Evaluating mortgages and its lenders
Buying a home is a dream in everyone’s life. It is a significant life event and a very important milestone in your financial position as well. A home is the biggest and most expensive purchase that you will most probably make in your entire lifetime. If you are extremely fortunate to have enough of your own money to buy your new home, then congratulations to you. But if you are like most of us, you will need to borrow money to finance your dream purchase.
How to chose the right lender
There are various companies providing mortgage loans at attractive terms. There are online as well as brick-and-mortar institutions offering mortgages. With so many companies and options available today, it becomes important to understand what each lender is offering. Having the right knowledge will allow you to compare different companies and pick the best one depending on your particular situation. Low interest rates are definitely important, but not the only factor in choosing a mortgage lender. Following are some key features which you must examine in order to thoroughly evaluate your mortgage options:
- Interest Rate: This is the number one concern of most borrowers, what interest am I getting my mortgage at? Interest rate decides how expensive or cheap your mortgage is. It determines the installment which you will pay every month. The interest rate depends not only on which lender you are borrowing from, but also your creditworthiness. If you have a low credit score, or if you are deemed to be a “riskier” borrower by the lender based on your financial record, then you will be quoted a higher interest rate. If you have stable financials and have a good credit score, then you can benefit from a lower rate of interest. General macroeconomic policies and federal interest rates also affect mortgage interest rates.There are two types of interest rates, fixed and variable. Most borrowers try to get a fixed interest rate, as they know what they will be paying and there won’t be any unpleasant surprises. However, sometimes people do not get the fixed option and have to go for the variable rate option. One plus with this option is that your interest rate will move along with the federal rate, so it can go up but can also go down.
- Closing Costs: Most lenders will charge you a closing fee, which is a percentage of the total price of your new home. Normally it is around 5%, but it varies according to the lender. There are fees that the lender charges you for things like loan origination, processing fees, credit report fee, insurance fees, survey fees, home appraisal costs, legal costs, etc. This list can be quite large, but they are all real costs and the lender will charge you for all of them. Hence, it is important to compare what kind of closing fee each lender is charging you. You may be getting a great deal in terms of interest and loan duration, but an unreasonable closing fee can be a challenge.When you get your loan quote with the closing fee, go through it in detail and understand what fees you are being charged. Question any fee which is not clear to you. Keep a watch on fees which have slightly different names but mean one and the same thing. Lenders do tend to double charge two fees for the same action/cost. You should also negotiate the closing fee with your lender. Normally, there is an option of paying a higher closing fee for a lower interest rate. One thing you can do to lower your closing fee is to agree a higher interest rate for a lower closing fee. This, of course, is a personal preference, as someone may not mind paying a higher closing fee for a lower interest rate, while someone else may not have enough liquidity to pay high closing fees. So that person may settle for a higher interest rate.
- Loan officers: When you are evaluation various mortgage lenders, make sure you meet and talk to the loan officer. Try to evaluate how they work with you. Are they pushing you to buy a larger/more expensive home just because you can get a higher mortgage? Or are they giving you the complete freedom to pick and choose your options? If someone is pushing you into buying a bigger home, they may be doing so to earn a bigger commission or just do bigger business for their company. That may not necessarily be ethical. Always evaluate the person and build a relationship. If you are comfortable working with the loan officer, only then choose that lender. After all, you will be working with them for a long time to come and you will need support from the right type of loan officers at critical junctures.
- Down Payment: Compare the down payments that various financial institutions are asking you to make. Sometimes, you can negotiate a higher down payment and then lower installments. You can do this if you have extra cash to make a higher down payment and then enjoy a lower outflow every month during the term of the loan. If you do not have enough cash and are barely able to make the down payment, then negotiate a lower down payment. But in this case, you will have a higher outflow every month.
- Term of the loan: The term of the loan is the duration for which you have to pay monthly installments. It can be 10 years, 20 years, or more. A shorter duration will mean a larger installment, while a longer duration will mean lower installments. If you opt for a longer duration, then do note that your overall cost (addition of all the installments during the lifetime of the loan) will be much higher than a shorter duration loan structure. So, depending on your cash flows and your ability to pay the mortgage installments, you may choose a shorter or longer duration structure. This is something you will have to discuss with the loan officer at a mortgage lender.
- Accessibility: Call the customer service number of a prospective lender, or write them an email. See how responsive they are. When you call them, are they giving you the right amount of attention and access? If you borrow from a particular financial institution, then there will be times when you need answers to questions. You will need accessibility from the lender. Ideally, 24/7 availability is a good sign. What you do not want is a lender who takes a long time to get back to you, or is available for only a few days of the week.
- National vs Regional: Some financial institutions are larger and well established in multiple states of the country, while some lenders are regional smaller-scale institutions. A larger organization will have standardized processes and branches in multiple locations. This might be convenient for you, especially if you are on the move all the time. A smaller institution may not have the reach of a larger setup, but they are great if your credit scores are not very good or if you have some specific requirement which the smaller regional lender can fulfill. Smaller lenders will be less bureaucratic and more approachable as well. So, if those factors are important to you, then go with a smaller institution.
- Direct lender vs broker: You can either get a mortgage through a broker or approach the lender directly. A direct lender will not only disburse you the money but also underwrite the contract. The entire mortgage processing is also quicker with a direct lender as they will have everything in-house. The benefit of going through a broker is the fact that the broker will compare different mortgage quotes and give you the best option. You will not have to shop around and evaluate the quotes yourself. If you are ready to put in some time and evaluate various mortgage offers yourself, and if you have the willingness to approach multiple lenders yourself, then you may choose the direct lender option. If you are not able to give the time and effort to go through the search process, a broker may be a better option.
- Track record of the lender: It is very important to do some background verification of the lender from whom you plan to borrow a mortgage. There is a Nationwide Multistate Licensing System which compiles and keeps a record of various infractions that mortgage lenders commit. You would want to go through those and see what the infractions are. Often times, they are something minor and that can be overlooked. But other times, the offenses can be quite serious, such as offering more incentives to loan officers than legally allowed, or not having licensed loan officers. If you see a pattern of infringements or a trend of repeat infringements, that should be a red flag. Do your homework on the background of a prospective mortgage lender and look beyond just the website and the online reviews.
- Quality of information: Mortgages are complicated. There are many details and technical information that the borrower must understand before signing the final document. It is your job to understand and seek information to educate yourself. At the same time, the mortgage lenders also have a responsibility to provide you with clear information. One way to evaluate this is by visiting the website of a prospective lender and read through the information. Check to see how clearly and easily you understand the information. Is there any ambiguity? Does the website have helpful tools and calculators that make your life easier? What about the customer service, are they polite and helpful? These factors will give you an insight into the quality of the organization that you are planning to work with.
- Pre-approval process: Many times, you can now apply for a pre-approval online on a lender’s website. If that is not possible, you can even visit the physical branch and go for a pre-approval. Doing so will give you an insight into how quick the process of a lender is. Pre-approval does not require much documentation so it is easy to do. You can do the pre-approval process just to get a feel of what it will be like working with a particular lender.
Some helpful tips in preparing for a mortgage
- Improve your credit scores: There are tons of ideas available online on how you can improve your credit scores. There are many tips and you can surely follow a few of them. You must make regular payments of your bills and credit cards. Request for a credit report and dispute any errors on them, if there are any. Experian, TransUnion, and Equifax are the three biggest credit bureaus where you should request a credit report and make sure it is accurate. Almost every lender will use credit reports from either/all of these three bureaus to process your mortgage file.
- Pay off existing debts and do not take on new debt: In the months leading up to your mortgage, try and pay down your debts. Pay down credit card debt and any other smaller loans if you can. The lesser debt you have, the better terms you will get from your mortgage lender. Not having any pre-existing debt will also lower your debt-to-income ratio and boost your creditworthiness.
The above information will make you well-informed about mortgages and lenders. It will get you started right away and you will be able to start approaching various lenders once you have understood the various mortgage features and offerings listed above.
Dedebt is connected to a large network of mortgage lenders. It can help you choose the best option and can help you evaluate various mortgage proposals. Feel free to fill out the form below or call us. We have been in the business of mortgages for a long time and have a team of experienced professionals to help you successfully make that dream purchase of a new home.