Purchasing a home, whether it’s your first home or your tenth, always involves important decisions at the beginning of the home buying process such as qualifying for a mortgage loan.
Selecting the right lender can have a significant impact on your home buying process. An experienced and ethical lending team will make sure you are offered the best loan for your unique circumstances and will meet their milestones in a timely manner to ensure your closing takes place a scheduled. Buyers may think that their best choice is to get a loan from their bank. However, they may benefit from exploring other options and asking key questions before committing to any specific lender.
Question 1. Bank, Mortgage Lender or Mortgage Broker?
Many banks and credit unions offer mortgages to their customers. In certain cases, the existing relationship may entitle the borrower to preferred rates or reduced closing fees. In shopping for a mortgage loan, you want to make sure that the lender has the right loan program for your needs. Banks and credit unions typically have limited mortgage products. If you are self-employed, new to credit, or have saved less than a 20% down payment, a bank or credit union may not have the right loan for you.
Mortgage Lenders are typically financial institutions that deal solely in real estate / real property loans. They are separate from banks and may have one or multiple sources of funds. They define their own rules of tolerable risk and build loan products that align with their available funds and risk models. While typically more flexible than banks, they also have a limited array of products.
Mortgage Brokers are the independent contractors of the mortgage lending industry. They have solid relationships with multiple lenders and usually have the most flexible and diverse array of loan products to offer buyers. When shopping for your mortgage loan, interview different types of lenders and pick the one that offers the right loan structure for your specific needs.
Question 2: Do They Offer Pre-Approval Letters?
First, do not confuse pre-approval with pre-qualified. Pre-qualification is at best a guess at a buyer’s ability to obtain a loan and does not carry a lot of weight in today’s real estate market. Pre-approval, on the other hand, means that the lender has conducted first-level due diligence and feels reasonably confident that the buyer will qualify for up to an X dollar loan during the next three to six months.
Pre-approval lets the buyer know the highest price home they can aim to purchase and also gives the buyer an advantage in competitive markets by submitted a pre-approval letter with their offer. If you encounter a lender that does not provide pre-approval letters or wants an upfront fee (separate than the application fee), keep searching for a mortgage lender.
Question 3: What Type of Loans Do They Offer?
If you have saved a 5% down payment for your home purchase, then a lender that requires a 20% down payment is not the right one for you. Similarly, if you want to lock in a low rate for a 15-year mortgage, but the lender only offers 30-year mortgage products, again, not the right lender for you. A real estate investor needs a different loan than a homeowner planning to raise a family in the home. There are hundreds of different types of loans with diverse qualification requirements and terms. Do your due diligence and make sure you focus on finding a loan that best serves your unique buying needs.
Question 4: Will They Lock In A Rate?
A rate-lock is a set interest rate that is guaranteed to the borrower as long as the loan is closed within a specified time frame. If you are buying during a time when interest rates are fluctuating, then working with a lender who offers a rate-lock is a plus. Be sure you fully understand the terms of the loan associated with that rate.
Loans can have variable rates, fixed rates, or even be interest-only or negative amortization loans. Make sure you understand all the moving parts before you commit to a lender. The right rate can save you thousands of dollars over the life of a loan.
Question 5: What are ALL the costs?
This where doing your homework and perhaps even some comparison shopping can save hundreds to thousands of dollars at the closing table (and for the life of the loan). In addition to the interest rate it’s important to ask questions about:
- Application Fees
- Credit Report Fees
- Annual Percentage Rate (APR)
- Origination Fees
- Inspection Fees
- Title Insurance
- Recording Fees
- Total Closing Fees – all of them!
Many fees will be perfectly legitimate such as reasonable inspection fees and owner’s title insurance. Other fees can be made up or just “fluff” to make the loan more profitable. Be sure to study the typical closing fees for your state and assess your full costs before committing to any specific mortgage lender.
Be An Informed Buyer
The more you know about the home buying and mortgage lending process in your state, the more confident you will feel about making decisions. Often, purchasing a home is the most important and largest expenditure in an adult’s life. Do your research and be sure to carefully interview real estate professionals and lenders before embarking on your search for a home.