hand. The best part? The lender is committing to offer a loan to you—but you’re not committing to take it yet. Therefore, if you’ve identified two or three lenders you’d be happy to work with, it’s fine to seek preapprovals from all three, then make your decision about which one to choose. There’s a fair amount of paperwork and documentation involved in a preapproval, but it’s the surest way of being able to shop confidently and make offers on homes that you know you can borrow the money to buy.
Choosing a mortgage lender is a big decision, and an important one. It’s easier and less intimidating if you go into the process feeling prepared and with some basic knowledge of the products available to you and your financial position so that you can ask for the right information to make your choices clearer and easier to make. Taking these steps and considering these aspects of the decision will make it a more approachable and manageable part of the home- buying experience and will allow you to feel comfortable as you commit to buying the home you want. Ask the questions you need answers to, and check that you understand what you’ll be signing—then get out and hunt for your home.