January 11, 2017
Finding the right home loan – and a credible lender willing to offer it – isn’t easy. Since the Great Recession of 2008, mortgage interest rates have hovered near historic lows and the competition for home loans has grown fierce among the growing list of mortgage lenders.
It used to be that finding the bank with the lowest interest rate was about all the shopping necessary. Now, online sites have joined mortgage brokers, national banks, community banks and credit unions as sources for finding the right loan. Each one offers a sampler plate of choices with so many different terms, conditions and interest rates that it can make your head spin.
So, how do you find a lender willing to work with you to create the right mortgage?
The first step is a common-sense approach: ask people you trust.
Seek advice from friends, family members and people at work who recently were in the market for a home loan. Find out if there is a common lender and home loan that people favor.
Where to Find a Mortgage Lender
- Mortgage brokers. These are “the middleman” who matches the borrower to the lender. These are independent brokers that work with a variety of lenders. They will gather information about you, assess how much you can borrow, and what type of loan would work best for you, then submit the information to a lender for approval. These brokers, also called correspondent lenders, have specialties and usually sell the loans they write to large financial institutions.
- Credit unions. You might consider joining a credit union. These are nonprofit lenders owned by their members. You must be a member of the credit union to get a loan and sometimes there are limitations on who can join. Credit unions usually have lower interest rates and fees because they don’t have to show a profit. You also can get more personalized service.
- Large commercial lenders typically have home mortgage departments and employ mortgage bankers, also called loan officers, to process mortgages. They focus specifically on home mortgages and allow you to learn more the home loan process by visiting a branch office or contacting the lending department by phone. Examples of large commercial lenders are Wells Fargo, Chase and Bank of America.
- Savings and loans. These are state and federally-chartered lending institutions. They were once synonymous with home loans. They’ve dwindled in number during the past few decades, but are still a factor in the business. Like credit unions, they often focus on specific communities and might offer personal service unavailable from larger lenders.
- Online lenders. These are the new players in the game and they’re becoming more and more aggressive. They started out as the “go-to” place for consumers with average or poor credit, but now they’re lowering to levels that can make them competitive with banks and credit unions. Examples of online mortgage lenders are Sofi and Rocket Mortgage.
So now that you know where to go for comparative shopping purposes, you must decide exactly what kind of mortgage loan to get. Home loans come in many flavors with widely varying terms. The classic 30-year, fixed-rate loan used to be the standard, but over the years, loans with 10-, 15- and 20-year repayment schedules have become common. Some have mortgages with rates that adjust periodically, or have payment schedules that start low, then balloon after several years. There also are VA and FHA loans available, for those who qualify.
The best way to decide which loan fits your needs is research. Read as much as you can about how mortgages work, visit websites that compare terms and mortgage lenders and consider finding a mortgage broker who can offer advice on what might work best for you.
Be sure you know all your options before you start looking for a house. You might consider using a mortgage calculator to estimate how much home you can afford, or you could ask a lender for help. In many instances, lenders will prequalify you to borrow a certain amount – a step that takes some of the uncertainty out of the process and make your offer more attractive to the seller.
Consider how much money you’ll be able to apply to the purchase. This amount, called the down payment, can make a big difference in how much you’ll need to borrow. In most cases, if your down payment covers 20 percent of the sales price, you can avoid paying mortgage insurance, something lenders often require to avoid losses if you default on your loan.
Also, review your credit score and, if you have time before you begin house hunting, take steps to improve it. If you’re having trouble with credit card bills, consider seeing a credit counselor before beginning your search. The higher your credit score and the lower your consumer debt, the more likely you are to qualify for a mortgage with a low interest rate.
Once you’ve improved you credit score, explore the lending market.
Comparison Shop for Mortgage Loans
Once you have a lender – or lenders — in mind, compare the rates for different loans. Understand the pros and cons of longer and shorter term loans, adjustable rate mortgages and balloon loans. Also become familiar with government-backed loans through the Federal Housing Administration (FHA) and the Veterans Administration. When you decide the kind of loan works best for you, start comparing interest rates.
Finally, ask a lot of questions. Find out how long it would take to have a loan approved and what fees, known as closing costs, you will need to pay when you buy a home. Find out whether the fees can be rolled into your mortgage loans or whether you will need to pay them out of pocket.
Before you sign anything, always review the terms. Remember, a mortgage loan can be a decades-long commitment. Failing to live up to the terms could cost you the home, so know what you’re getting into.
Nicastro, S. and Kearns, D. (2016, August 2). 5 Tips for Finding the Best Mortgage Lenders. Retrieved from: https://www.nerdwallet.com/blog/mortgages/5-tips-finding-mortgage-lender/
Greene, M. (2013, March 26). A Look Behind the Curtain: How to Choose a Mortgage Lender. Retrieved from: http://www.forbes.com/sites/moneybuilder/2013/03/26/a-look-behind-the-curtain-how-to-choose-a-mortgage-lender/#66f333375810
Stewart, M. (ND) How to Choose and Work with a Mortgage Broker. Retrieved from: http://www.nolo.com/legal-encyclopedia/how-choose-work-mortgage-broker.html