The Dos and Don’ts of Choosing the Right Mortgage Lender
There are thousands of mortgage lenders in the US – From private investment pools and credit unions to large banks that dominate the mortgage market. Choosing the right mortgage lender can be tricky, but if you adhere to good practices, you may find the perfect match.
Do Your Research
It’s imperative to conduct your own thorough research and familiarize yourself with the mortgage process before you start searching for the right mortgage lender, especially if it’s your first time.
You need to know how a mortgage is calculated, how your credit score can impact your mortgage interest rate and therefore your monthly mortgage payments, and how much down payment you may need. It also helps to have an understanding of the housing market, and other concepts associated with the mortgage.
This will help you identify the mortgage lenders that are the right fit for you. You can narrow the pool of potential mortgage lenders down to a manageable size. It will also help you compare different lenders based on the terms they are offering.
When you are researching the lenders themselves, it’s important to read the reviews left by borrowers who worked with these lenders in the past, so you can make an informed decision.
Don’t Confuse A Mortgage Broker With a Mortgage Lender
When you are researching the right mortgage lender, you will come across two types of entities – mortgage brokers and mortgage lenders. A mortgage lender, direct lender, or mortgage bank is the institution that will lend you money to buy your home.
They will assume the liability and will earn from the interest on your mortgage loan. A mortgage broker is the entity that will connect you to the right lender.
Working with a mortgage broker instead of hunting for lenders directly can significantly cut down your research time. Brokers, based on the financial information you provide them, can help you identify multiple lenders that will offer a mortgage loan to you, and compare interest rates and loan terms. This saves you time and allows you to find the best rate available based on your specific situation.
Do Choose The Right Type of Lender
If you decide to choose a lender instead of using a broker, these are the types of mortgage lenders available:
The big banks or national banks have a nationwide presence, stability, and credibility. Hence, they have the luxury of being restrictive with their requirements.
Credit unions and small local banks focus on local borrowers and might be better suited for individuals living in the area they cater to. They may have fewer requirements compared to the big banks.
Fintechs/Online Mortgage lenders are growing in numbers. They may not have the credibility and reach of the big banks or even credit unions with a solid regional presence. With minimal overhead as primarily an online business, they might be able to offer better rates and softer terms to the borrowers.
A consumer with poor credit may be able to find a mortgage through a private mortgage company or mortgage lender that specifically caters to borrowers with lower credit ratings. The right type of lender for you would be the one that offers you the best rates and mortgage terms for your situation.
Don’t Compromise on Transparency
Not all mortgage lenders are equally transparent about loan terms, rates, and fees associated with loan processing, that can be a major red flag. Try to find mortgage lenders that are transparent about all mortgage terms and willing to spend the time necessary to answer all your questions.
Do Identify The Right Loan Type
There are different types of mortgage loans available, and the right mortgage lender has to offer the loan ideally suited to your requirements.
For example, if you do not have a hefty enough amount saved up for a typical 20% down payment and you qualify for an FHA loan, you should look for lenders that offer FHA loans and adhere to the basic requirements (credit score, Debt-to-Income, etc.).
You may get a mortgage by putting as little as 3.5% as a down payment. Similarly, you may qualify for a VA or USDA loan, so look for lenders that facilitate these mortgages.
Don’t Forget To Ask Important Questions
There are a lot of important questions you need to ask your mortgage lender, and you should pick a lender that can offer you comprehensive answers to these questions so you can make an educated decision. This includes information about early payment, i.e., what are the terms and whether there is a prepayment penalty.
Similarly, you should ask about mortgage points, the need to get Private Mortgage Insurance (PMI), and pre-qualification/pre-approval provision. You should also have a clear idea of how much you will be paying in mortgage fees.
These fees are sometimes rolled into the mortgage and are spread out over a long period, so many borrowers don’t notice. But they can significantly increase or decrease the cost of borrowing, and the right lender should have reasonable fees associated with the mortgage loans they issue.
Do Your Own Calculations
It’s important to do your own calculations to determine your mortgage payment comfort level. Only you will know what future expenses need to be accounted for like the costs of daycare, retirement plans and future investments, or furniture for that new house. The lender will only be able to estimate how much you can afford based on your current expenses and it never hurts to leave some wiggle room for future potential expenditures. You should feel free to ask questions of your lender and stick to what you know you can afford to make an educated decision.
Don’t Chase Uncharacteristically Low Rates
Unusually low-interest rates are a red flag. If a lender is offering you interest rates that deviate significantly from the norm, you should try to figure out why? There should be a legitimate reason behind the low rates.
These rates should also be evaluated in the context of your credit score. If your credit score is low and a mortgage lender is offering you prime rates, it might be a red flag.
The most optimal rates are reserved for the best applicants (low risk) that offer the strongest combination of credit score/history and income.
