Half the effort of buying a new home is finding the perfect house. The other half is finding the right match in a mortgage lender. You’ll need a mortgage to ensure you can buy the property unless you have enough cash to purchase it.
When searching for a mortgage lender for the first time, it’s essential to research all of the ones in your area. Compare and contrast them all, focusing on the differences between their rates, down payment requirements, loan terms, closing costs, and fees.
Of course, mortgages can be complex and daunting, especially when purchasing your first home. With that in mind, let’s go over everything you need to know about mortgages and the organizations that give them.
Mortgages: an Explanation
A mortgage is composed of two components—the principal and interest.
- The loan amount is referred to as the principal. Interest is the amount of money you must pay back in addition to the loan.
- The interest is a portion of the principal and is the lender’s way of charging you for borrowing their money. A mortgage is paid on a lender set schedule, usually on a monthly payment schedule.
- Pricing a loan involves another factor, the APR. The APR assesses the entire cost of the loan, including the loan fees and interest rate.
Types of Mortgages
There are 6 mortgage types. These are not created equal.
Some mortgages have stringent guidelines or require a down payment (typically 20%, but as small as 3%). Some loans require excellent credit, while others specifically focus on borrowers with poor credit ratings.
The U.S. Department of Agriculture Loans
The USDA focuses on low-income buyers in rural areas nationwide. These loans are government-insured and require little to no down payments. The borrower’s property must meet the USDA’s eligibility rules.
The government does not back this loan. If a borrower has good credit, a solid income history, a 3% downpayment, and has a stable income, they qualify for this loan.
Most conventional loans are bought and sold by Freddie Mac or Fannie Mae. These are enterprises sponsored by the government.
Federal Housing Administration Loans
The FHA focuses on buyers with a low income who are first-time homeowners. Usually, these borrowers can’t qualify for a conventional loan. Eligible borrowers will have to put a down payment of as little as 3.5% down to purchase the home.
Loans from the FHA have relaxed credit score requirements when compared to conventional loans. However, the money is not lent by the FHA. Instead, lenders approved by the FHA lend the money.
One of the significant drawbacks of the FHA loan is the mortgage insurance premium. This is an upfront cost. This insurance ensures the lender is protected from the borrower defaulting for the loan’s lifetime.
Conforming Mortgage Loans
The federal government binds conforming loans by a maximum limit. The limits are dependent upon the geographical area. For example, in certain United States sections, such as New York City, a higher maximum loan limit can be found. This is because the home prices in the area are higher than the loan limit by 115%.
Non-Conforming Mortgage Loans
These loans cannot be bought or sold by Freddie Mac or Fannie Mae. This is due to the underwritten guidelines or the amount of the loan.
The jumbo loan is the non-conforming loan you will run into most frequently. These loans are typically larger than the conforming loan limits, thus the name.
For lenders, these loans are risky. This means that borrowers must show a large cash reserve. A borrower may also have to make a ten or twenty percent down payment. The borrower must also have strong credit.
Veterans Affairs Loans
The VA guarantees loans for service members and their spouses. One hundred percent of the loan with no required down payment. There are other benefits, too, such as fewer closing costs and lower interest rates.
However, a funding fee is required for these types of loans. This is a percentage of the loan used to ensure the cost is offset by the taxpayers. This fee varies and is dependent upon the category of military service and the amount of your loan.
Types of Mortgage Lenders
There are also six different types of mortgage lenders. It would help if you looked at all local financial institutions. Also, be sure to research online lenders.
Direct lenders give borrowers mortgages directly. This means the borrower only deals with the direct lender for the entire process.
One benefit of this type of lender is that the process is done in-house, meaning questions about the lender’s fees, terms, and more. Talking to as many direct lenders as possible allows you to compare and contrast them, ensuring you find the best deal possible.
Each lender has different terms of agreement and rates per mortgage. If you fail to read carefully, you may find yourself with a complex and expensive loan than initially intended.
Wholesale lenders never interact with borrowers. These organizations work with third parties and mortgage brokers, offering discounted rates for the loans.
These lenders give loans via their client’s bank deposits. This allows them to hold the loan and keep it after closing. Typically, these lenders are banks.
These lenders are private investors (either an individual or a group) who provide loans at shorter than usual timeframes. These loans are secured by real estate. These lenders are interested in the value of the property.
Payment is required in a narrow timeframe (1-5 years). All fees are generally higher than usual with this type of loan.
Correspondent lenders fund their own loans. However, they typically rapidly sell these loans to larger lending institutions on the secondary mortgage market after the loan closes.
These are independently licensed professionals that act as the middleman between the lender and the borrower. Typically, the lender or borrower pays the lender, who charges a small amount (1-2% of the loan). These institutions do not do anything but help lenders and borrowers connect.
Lender’s Factors of Consideration
When you go through the approval process for a loan, financial institutions will closely scrutinize your finances. This includes your credit report. However, it is much more than looking at your credit score.
Mortgage lenders will look at many different things during the approval process.
- To begin with, the payment history of credit cards, loans, lines of credit, and anything else that may show up on your credit report will be looked at. This is to ensure you have a history of on-time payments.
- Institutions will also take a look to see if you have recently applied for any other forms of credit or debit. Additionally, they will examine your credit utilization ratio. This ratio indicates how much of your available credit you’re using. Most institutions prefer your balance to be under 30%. A lender may also preapprove you after looking at any outstanding loans you may have or your gross income.
Ensuring You Find the Mortgage Lender That Fits Your Needs
Researching and looking at many different lenders is the only way you will find the best rate. It would be best if you considered local banks, credit unions, and online lenders. Talk to them about their rates, closing costs, fees, down payments, and more.
Here’s what you can do to ensure you find the best mortgage rate.
Step One: Ensure You Have Strong Credit
To start with, you should strengthen your credit score. The best way to improve your credit score is by making on-time payments. Additionally, if you can pay down thirty percent of your credit limit, that will ensure you have strong credit.
Step Two: Determine Your Budget and Expand Your Knowledge
The second step you should take is to determine your budget. You should always know what you cannot afford.
You should factor in all the daily expenses you have. Also, include your own financial goals. Costs can include utilities, daycare, insurance, and groceries.
Additionally, being armed with knowledge is key to getting the best rate. This means you should also know the different types of mortgages and the often confusing terms that go with them.
Step Three: Compare and Contrast
As previously stated, you should always talk to multiple mortgage lenders. Compare and contrast the different options you receive. Don’t be afraid to ask questions. You can also use websites, such as Bankrate.com, that compare mortgage rates and lenders.
Step Four: Always Read Carefully
You should always carefully read the mortgage documents. While tedious, they are essential, and if you don’t read them, you may regret it later.
Ensure you carefully read the stated interest rate, monthly payment cost, lender and loan processing fees, down payment cost, and closing costs. Never be afraid to ask questions.
Some lenders offer credits. These credits ensure that the amount you pay at closing is lower. However, be warned that these cause your loan interest rate to go up.
This means the loan is more expensive in the long run due to a higher interest rate.
You may see a large number of costs from third-party services as you read your mortgage document. These include lender’s title insurance, appraisal, recording and transfer fees, and more.
These costs can be negotiated, but lenders generally do not set the prices for these services.
There’s a lot that goes into determining the factors in a mortgage and mortgage lender. Mortgages are complex and daunting, but that doesn’t mean you should be afraid.
Remember that there are six different types of mortgages, all with different costs, rules, fees, interest rates, and eligibility requirements.
When comparing and contrasting different mortgages, ensure you pay special attention to each lender’s rates, property insurance, down payment cost, closing costs, fees, and loan terms.
Never be afraid to ask questions, and don’t be scared to walk away. The only way you will find the right mortgage for you is if you talk to many different lenders.
The mortgage you choose is up to you. Just ensure you are armed with all the proper knowledge and confidence you need, and you’ll find the best rate.