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You Picked Out Your Home Now You Need A Mortgage
Have you decided that this is the right time to buy a home? If you have, then there is another big decision that you have to make. One that will affect you and your pocketbook for years to come.
Choosing the right mortgage lender is a decision that can save you hundreds or thousands of dollars each year. Choosing the wrong mortgage lender can cost you hundreds or thousands of dollars each year, and several thousand over the life of your loan.
Below you will find everything that you need to consider when choosing mortgage lenders.
What Is a Mortgage Lender?
A mortgage lender is any person, institution, or corporate entity that lends money for real estate purchases. The lender can be an individual such as an investor, or more commonly, a bank or credit union. The lender loans money and expects a repayment with added interest in the future. The interest charged on the loan depends on the lender.
How Does Mortgage Lending Work?
There are a series of events that occur during the process of mortgage lending:
- The borrower fills out a sales contract on the real estate
- The borrower submits the financial documents to the mortgage lender
- The lender evaluates the buyer’s ability to repay the loan
- The lender sets the loan amount and interest rate for the loan
- The lender appraises the home to see if it is worth the amount being requested
- The borrower pays the lender the down payment and also pays closing costs
- The borrower makes monthly payments to the lender for the life of the loan
The Factors to Consider When Choosing a Mortgage Lender
Determining who your mortgage lender should be can be a labor-intensive process. But if you carefully do research, you will end up with the lender who best meets your needs.
The Type of Lender
There are several options in lenders for the person looking for a real estate loan. Banks, credit unions, online banking, and non-bank lenders are the options most widely used.
Banks
Banks are financial service providers licensed by the government. They have the authority to make loans and receive deposits.
A large percentage of borrowers get their mortgages through the bank. An increasing amount of borrowers are using non-bank options for their financing.
Banks tend to be large institutions with a wide array of services. They usually deal with a large volume of mortgage applications. They also take a longer time to close real estate deals.
Although banks can offer special discounts, they also have stricter lending standards and usually have high interest rates and transaction fees.
Credit Unions
Credit unions are non-profit organizations that are formed with very specific membership requirements. They provide most of the same services offered by banks but are typically smaller institutions.
Credit unions tend to have less stringent standards than a bank, so potential borrowers with less than excellent credit, stand a better chance of getting a mortgage.
Although credit unions can sometimes offer lower rates than banks, they have fewer loans available.
Mortgage Bankers
A mortgage banker or mortgage lender is a person or institution that originates a real estate loan and usually provides the funding as well.
Revenue is typically generated by charging an origination fee for the loan. The mortgage banker can choose to keep servicing the loan they originated, or they may opt to sell the loan.
Some mortgage bankers are able to fund all types of transactions including residential purchases, refinancing, investment properties, and construction loans.
Additionally, mortgage lenders can offer a wider variety of options for lenders than are available from a bank. They also tend to have less stringent credit requirements and close on loans faster than the typical bank.
The Type of Loan
Another factor to consider when finding a mortgage lender is the type of loan that you will get. There are several types of loans, and each one has pros and cons which you should go over carefully with your mortgage lender.
Conventional Loans
Conventional loans are not insured by the government. Mortgage companies, credit unions, and banks, usually offer conventional loans.
These loans can be conforming loans that fall within the maximum limit set by the Federal Housing Finance Agency, FHFA.
The Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation, (Freddie Mac), guarantee conforming loans.
Conventional loans can also be non-conforming loans or jumbo loans, which do not fall within the limit set by the FHFA. These loans are not backed by Fannie Mae and Freddie Mac.
Conventional loans may be used for most types of real estate. They can be issued with as little as 3% down.
The borrower, who should have a credit score of at least 620, may be required to pay Private Mortgage Insurance, PMI if their downpayment is less than 20% of the purchase price.
Conventional loans work best for those borrowers with strong credit, steady employment history, reliable income, and the ability to put down at least 3%.
Federal Housing Administration Loans
The Federal Housing Administration or FHA is a government agency that backs loans issued by an FHA-approved lender.
These loans are best suited for borrowers who do not have much money for a down payment or have mediocre credit scores in the 500’s. The down payment for these loans can come from gifts from others, financial assistance grants, or personal savings.
Buyers who qualify for an FHA loan are required to pay mortgage insurance.
Veteran’s Administration Loans
Veteran’s Administration, or the VA loan, is another government-backed loan provided to active duty and veteran members of the armed forces.
Down payments and Private Mortgage Insurance, PMI, do not have to be paid for a VA loan.
Additionally, any closing costs are set and can be paid by the seller of the property.
United States Department of Agriculture Loans
A USDA loan is a government-backed loan given to low and moderate-income borrowers who are either first-time buyers or who are unable to meet the standards for a conventional mortgage.
The property that is going to be mortgaged should be in an eligible rural area.
The USDA defines an eligible area as “open country or any town, village, city, or place, including the immediate adjacent densely settled area, which is not part of or associated with an urban area”.
The U.S.D.A loan does not require any money down
The Type of Interest on the Loan
The two main types of interest on loans that can be charged are an Adjustable Rate of Interest or a Fixed Rate of Interest. You need to know which type your mortgage lender would be willing to extend to you.
Adjustable-Rate Mortgage
The interest rate on an adjustable-rate mortgage, also known as an ARM, is adjusted, or changed, periodically. An index is the basis for the adjustment.
The index used for the adjustment may be either the 1-year Constant Maturity Treasury, CMT, securities; the London Interbank Offered Rate, LIBOR; the Cost of Funds Index, COFI; or the mortgage lender’s own cost of funds index.
Adjustable rates mortgages pass on a part of the interest rate changes from the lender onto the borrower.
The borrower can benefit if the interest rates go down but can be negatively affected if the interest rates go up.
Fixed-Rate Mortgage
A fixed-rate mortgage has an established rate of interest that does not change for the duration of the loan. As a result, your principal and interest monthly payment amounts remain the same.
A fixed-rate mortgage tends to be more popular than an adjustable-rate mortgage since it allows the homeowner to have a stable budget with regards to their mortgage over a long period of time.
The typical periods chosen for fixed-rate mortgages are 15-year and 30-year terms.
What Are the Qualifying Requirements for the Lender?
Mortgage lenders are usually looking for clients with certain characteristics. Some may require you to have FICO scores over 600. Others may be fine with lending money to those who have sub-par credit scores
There are lenders who may require you to put down 20% of the purchase price while others may allow you to put down as little as 3%, or no money down at all.
Ideally, your mortgage lender can choose to waive some or all lender’s closing costs which can include processing, application, and underwriting fees.
Making the Right Choice of Mortgage Lender
Choosing to buy a home was just the first step. Now that you have additional information, you can make an informed decision with regards to who holds your mortgage.
You should be looking for a mortgage lender who will provide competitive as well as diversified mortgage financing.
Here at RealFi, we are one of the top correspondent mortgage bankers in America. We would love to help you on your journey as you make owning your home a reality.
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