How to choose a mortgage lender

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Everything you need to know about choosing the best mortgage loan: mortgage types, hidden fees, and where to look

In order to find the best mortgage loan, first-time home buyers need to assess more than just interest rates and credit scores. It’s important to consider a variety of factors including who the mortgage company is, what types of mortgages they offer, and how much closing costs are. 

Although many aspects of the mortgage application process are similar across lenders, there are some key differences you should take into account before making a final decision. 

Small fee variations among loan estimates can make a big difference in final cost. Buying a $250,000 home with an interest rate just one-quarter of a percent higher or lower than what a different mortgage might offer translates into $10,000 in total over the life of the home loan. 

The idea is to identify a mortgage lender that will not only help you find what you think you need, but also inform you of the options and loan nuances you didn’t know existed. Unless you work directly with mortgage loans, there’s no way to know for sure what to look for. That’s why it’s important to ask the right questions and speak with a professional who is honest and willing to help. 

What you’ll learn

  • Where to get a mortgage loan 

In this article you’ll find out where you can secure a home loan for your first residential property. Banks are just one of many lenders offering mortgage loans. There’s a lot of mortgage companies offering different kinds of mortgages. 

  • How to compare mortgage offers 

We’ll tell you what aspects of the mortgage loan you need to assess in order to make an informed decision and, ultimately, choose the right mortgage loan for you.

  • What questions to ask a lender 

It’s hard to know what lenders offer if you don’t ask the right questions. Keep reading to make sure you’re prepared for the conversation with your loan officer.

Where to get a mortgage loan

Not all homebuyers know that there are many mortgage companies offering a variety of loan products and services. You can apply for a mortgage loan at a local bank branch where you have a checking account; a mortgage broker that works with several lenders; or even an online lender. 

Understanding loan origination

Lenders that accept your mortgage application and lead you through the loan process from start to finish are mortgage loan originators (MLOs). These entities are the original lenders for the mortgage and work with the borrower right up until the closing phase. 

Loan origination is the process by which a borrower applies for a new loan and a lender processes that application. A loan originator won’t make the final decision on your loan application or decide how much to lend you. Their job is to collect your financial information, evaluate what loan options make sense for you, negotiate rates, and submit your application for underwriting. 

The lender’s underwriting department is in charge of evaluating your risk as a borrower, as well as approving or rejecting your application. Below you’ll find a comprehensive list of the different types of mortgage lenders and the advantages to working with each. 

Conventional banks

The most common type of mortgage lending institution is a traditional bank. Aside from offering customers checking and savings accounts, they also offer a variety of consumer loans and potentially, investment services. 

You can apply for a bank mortgage loan either online or in person. Your application will then be assigned to a loan officer for review. Prospective homebuyers who have existing accounts at their local branch may prefer to go through a conventional bank as opposed to a larger institution. In this way, they receive personalized service from bank representatives that are already familiar with their finances.

Credit unions

Similar to banks, credit unions have a variety of financial offerings including savings and checking accounts, as well as loans. With more than 5,100 federally insured credit unions across the US, borrowers have multiple opportunities to secure a mortgage loan through this kind of lending institution. 

More than half of the loans issued by credit unions are mortgages. The only catch is that in order to qualify for a mortgage loan, you need to be a member. As a member of a credit union you have something called a “common bond” with others. This means you share similar financial needs or preferences with a particular community. 

Credit unions exist to serve the basic financial needs of a specialized group of people, often grouped together by geographic region, prior employment, or governmental affiliation. You may prefer applying for a mortgage at a credit union if you’re already a member of one, or plan to become one soon. 

Non-bank mortgage lenders

More mortgages are issued with non-bank mortgage lenders than anywhere else. Non-bank lenders are classified as companies that offer their services exclusively online. Such financial entities may work exclusively with mortgage loans, or offer a variety of consumer loans. 

The main advantage to working with a non-bank mortgage lender is speed. Some of the most well-known mortgage companies in the US have made a name for themselves by offering quick turnaround times. 

In addition to a faster mortgage process, non-bank lenders also offer more leniency in regards to credit scores. They are also more willing to work with non-conventional loans (such as FHA, VA, and USDA loans) than conventional banks. 

Mortgage brokers

If you’d prefer to have someone research multiple lenders on your behalf, you may want to work with a mortgage broker. Mortgage brokers review offers from a large network of lenders and advise you on which loan offer to choose. They also act as intermediaries between you and the lender, gathering all necessary financial documents and providing the lender with an underwriter. 

Going through a mortgage broker typically comes with an upcharge because brokers earn commission on mortgage loans (similar to real estate agents on home sales). Compare commission rates among mortgage brokers to avoid paying any surprise fees at closing. 

Mortgage marketplaces

Prospective homebuyers can also review quotes from multiple lenders themselves on mortgage marketplaces. Mortgage marketplaces offer borrowers opportunities to find great mortgage rates and deals on closing fees, without needing to go through a mortgage broker. 

How to compare mortgage loan offers

Once you’ve understood all the places you can shop around for a mortgage loan, you’ll want to assess which loan option is the most favorable. Unless you’re outsourcing your search to a mortgage broker, you’ll need a strong grasp on what differentiates one loan from another.

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There’s a lot that goes into your mortgage decision beyond interest rates—consider closing costs, loan term, and what type of mortgage suits your needs best

Know that there are different types of mortgages

Mortgage loans are formatted differently. It’s important to pay attention to the way in which they are structured, seeing as these differences have a big impact on the lifetime costs of a home loan. 

Understanding what kind of mortgages exist will help you choose a lender offering mortgage products and services that fit your needs. Take a look at factors influencing mortgage loans below to know what to look for:

Different terms 

The payment schedule you’re on when paying a mortgage is referred to as the mortgage term. The most common mortgage terms are 15 and 30 years. However, you can also find mortgages from 10, 20, and even 40 years. The term of a mortgage impacts your monthly payments and the total amount of interest due. 

Shorter terms usually translate into bigger monthly payments, but less interest over the time of the loan. Longer terms come with smaller monthly payments, but more interest over the life of the loan. 

Fixed-rate

Most homebuyers choose a fixed-rate mortgage. Interest rates on fixed-rate mortgages are locked in and will never increase over the life of the loan. This allows homeowners to be certain that the interest they pay on their mortgages will remain constant.

Keep in mind, however, that other variables affect your monthly mortgage payment. Property taxes and homeowners insurance can vary depending on where you live and who your insurance provider is. 

Adjustable-rate

An adjustable-rate mortgage (ARM) has a “teaser” interest rate which is typically lower than what you’d find on a comparable fixed-rate loan. However, this lower interest rate is good only for a set period of time, after which a variable rate is introduced. Now that interest rates are lower across the board, the effect of an adjustable-rate mortgage has decreased, though as inflation increases, interest rates are set to increase as well, putting people with ARMs on alert.

Government-backed

FHA loans, VA loans, USDA loans exist to help individuals and families that would otherwise not be able to secure a mortgage loan. These loans are considered to be government-backed mortgages because, although they are issued by lenders, they are secured by the government. 

Government-backed mortgages typically have lower credit score requirements and allow borrowers to put down a fraction of a typical down payment. However, they also have eligibility standards and stricter appraisal processes.

Conventional 

Conventional loans are made available through a private lender with no government backing. They fall under two subcategories: conforming and non-conforming

The main difference between the two is that conforming loans meet certain standards created by the government to support homeownership in the US. Non-conforming loans are slightly harder for lenders to sell to Freddie Mac and Fannie Mae (two quasi-government organizations that buy mortgages from lenders). 

So, even though conforming conventional loans are not backed by the government, they are an easier sell to lenders than non-conforming loans. This means you might be able to secure a better deal with a conventional loan that is conforming than one that is not. 

white and blue house beside fence
Remember, there are different types of loans for different financial situations, so no matter your finances there is likely an option for you

Consider down payment and mortgage insurance

In addition to considering the differences among mortgage loans, you also want to pay attention to down payment minimums and mortgage insurance rates. Ask your lender if you qualify for any down payment assistance programs so you can secure a mortgage loan without having to completely empty out your savings. 

You want to keep some cash on hand when applying for a mortgage because lenders typically require at least two months of cash reserves in order to approve your loan. 

How much you pay in mortgage insurance will depend on how much you put down in down payment. If you put anything less than 20% down you will most likely need to pay private mortgage insurance (PMI). 

Assess fees associated with the loan

Along with insurance and down payment requirements, you also want to ask your lender about any associated fees. Not all fees are easily understood or even overtly stated. Some lenders list the fees individually while others lump them together. 

A variety of fees can be charged such as; underwriting fees, application fees, and closing costs. Compare lender fees and negotiate as much as possible to avoid paying more than necessary. 

Consider the individual, not just the lender 

Lastly, you want to consider the person who is selling you a mortgage loan. Do they seem willing to help you? Are they knowledgeable about all the fees associated with the mortgage loan? 

If you don’t feel at ease when discussing your potential mortgage loan, you don’t have to move forward with the process. An inexperienced lending officer can complicate your mortgage application process and make the experience much more stressful than it needs to be. 

Seeing as you are locking yourself into a major investment—one that will extend over at least one decade of your life—you want to make sure you trust the person you are working with to secure that loan. 

Wrapping up

Choosing a mortgage lender isn’t always a clear-cut process for first-time homebuyers, but it doesn’t have to be complicated. Follow the advice provided above to secure the best possible mortgage rates.

It’s important to take your time and carefully assess the benefits and disadvantages of each mortgage loan you’re presented with, so don’t rush it. You want to make sure that you’re locking yourself into a mortgage that makes sense for you in the long-run. 

By asking the right questions, carefully assessing terms and conditions, and understanding which entities provide what kind of loans—you’ll be in a strong position to find the best mortgage loan for you. 

FAQs

How do I choose a mortgage lender?

Choosing the right mortgage lender requires you to shop around a bit. Consider all of your options before making a final decision. Check out conventional banks, non-bank mortgage lenders, credit unions, mortgage brokers, and mortgage marketplaces. Ask your mortgage lender about how interest rates vary depending on loan terms, and how much mortgage insurance will come out to.

What should you not say to a mortgage lender?

Never lie to a mortgage officer. They probably have a way of verifying anything you claim. You also do not want to ask: What’s the most I can borrow? This question comes across as somewhat irresponsible to lenders. 

Avoid mentioning any new credit cards you’ve recently opened up. (Preferably, do not open them up at all when applying for a mortgage loan). Lastly, if you’re going through a transitional time in your career, leave that part out of the conversation. One of the main factors loan officers look for is job security and consistent income. 

Does it matter which mortgage lender you use?

Home loans differ depending on the mortgage lender you choose. Retail lenders (such as banks, credit unions, and mortgage bankers) provide mortgages directly to consumers by borrowing money from larger banks. Direct lenders (such as financial institutions or private entities) finance their own loans, using their own money to fund mortgages. 

What should I know before talking to a mortgage broker?

You want to make sure that before you talk to a mortgage broker you are aware of your credit score and debt-to-income ratio. You also want to be able to produce proof of income and a healthy savings account. Additionally, it would help to have an understanding of the differences among mortgage lenders. This would provide you with some leverage and perhaps, the ability to negotiate rates. 

About the author: Vivian Tejada is a freelance writer and small business strategist based out of Providence, RI. She specializes in writing SEO blogs, property descriptions and website content for real estate companies. She’s also an avid traveler, location-independent and enjoys trying out new restaurants. 

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