There are a lot of people to deal with when you’re trying to find and buy a home: sellers’ and buyer’s real estate agents, mortgage brokers or lenders, escrow agents, home inspectors and assessors, title companies, lawyers – the list can be exhausting.
Interviewing and finding the right experts can be the most difficult and frustrating part of buying a house, especially for first-time home buyers. But using the right people to help you through the process can be the key between a successful home purchase and an enormous disappointment.
Relatives or friends who’ve recently bought a home in the area are often the first place buyers turn to for references to qualified real estate professionals. However, the mortgage landscape changes quickly, and different lenders cater to different borrower scenarios. The bank or mortgage lender which provided the best rates and service to your friend or relative eight months ago may not be the best choice for your unique borrower profile, or desired property.
That often leaves you to conduct your own research to find the best mortgage lender for your purchase. Here are some tips on how to do it the right way.
Before you visit your local credit union, pick up the phone or do a Google search for online lenders, it’s crucial to understand the different types of institutions that originate mortgages.
- Credit Unions: These membership-only institutions often offer the best mortgage rates for home loans. Memberships used to be restricted to small pools of members like military families or union members, but in recent years many have loosened their membership restrictions. In some areas, you can find a credit union open to all local residents.
- Local Savings Banks: These banks, as opposed to larger nationwide banks, are likely to offer competitive mortgage rates while providing personalized service.
- Large Retail Banks: Like credit unions and local banks, retail banks originate and service the loans they make. These are the huge full-service financial institutions you’re familiar with, like Chase or Bank of America. You’ll sometimes see retail banks and mortgage banks described in a single category called “direct mortgage lenders,” because they loan the money directly to borrowers.
- Mortgage Banks: As their name implies they write and fund mortgages, but then usually sell the loans to other companies for servicing. Quicken is one example of an online mortgage bank.
- Mortgage Brokers: These companies and/or individuals serve as intermediaries between the borrower and a number of different lenders, although they don’t work with direct lenders – you have to get those loans directly from a bank. The best brokers have access to a wide range of “wholesale lenders” and will shop for the best deal on your behalf. That saves the borrower a lot of work, but you’ll usually have to pay the mortgage broker a fee.
If your finances are in good shape with a solid credit score, no red flags on your credit report and no big balances on your credit cards, you may do best going to a local bank or a direct lender. If you have less than stellar credit, though, using a broker may be your best route because they often have access to a wider variety of loan products and lenders.
Understanding Mortgage Products
The aspect of the mortgage process that often confuses many home buyers is figuring out the “right types” of mortgages to consider. Home loans fall into several “either-or” categories, and it’s better to understand them ahead of time instead of relying on lenders to explain them. Let’s take them one at a time.
Conventional Loans vs. Government-Insured Loans
Conventional loans are issued by direct mortgage lenders, like savings and mortgage banks, although brokers will also have access to them. There are fewer requirements placed on conventional mortgage borrowers, who will have the most (and best) options for loan terms and rates, with generally-lower closing costs. Higher down payments are usually required, though, and qualification criteria are stricter.
Government-insured loans (FHA loans insured by the Federal Housing Administration, VA loans for veterans and USDA loans for rural properties) are easier to obtain for those with lower credit scores or poorer credit. They often require a smaller down payment (or even no down payment at all), rates can be lower than conventional offerings, and closing costs can sometimes be rolled into the loan balance.
However, most government-backed loans require you to carry private mortgage insurance, you can’t use them to buy an expensive house because loan amounts are limited, and only certain applicants are eligible for VA or USDA loans.
Fixed-Rate Mortgages vs. Adjustable Rate Mortgages
A fixed-rate mortgage will lock in the same interest rate and monthly payment for the life of the loan, whether it’s 15 years, 30 years, or another period of time. The main reasons to choose a fixed-rate loan are stability and security, since you’ll always know how much your payment will be.
An adjustable rate loan does exactly what its name says – the interest rate (and therefore, the monthly mortgage payment) adjusts automatically, under terms set when the loan documents are signed. Rates are usually tied to major national interest rates at the time of adjustment.
In most cases, an adjustable mortgage starts out with a lower rate and monthly payment, which increases over time unless the loan is refinanced. That can be a bonus for those who expect their earnings to increase over time, but can’t afford a higher conventional mortgage rate to start.
(Avoid balloon mortgages, which may initially look attractive because payments are extremely low. They’ll require you to pay the entire remaining balance, or run the risk of losing your home, when the loan term is up.)
Other Questions to Ask Mortgage Lenders
There’s one more step before actually talking to prospective mortgage lenders: making a list of questions you’ll want to ask them. There’s more to home loans than the interest rate and monthly payment, and if you don’t understand exactly what you’re signing, you could be in for some very unpleasant surprises.
- Is that interest rate the APR? An advertised 4% interest rate may sound great, but it might only reflect the interest that you pay each year just to borrow the loan principal. In truth, you’ll be paying a higher interest rate than that.
The APR, or annual percentage rate, can be significantly higher. It’s the total cost of the loan including interest, loan origination fees, broker fees, “discount points” that can lower your interest rate for upfront payments, and private mortgage insurance. It may also include the loan application fee and homeowners insurance premiums.
Knowing the APRs will let you understand the exact cost of your loan, allowing you to make smart comparisons between lenders. 2. What fees will I have to pay at closing? This allows you to know how much cash you’ll need in addition to the down payment when you’re ready to sign on the dotted line, since closing costs can amount to anywhere between two and five percent of the purchase price. You won’t be able to get an exact number until just before closing, but you should be able to get a loan estimate well before then. 3. Can any of the fees be waived, or combined with my loan amount? There’s nothing wrong with trying to save money. 4. What loan programs am I eligible for? This lets you judge between loans with lower or higher down payments, differing interest rates, and different mortgage terms. 5. How much will I have to improve my credit score to qualify for the best rate that’s available? This won’t be a factor for those who are struggling to qualify at all, but those with good financials may be able to do even better with a slight improvement in their score.
OK, You’re Ready to Get Mortgage Preapprovals
You’ve finally got all the information you need, and it’s time to engage with a company and get preapprovals. They’ll show sellers and realtors that you’re a “qualified buyer,” and give you a firm handle on how much house you can buy and how much it will cost you. A preapproval can usually be issued (in the form of a letter or email) in 1-3 days.
Be aware that a preapproval is not a prequalification; the latter is done simply on a “this is what I make, this is what I owe, cross my heart and hope to die” basis. A preapproval, though requires you to submit financial documentation including social security numbers (for credit checks), pay stubs, bank statements, and information on where your down payment is coming from. It’s a real certification of your ability to buy, based on real data.
But also be aware that it’s not a commitment on your part. Just because a lender pre-approves you, you don’t have to actually take out a mortgage loan with them. You’re free to shop around again when you’re ready to buy a specific house. That’s when you’ll submit an even more detailed mortgage application.
In fact, you’re free to shop around and get several pre approvals – and you should. That will not only give you peace of mind, it will let you compare the terms and rates being offered by all of the lenders you’re seriously considering. And some may offer you loan options that others either don’t or can’t. While you’re not committing to anything when you get a preapproval, the process does help you be sure that you’ve found the right lender and the right mortgage.
So, How Do You Choose A Mortgage Lender To Speak With?
Reviews and recommendations aren’t gospel, but take a look at them before going too far with any lender. If people have posted nothing but horror stories about lenders or brokers, consider that a major red flag.
Local banks often post their teaser rates on the marquees you see as you drive by, or advertise by direct mail or in the newspaper. You’ll also see them posted in the bank you usually do business with – and if you have a business relationship at a bank, you should at least speak with the manager or loan officer there. You can compare those local rates with ones you may find by searching online, and then pick out those which sound most promising.
Consider the rates and mortgage programs suggested or offered by the banks or brokers you speak with, of course, but remember that mortgage lending is a customer service business. If a lender doesn’t get back to you quickly or respond honestly to your questions in the pre approval stage, you can expect the same communications problems when you submit your actual mortgage application and communication becomes even more important.
Finally, if you think you’ve been wronged or lied to by a mortgage lender, file a complaint with the US Consumer Financial Protection Bureau. They’ll work with you and the lender to resolve the issue.
In summary, the right mortgage lender is the one who comes up with the best loan program for you – and just as importantly, someone you feel comfortable with enough to trust.
How Own Up Is Different
Own Up exists to provide the best mortgage shopping experience for everyone from first time home buyers and those looking to refinance their current mortgage, to seasoned borrowers who have been through the process many times.
Own Up is a free-to-use service that provides a unique and powerful shopping experience to help borrowers find and compare rates. Using only a soft credit check (unlike many lenders which use hard credit checks that negatively affect your credit), Own Up can issue pre-approval letters in minutes and check rates across an exclusive network of local lenders and credit unions. Own Up shops for you anonymously, so your only point of contact is your personal, unbiased advisor – that means you don’t have to do the leg work of checking rates at different lenders and fielding sales calls from loan officers at different institutions. Own Up advisors offer a concierge like service, helping borrowers understand and compare their options across a variety of lenders and loan products. When it comes time to lock a rate and formally apply with one of their lenders, your advisor is there every step of the way to ensure the application and approval process goes smoothly.
Need help with the rest of the home buying-process? Check out our complete guide to buying a house.