What to Look for in a Mortgage Lender
How to Find the Right Mortgage Lender
1. Optimize Your Credit Score
If you’re even considering buying a home in the future, you should know the state of your credit score. Your credit score will be a number between 300 and 850 that ranks your creditworthiness based on your credit history: amount of current debt, history of debt repayment, number of open accounts, etc. A low credit score sends the message to the lender that you’re at greater risk of defaulting on your loan.
You can request your credit report from any of the three major credit bureaus: Experian, TransUnion and Equifax. These bureaus are required to provide you a free report once every 12 months if you request it.
If your credit score is lower than you’d like, check for any errors in your report. If you don’t find any errors, take a look at your debt-to-income ratio. Many loan officers want to see a ratio below 43%. To improve your score, start by paying off your high-interest debts first to lower your overall debt level quickly. Paying down credit cards and making prompt payments can help raise your credit score.
2. Research Your Mortgage Lender Choices
You could procure a loan from any one of the many types of lenders. Understanding the differences will help you determine which option is best for you. If you’re unsure about what to look for in a mortgage lender, a mortgage broker can help you weigh your choices and make a sound suggestion, but they may charge a fee.
Traditional Banks: Traditional banks offer mortgage loans as one option in their portfolio of services. You may qualify for added benefits or special rates if you already have an account with them. Unlike credit unions or correspondent lenders, banks are more likely to continue servicing your loan after you close.
Credit Unions: A credit union is a financial cooperative that is created, owned and operated by its members. A credit union can offer traditional banking services, including providing home loans, but often offer fewer options than traditional banks.
Correspondent Lenders: Correspondent lenders initially provide your loan, but they will immediately turn around and sell it to investors, like Fannie Mae or Freddie Mac.
Hard Money Lenders: Hard money lenders are typically private companies or individuals with sufficient cash reserves to issue short-term loans. These loans often require repayment within a few years and may charge very high interest rates.
3. Determine the Type of Loan You Need
A conventional loan may be the best choice for the majority of people buying a home. This type of mortgage isn’t guaranteed by any federal agency. Loan limits are outlined by the Federal Housing Finance Administration (FHFA). Requirement standards for down payments and income are frequently set by Fannie Mae and Freddie Mac. You’ll likely need a credit score of at least 620, but a 740 or higher may get you a lower interest rate and allow you to make a lower down payment. Your conventional loan may come with a fixed interest rate or an adjustable rate.
Fixed-rate mortgages allow the homebuyer to lock in the interest rate for the life of the loan. This would allow for more predictable monthly payments because the only variables will be property taxes and homeowners insurance.
Adjustable-rate mortgages (ARM) sometimes offer introductory interest rates for a set period of time. These initial rates can be lower than most fixed-rate mortgages. Once that introductory period has passed, however, interest rates can fluctuate — usually growing higher than the introductory rate — at the lender’s discretion.
Federal Housing Administration (FHA) loans are mortgages backed by the federal government. This type of loan was designed for low-to-moderate income homebuyers. Your bank or other mortgage lender can determine if you qualify for an FHA loan, and if you do meet the requirements, you may be able to put down a smaller down payment. FHA loans usually require the homebuyer to purchase mortgage insurance depending on the loan-to-value ratio.
A U.S. Department of Agriculture (USDA) loan is designed for rural homebuyers who don’t qualify for a conventional mortgage. USDA loans may require no down payment, but applicants must meet certain criteria for approval, including regular income and employment history, an acceptable credit score, and the ability to make the necessary monthly payments.
The U.S. Department of Veteran Affairs guarantees certain loans for qualified active-duty military members, veterans and some military spouses. VA loans are issued by VA-approved private mortgage lenders, such as banks, and applicants must still meet the lender’s requirements for debt-to-equity ratios and income to qualify. A VA loan doesn’t always require a down payment or mortgage insurance, and this type of mortgage often provides lower closing costs and interest rates than FHA or conventional mortgages.
4. Compare Terms and Rates
Once you know more about what to look for in a mortgage lender and you understand your options, start making some inquiries. Ask several lenders about their fees, closing costs, down payment requirements and interest rates. Securing even a slightly lower rate initially can save you thousands over the life of the loan. But as you’re comparing overall costs, also consider the reliability and reputation of the lender and your level of trust in the institution.
5. Secure a Pre-qualification
Mortgage lenders can provide a prequalification letter that outlines how much they’re willing to lend you before you even begin looking at houses. You can request pre-qualifications from multiple lenders, allowing you the opportunity to more directly compare interest rates and terms. As a bonus, loan pre-qualifications often give you an edge when bidding on a house because it tells the seller you’re a serious candidate and there likely won’t be any drama during closing.
FYI: A prequalification letter doesn’t guarantee the rates or size of your loan. Lenders will often double-check your qualifications before drawing up the official papers, and if you take out a new loan or move money between your accounts, they may reconsider their offer.
If you’re preparing to buy a home, congratulations! At First National Bank and Trust, we’re here to offer additional mortgage information and help in any way we can. Our mortgage calculator can help you estimate your future monthly payments. We offer home loans, and we’d be happy to provide you a quote or discuss prequalification.