It would be awesome if finding the right mortgage lender were as simple as swiping right on an app (#lender, anyone?).
But you can’t choose a mortgage lender that way because there are too many moving parts.
Your finances and your lender’s terms and services must match to make it work. Taking shortcuts when it comes to choosing a mortgage lender will likely leave you with a loveless, high monthly mortgage payment.
If you’re only staying in the relationship for the sake of the house, you’ll never be satisfied. You need to know what to look for when you’re looking for The One. 😍
Mortgage Lender: Your Agent for Your Real Estate
A mortgage lender is a financial institution that offers mortgage loans. Each lender has unique guidelines to evaluate your creditworthiness, which builds their confidence in your ability to repay the loan.
Having the right mortgage lender means shopping around and comparing many different suitors until you’ve narrowed it down to one.
Mortgage Lenders Beyond Mortgage Brokers: Tons of Options
Before you select a mortgage lender for your home buying journey, it’s important to know exactly which types of lenders you can recruit because each is unique.
As the name suggests, direct lenders loan money directly to you to fund your mortgage, which can lower your fees. This can be a credit union, bank or major lending company.
Mortgage brokers act as matchmakers between borrowers and multiple lenders. They help you find a lower interest rate – for a fee. Keep in mind that they’re the ones out shopping for the best loans for you.
Correspondent lenders only carry the loan for a short time. Eventually, they will sell it to a sponsor who will take over the risk.
Portfolio lenders originate mortgages and then carry the loan rather than sell it in the secondary market.
Know Your Credit and Take Good Care of It: Tip #1
Your credit score is one of the most important parts of getting a low interest rate on a mortgage loan. You should know your credit score and know what can jack it up or tank it. Many lenders require a minimum credit score of 580.
There are other aspects of your finances worth examining:
- Outstanding loans and debt
- Monthly net income
- Monthly expenses
- Financial goals
Lenders will use your financial information to determine your debt-to-income (DTI) ratio (the amount you owe each month divided by your monthly income).
For conventional mortgages, your lender will want a DTI of 36% or lower, though they may accept a DTI as high as 50%. For a government-backed mortgage, like a Federal Housing Administration (FHA) loan or a Department of Veterans Affairs (VA) loan, the DTI can be as high as 57%.
You can use our calculator to figure out your DTI ratio.
❓ Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!What Is DTI?
🟢 On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.How much can I afford?
🟢 On Track – You’re right on track for your house-buying journey!How much can I afford?
🚨 Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.What Is DTI?
🚨 Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?
Know What Type of Mortgage You Want: Tip #2
There’s more to picking a mortgage than figuring out how long of a commitment (aka payment period) you’re looking for. You’ll want to check out the wide variety of mortgage options in the lending pool to reel in the “best catch” for your unique financial situation.
Your mortgage term is the length of time it will take for you to make monthly payments until the loan is paid off. The most common terms are 15 and 30 years. There are also 40-, 20- and 10-year terms – and even terms as short as 8 years.
A fixed-rate mortgage is exactly what it sounds like: A mortgage with an interest rate that doesn’t change. This type of mortgage makes it easier to plan out your finances and avoid any nasty surprises that may come from wild interest rate fluctuations.
Adjustable-rate mortgages (ARMs)
ARMs are – wait for it – mortgages with interest rates that adjust. You’re typically locked in for a fixed rate for a set period of years, then after that, the rate adjusts to meet the market rate every 6 months or a year.
OK, we’re not gonna lie, ARMs can get a little tricky to wrap your head around because they involve complex finance-speak – like “index,” “margin,” “caps” and “ceiling” – that you might not really care about unless you’re getting one.
An ARM may be the way to go in some very specific cases. You know, like when interest rates are high and will likely go down. Or when you just know your rap career is about to blow up, so you’ll be able to afford your payments if interest rates blow up, too.
Government-backed mortgages are (drumroll, please!) mortgage loans backed by a federal government agency.
“Backed” means that they are guaranteed because they are secured by a federal agency. A guaranteed loan usually means that qualifying for it is easier. You pay a lower down payment (or maybe none at all) and you may be able to skip mortgage insurance. What’s not to love?
There are three main types of government-backed loans: the FHA loan, the U.S. Department of Agriculture (USDA) loan and the VA loan.
If you don’t qualify for a government-backed loan, try to qualify for a conventional loan. Conventional mortgages come in all shapes and sizes. They are not guaranteed by any federal agency, which means the standards for qualification tend to be higher. Regardless of that, some lenders require only as little as a 3% down payment.
Closing costs and down payment assistance programs
If your credit is pristine but you’re short on cash, some programs can help with your down payment or closing costs through grants and other assistance, including some that are tailor-made for first-time home buyers.
There Are Times You Should Seek Approval and a Mortgage Preapproval Is One: Tip #3
A mortgage preapproval is like a dry run of the mortgage prequalification process. It happens before you find a house. Unlike prequalification, the lender does a hard credit check for preapproval and carefully scrutinizes your finances.
How preapproval helps
Once the preapproval process is complete, you’ll receive a letter from your lender that indicates the amount of loan you qualify for. Show this letter to sellers to give you an edge over the competition.
The letter indicates that you’re serious about buying a home. It shows that your creditworthiness has been reviewed and passed the test. Preapproval also saves you time because you’ll already know your purchase limit when you make an offer.
Documents you will need
You’ll need the same documents for a preapproval that you’ll need for a loan application. Now is the time to buy that accordion file and do some serious adulting. You’ll need:
- Your Social Security number
- Bank, savings, checking, investment and other financial account information
- Outstanding debt obligations (credit card, car loan, student loan, etc.)
- Most recent 2 years of tax returns, W-2s and 1099s
- Salary and employer history
- Proof of income
- Documentation of where your down payment is coming from
- Your previous address
Narrowing the Field: Put Them Through an Interrogation
Meeting with your first mortgage lender might feel like “loan at first sight,” but you need to pause before you seal the deal. Like dating, there are other lenders in the sea. This is your opportunity to be a player and explore all your rates and terms before you put a proverbial ring on it.
Keep it casual. Don’t make any commitments until you know you’ve found The One. Meet with several lenders and compare:
- Their payment terms
- Their down payment requirements
- Which lender fees the buyer is responsible for at closing
- Which fees (if any) can be waived or rolled into the mortgage
- Their turnaround times are on preapproval, appraisal and closing
- How well they communicate and how quickly they respond
After you’ve weighed it all out, follow your heart and make your decision.
Love and Lending: It Pays To Be Picky
Don’t leave finding the right mortgage lender to destiny.
Choosing a mortgage lender with the best terms and mortgage options can be the difference between satisfaction and wishing you hadn’t settled.