Choosing a mortgage lender can be confusing, so where should you start when you are ready to find financing for your home?
How do you prepare before choosing a mortgage lender?
Ideally, before making an offer on your dream house, you will get a mortgage pre-approval. If you take this step first, the realtor and seller of the house will know that you are serious about buying the home. A mortgage pre-approval gives you some negotiating power, and helps smooth the home loan process. Of course, you do not have to take this step, but you will find that it eases the way for you considerably if you choose to do so.
Whether you want to get a mortgage pre-approval or not, the first step to preparing to apply for a mortgage loan is to check your credit score. The higher the score, the more bargaining power you will have and the lower your interest rate is likely to be. Here is a general estimate of how your credit scores will impact your interest rate:
- Excellent scores (760-850) net the lowest rate available.
- Very good scores (700-760) may get you a rate approximately 0.25 percent higher than the lowest rate available.
- Good scores (600-699) may get you a rate approximately 0.5 percent higher than the lowest rate available.
- Moderate scores (620-660) will cost you 1.5 percent more than the lowest rate available.
- Credit scores lower than 620 will mean that your interest rates go up 2 to 4 percent or more. In some cases, you may not qualify for a mortgage loan at all with credit scores lower than 580.
Ensuring that your credit is in pristine shape can save you thousands of dollars over the course of your loan. Even a 1 percent difference in your interest rate can make a huge difference over time. For example, suppose you are financing $200,000 at 4.0 percent interest for a 15-year term. Over the course of the loan, you will pay $66,288.00 in interest.
Now, suppose you finance the same $200,000 for 15 years at an interest rate of 3 percent instead. You will pay $48,608.80 in interest. By financing for just one percent less, you save $17, 679.60 over the course of your loan. Considering this, it is easy to see why your credit score is so important.
If your credit scores are lower than 600, you may want to consider waiting a bit to purchase a home. The best course of action is to raise your credit score by paying off debt before you apply for a mortgage loan.
Are there different types of mortgage lenders?
Once your credit scores are 600 or above, you can begin your search for a mortgage lender with confidence. There are different types of mortgage lenders.
Banks and credit unions: Banks typically have a loan department which offers mortgage loans in addition to other types of loans. Because banks are not simply in the business to fund mortgage loans, you may find that banks do not offer many different types of mortgage loans. Credit unions also have loan departments, and often offer more favorable interest rates than some other types of lenders because they are non-profit organizations owned by their members.
Correspondent lenders: The most common type of correspondent lender is a local mortgage loan company makes your loan and then likely sells your loan to a larger direct lender like, for instance, Wells Fargo or Chase.
Savings and loan associations or mutual savings banks: In some communities, you can find these lenders, who are usually very community-focused and provide favorable rates for locals.
Mortgage companies: Mortgage companies work with multiple lenders to find the right fit for each borrower, and generally offer a variety of mortgage loan options based on the needs of the borrower.
What do mortgage brokers do?
Mortgage brokers work with different types of lenders and can often offer a wider variety of loan types than your local bank may be able to offer. A good mortgage broker will:
- Talk with you about your financial situation and goals.
- Locate and explain your financing options in detail.
- Work with you to get a mortgage pre-approval.
- Help you complete your loan application and documentation.
How can you compare different mortgage companies?
There are two main areas of comparison that are important when choosing a mortgage company. The first is the simplest. When you talk with a mortgage company representative, do you feel that he or she is really listening to what you have to say? Are you comfortable asking questions? Does your lender answer all your questions clearly? Is the lender professional and courteous to you? If you can answer “yes” to those questions, put this lender on your short list for consideration.
The second area of comparison is the cost associated with your loan. Getting a Good Faith Estimate from several lenders will help you compare important costs such as interest rate, terms, closing costs, and so on. Examining loan estimates carefully will help you narrow down your lender choice to the right lender for you.
To help you to make these comparisons, your prospective lender should provide you with a Good Faith Estimate, which is a detailed list of estimated costs, including:
- Settlement or closing costs including loan origination fees, which lenders charge for processing your loan paperwork and underwriting fees, which cover the cost of evaluating your loan application.
- Appraisal fees and home inspection fees, if applicable.
- Title insurance, which protects the lender if a title issue is discovered after the loan is made.
- Property taxes.
- Attorney fees for title search, deed preparation, and court filing fees.
- Interest rates.
- Partial month interest.
- Credit check costs.
- Hazard and property insurance rates.
Getting a Good Faith Estimate from several lenders will help you more accurately compare the actual costs of mortgage loans.
What questions should you ask before choosing a mortgage lender?
Remember that your mortgage lender’s job is to work with you to get the best possible mortgage loan for your situation. You should therefore feel free to ask your lender about anything for which you need clarification. If you cannot talk freely with your mortgage lender, it may be that you need to find another lender with whom to work.
Here are some common questions that will help you choose your lender wisely:
- Are you licensed to do business in this state? (This question applies to mortgage brokers specifically. Bank employees and loan officers do not have to have a license.)
- Do you belong to the National Association of Mortgage Professionals? (While this is not a requirement, if your mortgage professional belongs to this organization and state professional organizations as well, that is a good sign that you are dealing with a reputable lender.)
- What loan programs do you offer?
- How much of a down payment will you require?
- What are the costs associated with the loan you are offering me?
- Can I have a Good Faith Estimate right away?
- How long does the loan process usually take?
- Can you provide me with references from your three most recent clients?
- How will you communicate with me throughout the loan process?
- Will your company service my loan, or will another company service the loan?
A good mortgage lender will answer these questions and any others that you may have during the course of your loan application. If your lender is not able to answer these questions or seems unwilling to do so, look for another lender.
What questions will a good mortgage lender ask you?
A good mortgage lender will talk with you at length before discussing the particulars of any loan product with you. Your lender will ask questions about your financial situation and goals. Your lender will also ask you what you are looking for in terms of a monthly payment amount for your mortgage loan, what kind of down payment you are able to make, and what your usual monthly expenses are.
He or she will ask for documentation to verify your income, such as recent paycheck stubs, W2s, or tax returns. Your lender will also ask for verification of your identity, in the form of a photo ID, such as a driver’s license or state-issued ID, and your social security card.
Finally, your lender will ask if you have any questions or concerns about the lending process before he or she continues with your loan application.
How can you look to find a good mortgage lender?
One of the best resources you have for finding a good mortgage lender is your family and friends. If you have relatives or friends who have recently been through the lending process and had a pleasant experience, they may be able to provide you with some good advice about their mortgage lender.
Your realtor may also be able to make some recommendations. Realtors work with several lenders, and may be able to tell you about local companies that have helped their clients in the past.
Your bank or credit union may be a good starting point for finding a mortgage loan. If you have an established relationship with your banking institution, you may find it advantageous to check out your bank’s loan packages.
You can also look online right here at SuperMoney for a mortgage lender. Exploring online mortgage rates and loan offers will give you a wealth of information you can use when you find the right lender for you. Online reviews can help you weed through the lenders.
Whichever way you choose, you should always be willing to ask questions of your lender to be sure you understand everything involved in the home loan process. Additionally, you should take the time to carefully read all documents before you sign them, to ensure that you are well aware of all the terms and conditions of your mortgage loan.
To start your online search for a good mortgage lender, take a look at our unbiased reviews of mortgage companies. You can find the best mortgage companies here.