What makes one mortgage lender different from another? Sometimes, it can be hard to figure out. From different lender types to varying mortgage rates, the process of picking a lender can be confusing and overwhelming, especially for first-time homebuyers
While there are many types of lenders from conventional banks, to credit unions, to mortgage brokers, to non-bank mortgage lenders, you can rest easy knowing that the lending process itself is nearly the same across all lender types.
After picking a REALTOR® and setting your home buying budget the next step in the home buying process is to find a lender and get pre-approved.
Prepare Your Budget and Your Credit Score
Setting your home-buying budget entails more than just knowing the amount a lender will pre-approve you for. Additionally, you’ll need to consider other home-buying expenses like your down payment, appraisal fees, title search fees, and recording fees to name a few.
Closing costs can run a homebuyer 2% - 5% of the home’s purchase price. It’s a good idea to ask a lender at the beginning of the lending process to walk you through the expected additional fees so there are no surprises at the closing table.
You should also check your credit score several months before you apply for a loan. Your credit card issuer may offer a free FICO score but to receive a thorough credit report you’ll likely have to pay for it.
Most loans require borrowers to have a minimum credit score. Conventional loans, for example, require a FICO score of 620, however, some FHA mortgages have lower acceptable minimums. If you know your credit score before you set out to find a lender you can focus your search on one who’s proficient with conventional loans or if needed, a lender who does a lot of work with FHA loans.
Once you learn your credit score you can make moves to improve it if necessary. Start by paying your bills on time and paying down any outstanding debt. Then work on keeping your debt balances low and paying off any new debt in its entirety immediately.
Research Lenders and Learn the Lingo
Your personal priorities (a fast turnaround time for example) along with some number crunching will help you determine which lender is right for you.
“When you’re looking for a lender, you want to understand the types of loans available to you,” notes Megan Ryan of the Zimmerman Group. “Whether it’s a conventional loan, a government-issued mortgage, or a jumbo loan, the type of loan you need can help you narrow down which lender is the best fit for you.”
Once you’ve found a lender who has experience issuing the type of loan you need it really comes down to the numbers and who can offer you the best deal. Here are the terms you’ll need to understand and compare:
- Interest rates: You hear a lot of talk about interest rates when you’re shopping for a mortgage. While interest rates are important when you’re comparing lenders you want to focus on annual percentage rates (APR).
An APR encompasses the entire cost of borrowing money. It’s calculated to include the interest rate, finance charge, and various other fees. The interest rate only tells you what it costs to borrow the money. For example, a 3% interest rate on a $1,000 loan for one year would mean you’ll be paying $30 in interest to your lender.
Your APR may be considerably different from your interest rate. Pay special attention to this number when shopping for a lender.
- Fees: To accurately compare fees between lenders you need to have a clear understanding of which fees are being included. This is easier said than done. Some lenders will list fees individually and some may bundle fees. Your best bet is to ask specifically which fees are included.
- Down payment and mortgage insurance: If you’re struggling to come up with a sufficient down payment, typically anything less than 20%, you will have to pay private mortgage insurance (PMI).
Another route to take is borrowing through an FHA loan. These government-issued mortgages typically only require a 3.5% down payment and some loans are geared specifically at providing down payment assistance.
Finally, when comparing lenders consider their communication style and their accessibility. Your lender should be easily reachable through your preferred mode of communication whether that’s by phone, email, or in-person.
If all of this sounds like too much work, consider partnering with a mortgage broker. These professionals do the legwork for you by reviewing your application and gathering quotes from multiple lenders then presenting you with your options.
Pick a Lender and Read the Fine Print
Mortgage rates change daily, so once you’ve found the right lender you’ll want to lock in your rate right away. A lock-in on a mortgage means that your interest rate won’t change between the time you make your offer and the time you close on the house.
Once your application is completed you’re ready for homeownership. Be sure to read the fine print of your mortgage documents so there aren’t any surprises at the closing table. The Consumer Financial Protection Bureau’s Loan Estimate Explainer is a great tool to help you understand the details of your loan documents.
Obtaining a mortgage is a major step. While it’s ok to relax and enjoy your new investment, don’t let this huge financial obligation out of sight. Maintaining good credit and paying your mortgage on time is the best way to avoid financial hardship down the road.
What’s Next?
Each state offers special lending programs to first-time homebuyers. Learn about Resources for First-Time Homebuyers in Illinois.
