Buying a home is no mean feat. It involves heavy expenditure and one that is probably the highest among all the purchases that an average person would make in their lifetime. Financing this significant expense is mostly done through debt. Most home buyers go for a mortgage to pay for their dream home.
The mortgage tenure tends to be long-term, running for as long as 15 years to 30 years. Hence, a mortgage borrower will be committed for years. That makes it important for the borrower to know all about mortgages and understand how to select the best mortgage among various options.
After all, he/she will be “married” to the mortgage for the long haul. There are many factors that one must consider when comparing mortgage offers.
Some of the main factors to keep an eye on are:
Interest Rate – Interest rates are the most popular metric when comparing mortgages from various institutions. Some lenders may offer low rates while others may offer higher rates with other favorable terms. Besides the actual rate, it is also important to know whether the rates are fixed or variable.
Variable rates tend to change over time and are usually linked to the Fed Funds Rate. Fixed rates stay the same no matter what happens in the economy. A few percentage points of difference in interest rates can lead to a major difference in the total price of a home since the loan runs for 15 to 30 years.
Down Payment – Down payment is the amount you have to pay up front for purchasing the house. The balance amount is paid through the mortgage installments.
Different lenders will offer you different down payment options. Try to negotiate the lowest down payment if that is what you prefer. Sometimes, you can pay a higher down payment and get a lower monthly installment for the duration of the mortgage.
It all depends on what you are comfortable paying as the down payment.
Fees – There are plenty of fees involved in processing a loan. There may be a loan origination fee, application fee, processing fee, credit report fee, survey fee, home appraisal fee, insurance fee, and even a closing fee.
The closing fee tends to be around 5% of the mortgage amount. Make sure you understand all the fees and then compare various options.
After all, you need to look at not just the interest rates, but the fully loaded cost of the mortgage transaction.
Customer service – Try and speak to every lender’s representative in person. Visit their physical branch if possible. When you speak to someone one-on-one, you get an idea of how transparent and professional that person is and whether you can work with that person/institution.
After all, you will be in it for the long haul, so might as well choose the right type of people to work with. Additionally, explore the customer service features of each lender.
Time taken to close the mortgage – Find out how long the process to close a mortgage will take. Different lenders will have different processes. Once you know the timelines, you can plan accordingly.
Online options – In the age of information technology and internet, it is almost a necessity for mortgage companies to have an online presence. See if the company you are considering has an online application option. Check if you can track your application status and progress online. A professional and good quality lender should have these features.
Low credit score acceptance – If your credit scores are not up to scratch or if you have had an unfortunate incident in your life which has affected your credit scores, you need to find a mortgage provider who will accept low credit scores. Find out what the minimum credit score requirement is from every lender that you research.
Selecting the best mortgage lender to work with should not be decided on the basis of who is giving you the lowest interest rate. Rather, a more broad and holistic view needs to be taken. Some tips on finding the best mortgage lender are:
Learn about the various types of lenders – There are various types of mortgage lenders that offer long-term mortgages for purchasing a house. The first type of a credit union.
This is basically a member-owned financial institution. You may have to become a member in order to avail a mortgage from a credit union.
Membership restrictions have eased up in recent times, so it should not be too difficult to join a credit union. Credit unions are known for offering attractive interest rates.
The second source of mortgages could be mortgage bankers. These are professionals who work for a particular financial institution and offer loans that are underwritten by that particular institution.
The third source is a correspondent lender. These are local mortgage companies that offer you the mortgage loan and then sell that loan to a Wells Fargo or a Chase.
Fourth is the mutual savings bank. These banks are locally focused, quite competitive in their terms and interest rates, and it will be worth your time to try and find one of these just to get a quote.
Lastly, savings and loans is another source of mortgage loans. These S&L institutions are small-scale community-focused lenders that are now becoming somewhat rare. They are also quite competitive in their loan offers and are worth searching for.
Pre-approval – Getting pre-approved for a mortgage loan has many benefits. Firstly, you will get a general idea of the amount of loan that a lender is willing to offer you.
And secondly, you have more bargaining power when negotiating with a seller or making an offer. Having pre-approval shows that you are serious about purchasing the house and gives confidence to the seller that you are capable of bringing in financial closure to the purchase deal that is being tabled.
Hence, when exploring various mortgage lenders, it is important to ask them what the pre-approval procedure is and how long they take to offer pre-approval. Normally, you have to submit a good amount of financial and personal information to the financial institution in order to get pre-approval.
Pre-approval, as the name suggests, is a preliminary process in which the financial institution provides the prospective borrower with an offer at the end of the process which includes the interest rate and the loan amount. This offer is usually valid for a few months.
The institution goes through the borrower’s credit information, employment details, income details, and various other financial details to decide on the pre-approval terms.
Compare interest rates – Interest rates are the number one question on the minds of almost all borrowers. It plays a big role in ultimately deciding which lender to work with.
After all, even a few decimal points of difference in the interest rate can result in thousands of dollars worth of savings across a loan tenure that runs a couple of decades long. You can begin by searching and comparing mortgage rates online.
This will give you a rough idea as these online rates are a starting point. Once your credit information has been analyzed and other information has been processed, you will get a more accurate interest rate. There is a system where you can buy points to lower your interest rate.
Explore this option in further detail. Once you have various offers at hand, you can negotiate hard and even play one institution against the other in order to extract the best possible offer. Remember to compare the interest rates and then choose the lender who gives you not just favorable interest rates, but other terms that are workable.
Ask many questions – Ask the mortgage companies questions about their customer service. Ask them how they communicate with their clients. Is there a 24X7 phone support service? Is there online support? Do you get notified via text messages? Also, clarify what fees will you be charged.
There are processing fees, application fees, commissions, etc. Get details of every single expense so that there are no surprises later on. Also find out the time that the company takes to pre-approve, appraise, and close out the mortgage loan.
Timelines are an important factor on which one can compare multiple lenders. Lastly, ask about the down payment requirement. How much down payment does each of the prospective companies expect you to make? These are all important questions that can differentiate one mortgage offer from another.
Low down payment options – Speaking about down payments, one handy piece of information to know is that there are loans backed by the Federal Housing Administration, the Department of Veteran Affairs, and the Department of Agriculture which offer low down payment options.
So, when you speak to a prospective mortgage lender, ask about the availability of mortgage loans that are backed by the above institutions so that you can take advantage of low down payment options. The lender might offer you non-government backed loans which also have low down payments.
A note about credit score
Your credit score is extremely important in the entire loan approval process. Interest rates are decided based on your credit scores. If you have a good credit score, then you are in a strong negotiating position and can really push for low-interest rates. If your score is not great, then try to improve it.
Pay off any outstanding debt, consolidate debt, use your credit card wisely, and follow general advice on improving credit scores. Once the scores have improved, then confidently approach mortgage lenders.
Best mortgage lenders
Some of the best lenders that we reviewed are:
Quicken Loans – This is one of the largest Federal Housing Administration lender. If you are looking for low down payments, then Quicken Loans is one company you must have a look at.
Rocket Mortgage – A great online lender. You can apply from your mobile or from your laptop. Decisions are also known to be quick with Rocket Mortgage.
Vylla – If you are worried about low credit scores, then check out Vylla. They have lent money to borrowers with credit scores as low as 500 in some cases.
Citi Mortgage – A great option for veteran loans, FHA loans, or even for a first-time borrower. Citi is a well-known brand and they have a vast presence across the US.