Before You Choose a Mortgage Lender, Read These Tips
The right lender can save you time, anxiety, and loads of cash. And the right loan officer — the professional who represents the lender — can be a powerful ally when you close on a mortgage. As with any potentially life-altering partnership, it’s important to choose wisely.
Only You Know Which Lender Is Your Type
There are three types of mortgage lenders — retail banks, credit unions, and mortgage banks — as well as mortgage brokers, who compare loan products via a circle of potential lenders to help you find the right one. Before you start narrowing down the candidates, you have to know what you’re looking for, and where to find it. Let’s talk about your options.
What they are: These are your Chases and Banks of America, plus your local banks. They do their own underwriting (investigating your finances), so retail banks, especially the smaller ones, can sometimes offer lower fees and less-stringent credit requirements. If you like to have your accounts all in one place, you may want to use your own bank.
Who you’ll work with: You’ll be assigned a loan officer, who will receive a commission or bonus for writing your loan.
What they are: They’re not-for-profit and customer-owned, so they’re not beholden to shareholders like a bank. Because of that and their not-for-profit tax status, they typically offer more personal service and lower fees. The flip side is less convenience: They have fewer branches and ATMs. And to apply for a loan, you must be a member of the credit union’s community, which could be faith-, employment-, interest-, or union-based, among other things. That said, it’s typically not difficult to become a member; the National Credit Union Administration’s Credit Union Locator is a tool for finding credit unions near you.
Who you’ll work with: As with a bank, you’ll be assigned a loan officer, who will receive a commission or bonus for writing your loan.
What they are: These banks only offer home loans. Many online lenders, like Rocket Mortgage by Quicken Loans, operate as mortgage banks.
Who you’ll work with: A mortgage bank will assign you a loan officer, who will receive a commission or bonus from the lender’s gross fees for writing your loan. An online lender is going to offer less hand-holding.
What they are: Mortgage brokers are essentially personal home loan shoppers — they act as liaisons between home buyers and mortgage lenders to help people find the lowest rates and the best mortgage terms. They’re able to get home buyers the best mortgage rates because they leverage their existing relationships with lenders — something individual home buyers can’t do. By doing the heavy lifting for the borrower, the idea is that they make loan shopping more convenient — and perhaps a bit faster.
Who you’ll work with: A mortgage broker can be an individual agent or a group of agents, who act as independent contractors. In exchange for their services, mortgage brokers typically charge a 1% to 2% fee of the loan amount, which is either paid by the borrower or the lender at closing.
Now that you’re armed with the basics, you’ll want to give yourself time to weigh the options about which lender, exactly, to work with.
It Pays to Shop Around Before You Commit
Over the life of the loan, seemingly subtle differences could add up to tens of thousands of dollars. That money belongs to future you and all your dream vacations, renovations, and remodeling goals. So before you choose your specific lender...
Thoroughly research any retail bank, credit union, mortgage bank, mortgage broker, or online option you’re considering. Make sure you’re clear on what they can offer you. About one in five (21%) home buyers said they regret their choice of a mortgage lender, according to a recent J.D. Power survey. You’re doing your homework so that won’t be you.
Interview lenders. You’re aiming for a shortlist of three.
Don’t be shy about seeking advice. Survey your family, friends, and coworkers — especially the ones who are nerdy about money
Ask your real estate agent for a second opinion. (S)he has experience with reputable lenders, particularly in your city or town.
Now, let’s say you’ve narrowed your list of potential lenders to three candidates. The next step? Finding out whether they will give you a loan.
Seek Out a Lender’s (Pre-)Approval
There’s a big difference between being "pre-qualified" for a loan and being "pre-approved".
Pre-approval means a lender has researched your credit and determined specifically how big a loan you can get. The amount you’re approved for can help you determine your price range, and thus save time and frustration when shopping. In most housing markets, sellers are going to expect you to be pre-approved when you make your offer.
Pre-qualification is an approximation. It's useful if you have no idea about your creditworthiness and would like a snapshot of where you stand.
Getting pre-approval early in the process also gives you an edge over other buyers. Here’s why:
It puts you in a better position when making an offer. A letter of pre-approval provides evidence to the seller and the seller's agent that a trusted financial institution is willing to finance the purchase. They're going to take you more seriously.
It’ll help you move quickly to make an offer when you see a home you want. It's more likely your offer will be accepted — or, at least, you won’t lose out on a bid because you have to go back to the bank to get approved for a loan.
When you’re pre-approved, you’ll receive a loan estimate. This three-page document spells out a future loan’s terms, including:
The interest rate,
The length of the loan,
Estimated costs of taxes and insurance,
How interest rates and payments might change over time, and
Other important financials.
By comparing loan estimates, you can effectively size up your loan options and decide which lender is best for you.
Credit Scores Make a Difference
Borrowers with scores of 760 or higher can typically qualify for the lowest interest rates.
Borrowers with scores below 650 may need to apply for a non-conventional mortgage, such as a Federal Housing Administration (FHA) loan. Backed by the government, an FHA loan requires a minimum credit score of 580 but lets borrowers make as low as a 3.5% down payment.
Borrowers with credit scores below 580 can still qualify for FHA loans, but they’ll have to make at least a 10% down payment. The lower the score, the tighter the requirements become.
Now you're ready to move ahead with one special lender and, at the same time, connect with an officer or broker who can help you select the home loan product that’s best for you.
Then give me a call; we'll take the next steps together to get you a new home.
KIMBERLY VAN HAL | Good to Know®
As a residential agent since 1987,
Kim has helped home buyers and sellers
in the Fargo Moorhead metro area
achieve their real estate goals.