Homeownership has always been a treasured part of the American Dream. Almost 63 percent of Americans own their own homes (source). If you are thinking of joining the crowd, you need a solid mortgage lender by your side. If you have already started searching for a good mortgage lender, you already know there is no lack of candidates from which to choose.
Take your time.
Buying a home is a long-term commitment. In the United States, mortgages often last longer than marriages. While the average marriage in the United States lasts 8 years before ending in divorce (source), you will probably have to make mortgage payments for 15 to 30 years. Pick the wrong lender or the wrong type of mortgage, and it could cost you your home. Choosing the right mortgage lender is not just about finding the lowest interest rate. Cheap rates are great but you also want a company that has a staff of professionals with the training and expertise required to make your home purchase a success.
This article provides six tips that will help you find the best mortgage lender.
Understand the mortgage lending market
The first step to choosing a good mortgage lender is to know what your options are. It helps to know who are the players in the mortgage lending field. These are the main types of mortgage lenders:
Mortgage bankers. These are bankers who work for a single financial company and prepare loan packages for their underwriters to consider. Mortgage bankers finance their mortgage loans by either using their money or funds borrowed from warehouse lender. Loan origination fees are the primary source of income for mortgage brokers. Once you sign the mortgage, they may sell it to another financial institution or pass on the servicing rights to another company.
Credit unions: These institutions are member-owned financial cooperatives that are founded and operated by members. The profits they generate are also shared between members. They offer similar services to banks but haver a smaller selection of financial products. However, their loan origination fees are often lower and their loans are easier to qualify for.
Correspondent lenders: Correspondent lenders are lenders that have the funds and resources to originate mortgages in their own name but will then sell them off to larger financial institutions.
Mortgage brokers: Mortgage brokers are not lenders. Instead, they are intermediaries between buyers and lenders. A good broker can help you access a variety of quotes from different lenders without having to apply with each lender separately. A good mortgage broker can help her clients save money on lower rates and fees. Having said that, you can save yourself the broker fee by doing some searching of your own. SuperMoney’s home loan search engine makes it easy to filter lenders by the features that matter the most to you.
SuperMoney Tip: Beware of mortgage brokers who operate as mini-correspondent lenders. Mini-correspondent lenders are salespeople for larger banks who charge a commission for setting up loans but rarely provide additional value or savings to their clients. Some brokers operate as mini-correspondent lenders to bypass the regulations and consumer protections that apply to mortgage brokers (source).
Don’t assume anything. Ask first. Sign Later
As with marriage, good communication is key to a successful relationship with your mortgage lender. Good communication starts with the interview process, which should never be rushed. A good lender will have a clear and accurate picture of your wishes and your financial situation. Communication should also include updates on the status of your loan applications and any related activity as the process goes on.
Here are some of the questions you may want to ask to be sure you understand the process and ensure that everything is on the up and up:
- Are you licensed to do business in this state?
- To what professional organizations do you belong?
- What loan programs do you offer?
- Tell me about your downpayment requirements?
- What documentation will you require from me?
- How long does your loan process generally take?
- What lender fees am I required to pay at closing? Can you roll these fees back into the mortgage?
- How do you typically contact your clients?
- Can you provide customer references or closing statements from your last three loans?
- How and when will you earn income from this loan?
- Can I have a Good Faith Estimate right away?
- Do you get paid on points or commission?
Recognize the red flags of a bad lender
Not every mortgage lender is reputable. Here are some typical signs that you need to look elsewhere:
Think twice if your lender
- Does not take time to get a good picture of your financial situation.
- Quotes a price without first finding out about loan size, your creditworthiness, your downpayment, and how you intend to use the property.
- Does not check multiple loan products to find the best rate.
- Fails to keep in contact with you.
- Does not openly disclose all applicable fees and costs.
If you observe any of these warning signs, back away from the deal.
How can a pre-approval help you?
A pre-approval is a written statement from a potential lender that states the loan amount and terms you could expect if you applied for a mortgage. It is always a good idea to get a home loan pre-approval before you actually go house-hunting. Why? Pre-approval lets you know how creditworthy you are and how much money you can borrow. Armed with this knowledge, you can narrow down your search for a home and avoid disappointment.
Additionally, a pre-approval gives you a certain amount of leverage in a negotiation process with a seller because it shows you are a serious buyer. In some cases, asking for a pre-approval can be a painful but useful reality check that lets you know you need to save more money, increase your income, or improve your credit before buying a home.
Improve your credit score before you shop for a mortgage
Purchasing a home is probably the biggest single financial decision you will make in your life. It pays to be prepared. Buying a home is not for everyone. You need to meet certain eligibility criteria that will generally include having a decent credit score. Even if you find a lender that will approve your loan with sub-par credit, you’ll pay for it in higher rates.
Read this article to find out how much you can save in interest payments when you have good or excellent credit. To give you an idea, a homebuyer with poor credit (<620) can pay nearly $200 more in monthly payments than someone with excellent credit (>760) on the same $216,000 30-year fixed rate mortgage. That is a total saving of more than $71,090 — more than a third of the value of the property — just for having a higher credit score.
Compare rates from several lenders
This can be the most frustrating part of buying a home. It can be tempting to go for the first lender that pre-approves your application. Always ask for a full estimate of the terms and costs from every lender you approach. Once you have a range of options to choose from, compare the costs and terms of each offer. Although lower interest rates and fees should be your main goal, you also need to consider the reputation and financial stability of the lender you choose.
If you’re interested in checking out the bigger players in online mortgage lending, we have already done the heavy-lifting for you. Click here to read expert and consumer reviews on the best online mortgage lenders.