To get a jump-start on the mortgage loan process, use these five tips to find the best lender for you.
1. GET YOUR CREDIT SCORE IN SHAPE
Not everyone can qualify to buy a home; you have to meet certain credit and income criteria to assure mortgage companies you can repay your loan.
A low credit score signals that lending to you is risky, which means a higher interest rate on your home loan. The higher your credit score and the more on-time payments you make, the more power you’ll have to negotiate for better rates with potential lenders. Generally, if you have a score under 580, you’ll have a tough time qualifying for most types of mortgages.
To build your credit score, first make sure your credit reports are accurate and free of errors. Get your report from the three major credit bureaus: Equifax, Experian and TransUnion. Each is required to provide you with a free copy of your report once every 12 months.
Next, try to pay off high-interest debts and lower your overall level of debt as quickly as possible. By lowering your debt, you’ll improve your debt-to-income ratio. Paying off credit cards and recurring loans before you buy a home will also free up more money for the down payment.
2. KNOW THE LENDING LANDSCAPE
It’s difficult to discern who the best mortgage lenders are in a crowded field. Here are the most common types of lenders you’ll choose from:
- Credit unions: These member-owned financial institutions often offer favorable interest rates to shareholders. And many have eased membership restrictions, so it’s likely you can find one to join.
- Mortgage bankers: Bankers who work for a specific financial institution and package loans for consideration by the bank’s underwriters.
- Correspondent lenders: Correspondent lenders are often local mortgage loan companies that have the resources to make your loan, but rely instead on a pipeline of other lenders, such as Wells Fargo and Chase, to whom they immediately sell your loan.
- Savings and loans: Once the bedrock of home lending, S&Ls are now a bit hard to find. But these smaller financial institutions are often very community-oriented and worth seeking out.
- Mutual savings banks: Another type of thrift institution, like savings and loans, mutual savings banks are locally focused and often competitive.
You can, and should, check if each lender you consider is registered in the state you’re shopping in through the Nationwide Multistate Licensing System Registry. Also, search the Better Business Bureau for unbiased reviews and information.
3. COMPARE RATES FROM SEVERAL MORTGAGE LENDERS
This is where homework and a lot of patience come into play. As noted, there are all kinds of mortgage lenders — neighborhood banks, big commercial banks, credit unions and online mortgage lenders. You have more options than ever.
You can search for the best mortgage rates online to start. Keep in mind that the rate quote you see online is a starting point; a lender or broker will have to pull your credit information and process a loan application to provide an accurate rate, which you can then lock in if you’re satisfied with the product.
Once you have several quotes in hand, compare costs and decide which one makes the most financial sense for you. Use your research as leverage to negotiate for the best mortgage rates possible.
While there’s more to finding a good lender than picking the lowest rate, that doesn’t mean it isn’t important. The total interest you pay on over the life of the loan is a big figure, and a low rate can save you thousands of dollars.
4. ASK THE RIGHT QUESTIONS
Picking the right lender or broker to work with can be tricky. Narrow your choices by asking for referrals from friends, family or your real estate agent, or by reading online reviews. Once you have some names, it’s time to ask:
- How do you prefer to communicate with clients — email, text, phone calls or in person? How quickly do you respond to messages?
- How long are your turnaround times on preapproval, appraisal and closing?
- What lender fees will I be responsible for at closing? (Fees may include commission, loan origination, points, appraisal, credit report, and application fees.)
- Will you waive any of these fees or roll them into my mortgage?
- What are the down payment requirements?
Note: If you’re looking for low down-payment options, a loan backed by the Federal Housing Administration, Veterans Affairs or Department of Agriculture might be your best bets.
Also, check with your mortgage lender or broker if buying points to lower your rate makes sense. With this strategy, you’re basically paying some interest upfront in exchange for a lower rate on your mortgage. Generally, one point equals 1% of the loan amount. For example, on a $200,000 mortgage, 1 point would cost $2,000 and could lower your interest rate by 0.25%.
This might be a good cost-saving move if you plan on living in the home for a long time. “Even though you pay additional points upfront to do so, you can save thousands of dollars in interest expense over the life of your loan,” says James Dowd, a San Francisco-based financial advisor and accountant.
5. READ THE FINE PRINT
Principal and interest payments on a mortgage aren’t the only costs of homeownership; you should ask your lender about other costs such as estimated closing costs, points, loan origination fees and transaction fees — and ask what each fee includes. If you are unsure of something, ask the lender for an explanation.
Some mortgage lenders will require an “earnest money” deposit to start the loan process. However, be wary of contracts specifying that the earnest money will be kept regardless of whether the lender offers a loan or the loan closes, says Kevin Stophel, a financial planner and advisor in Chattanooga, Tennessee. Ask the lender to specify under what circumstances the earnest money will be kept, and if the answer is vague, keep shopping around.
Don’t forget to examine the fine print of your loan documents, particularly the initial Loan Estimate and the Closing Disclosure. These will tell you the exact finance terms, who pays closing costs, what items are and aren’t included in the home, whether there’s a home inspection contingency, the closing date, and other important details.