How To Choose A Mortgage Lender

Selecting a mortgage lender is a crucial step in purchasing your dream home. In this article, we’ll discuss loan options, types of mortgage lenders, and frequently asked questions that may arise during the process. From organizing your finances to preparing the required paperwork, this comprehensive guide ensures you’ll be prepared when choosing a mortgage lender.

How To Choose The Best Mortgage Lender

With such a wide range of mortgage lending options available to you, it’s important to have the necessary information before making such an important decision. Here are six things you should know before selecting the right mortgage lender:

#1. Organize Your Finances

Mortgage lenders will review your financial paperwork to determine your eligibility. Key factors such as your credit score are evaluated by mortgage lenders to examine what interest rates and loan terms you may be eligible for. Building savings for a down payment and other fees related to buying a home will put you in a position not only getting your mortgage approved but also to negotiate better terms when shopping for a mortgage. By organizing your financial documentation, reviewing your credit score, savings and debt-to-income ratio, you will ensure a smooth mortgage process.

#2. Know Your Loan Options

Deciding which mortgage is right for you can impact your budget, long-term financial goals and homeownership experience. By evaluating the different types of home loans, loan terms and interest rate options, you can better prepare yourself to make a decision that best suits your needs and financial situation.

Conventional loans: A loan that is not insured by a government agency such as the Federal Housing Agency (FHA), the Department of Veteran Affairs (VA) or the United States Department of Agriculture (USDA).

Government-backed loans: Government-backed loans allow home buyers to purchase homes with smaller to no down payments.

Jumbo loans: Jumbo loans are loans that are valued higher than the conventional conforming loan limits. These limits are set by the FHFA.

Fixed-rate mortgages: These loans include monthly mortgage payments that maintain the same interest rate for the life of the loan.

Adjustable-rate mortgages (ARMs): A type of loan with an interest rate that can periodically change, usually after an initial fixed-rate period, often resulting in fluctuations in monthly mortgage payments.

#3. Prepare Your Documents

Purchasing a home and locating a mortgage lender requires a good amount of documentation. These documents could include proof of identification, income, salary and employment, tax returns and more.

Preparing these critical documents ensures a more efficient home buying process. It also helps to be sure your documentation is accurate and up to date. Oftentimes delays in this process can be a result of inaccurate or absent documentation. Always presenting well-prepared documentation accelerates the closing process and reduces stress.

#4. Get A Preapproval

Preapprovals are evaluations executed by mortgage lenders that help determine exactly what you can afford. This conclusion is reached after reviewing your debts, assets, credit history and more.

Preapprovals make it easier for you to establish a practical budget and plan out your financial commitments. This thorough review of your financial history also highlights any issues that need to be addressed in order to speed up the home buying process. Being this aware of your financial limitations puts you in a better position to negotiate a price that you consider feasible.

Getting preapprovals is a smart choice to make prior to house hunting. It shows a level of preparation that separates you form other homebuyers, which makes mortgage lenders more willing and eager to help you.

#5. Compare Multiple Mortgage Lenders

Comparing mortgage rates effectively helps you find the best and most accurate rate, which could ultimately lead to saving thousands of dollars long-term. By comparing multiple rates, not only are you getting competitive terms that align with your personal financial goals, but you’re also able to make a more educated decision regarding a mortgage to serve your financial plans. By exposing yourself to multiple mortgage options, you become much more familiar with key details that some may overlook, such as hidden fees, changes in interest rates and details about your rights.

When searching for a mortgage lender, ask each lender you interview how much interest you’d be paying on your loan if you went with them. More specifically, ask each potential lender about the annual percentage rate (APR), because it provides insight into the full cost of borrowing money. The APR includes both the interest rate and the fees that the lender charges to originate the loan.

#6. Read The Fine Print

When embarking on the home buying journey, the paperwork can be intimidating. This documentation is often riddled with essential information that mortgage borrowers won’t want to miss but may easily skim through.

For instance, a loan estimate is a crucial document you would receive when purchasing a home and establishing your mortgage. This three-page document breaks down the terms and important details regarding your mortgage. The first page includes basic loan information, loan terms and the cost at closing. The second page discusses the loan cost and the amount needed in order to close. Finally, the third page shows comparisons and other considerations. This document is certainly a lengthy, tedious read, however, reading the fine print could be how you learn about hidden fees, potential changes in interest rates and details about your rights.

Documents like loan estimates contain vital information that borrowers can easily miss. It’s important to always read the fine print to be fully aware of your position.

Where To Get A Mortgage

Like houses, mortgage lenders come in many shapes and sizes. Choosing the right lender starts with understanding the different types of lending institutions and networks, how to find them and which type might work for you.

Online Lenders

Online lenders are one of many kinds of nonbank mortgage lenders. Online lending allows mortgage borrowers to complete the mortgage process entirely online. Known as a direct lender, online lenders are lending institutions that can provide mortgage loans to borrowers without any intermediaries like mortgage brokers. This method is great for mortgage borrowers looking for convenience and accessibility. Online lenders have streamlined processes that result in accelerated approvals in comparison to traditional lenders.

Mortgage Brokers

A mortgage broker is not a type of lender, but rather an intermediary who connects borrowers with mortgage lenders. Brokers carefully review your financial profile and curate a loan that would best fit the borrowers’ financial capabilities. Factors such as income and credit score are evaluated before submitting the loan for approval from mortgage lenders.

Mortgage brokers are useful resources when a home buyer intends to purchase a home but could use some extra assistance ahead of the mortgage process. Since mortgage brokers work closely with both lenders and borrowers, they can help you prepare your paperwork, understand what you’ll need to get approved for a mortgage and how things like your credit score could impact your eligibility for a mortgage.

Mortgage brokers also have access to a wider range of resources and mortgage lenders. Widening your option with the aid of a mortgage broker grants the opportunity to find more lenders that might more adequately fit your needs. By working with a knowledgeable broker, you can save yourself lots of time and effort. Mortgage brokers know every detail of the mortgage process and prioritize their clients’ financial goals.

Banks Or Credit Unions

Similar to banks, members of credit unions can open checking accounts, savings accounts and mortgages. In fact, over half of the loans that credit unions issue are mortgage loans. Being a member of a credit union means you are a part of a local community, which typically grants you access to other financial services, products and other benefits. The main drawback to using a credit union has to do with their membership exclusivity. Many times, they only cater to a certain subset of the population. For example, some credit unions only service military members and their families.

Taking out a mortgage with a bank ensures a well-structured and secured home buying experience. Banks provide diverse mortgage options that can suit anyone’s needs. Taking out a mortgage through a bank means partnering with a well-trusted and experienced institution. Banks have an established reputations that include a smooth, clear experience.

Taking out a mortgage via a bank or credit union is a great option for those looking for more personalized service as well as flexibility. Both provide a wide range of mortgage selections, including fixed-rate, adjustable-rate and specialized loans. These institutions cater to a client’s needs and offer valuable financial expertise along the way.

Questions To Ask Your Mortgage Lender

Even if you think you have a good grasp on how to choose a lender, keep asking questions throughout the process to ensure you're not missing anything. Here are some common mortgage questions you may want to ask your lender:

Are There Loan Prepayment Penalties?

Some lenders charge a prepayment penalty if you pay off your loan before the term is complete. This helps them make back some of the money they lose on interest payments when you pay your loan off early.

What Are the Different Fees Included In My Loan?

There are a number of fees associated with buying a house and taking out a mortgage, like the loan origination fee we mentioned earlier. Be sure to ask your lender to list all fees associated with your loan.

What are discount points and how do they work?

Discount points are an upfront fee that reduce the cost of your interest rate. Mortgage borrowers can choose to pay for these points prior to taking out a mortgage. It’s important to weigh the upfront mortgage cost and your potential long term-savings.

What types of closing fees should I expect when I finalize my mortgage?

When taking out a mortgage or refinancing a loan, closing costs are a set of expenses you pay when finalizing the real estate transaction. These expenses typically encompass various fees including the appraisal, title search and loan origination charges.

Finding A Mortgage Lender FAQs

The mortgage process is riddled with questions and uncertainties. Here, we’ve compiled a list of some of the most frequently asked questions about finding a mortgage lender.

When should you start looking for a mortgage lender?

Although the home buying process can vary in duration, on average the home buying process can take anywhere between 4 – 6 months. It is recommended that you start looking for a mortgage lender as soon as you’ve determined your budget and eligibility for a mortgage to enter the house hunting process ready and prepared.

What should I look for when searching for a lender?

It’s important to prioritize your own needs when searching for a mortgage lender. In addition, be sure to hone in on lenders with good rates, terms that you agree and are satisfied with, as well as transparent fee structures. Reviews are great resources to ensure you have found the right mortgage lender for you.

Is it better to get a home loan through a lender or bank?

Taking out a mortgage with lenders versus banks each have their own advantages. Mortgage lenders typically have much more flexible eligibility criteria, more competitive rates and overall more accommodating to unique financial situations. Meanwhile, getting a mortgage through a bank makes managing your finances and mortgage much easier, as both services are in the same place. Weigh your options by comparing offers from several lenders and banks to find your right fit.

The Bottom Line

Choosing a mortgage lender might not be the most exciting endeavor, but it is critical to a successful home buying process. Be sure to weigh all your options, as there are plenty. Be sure to ask as many questions as possible to be knowledgeable and prepared ahead of taking out a mortgage. Ready to begin this process? Get a start on the mortgage application and your journey to homeownership today!