Shopping for a new home is exciting, but shopping for a mortgage? It’s a different story. Unless you’re paying in cash, choosing the right mortgage lender is as important as finding your dream home. It could mean the difference between a mortgage loan approval or denial, a high or low rate, and a smooth home-buying process or one filled with endless documentation requests.
Learn how to choose the right mortgage lender to save time and money in your home purchase or refinance.
Know What Mortgage Lenders Look For
Before you start shopping around for a mortgage, you need to know what lenders always look for in borrowers. Here are four common things mortgage lenders want to see:
- Income: Mortgage lenders want to make sure you can afford to pay the monthly payment. That’s why they’ll want to see steady income for at least 24 months. If you’re self-employed, some lenders will accept less than two years of employment history.
- Credit score: If you want the lowest interest rates and fees, aim for a credit score of 740; the higher, the better. However, there are several bad credit mortgages for those with scores below 500. You can check your credit score with any of these three credit reporting bureaus: Experian, Equifax, and TransUnion.
- Debt-to-income (DTI) ratio: Lenders also want to know how much debt you owe each month. So, they’ll calculate your DTI ratio by dividing your total monthly debt payment, including your new mortgage payment, by your before-tax paycheck.
- Down payment: While you don’t necessarily need a 20% down payment, a high down payment could mean lower monthly payments and better rates.
Choose the Right Mortgage Product
Now that you know what mortgage lenders look for, the next step is choosing the right type of mortgage. Different lenders offer different mortgage options, with others only specializing in certain mortgage loans.
First, you need to decide whether you need a fixed-rate or an adjustable-rate mortgage. With a fixed-rate mortgage, your interest remains the same the entire life of the loan, typically 15 or 30 years. On the other hand, an adjustable-rate mortgage means your interest rate and monthly payments will fluctuate as interest rates change.
Once you decide whether you need a fixed or an adjustable rate mortgage, you can now choose one of these types of mortgages:
Conventional Mortgage
This is the most popular type of mortgage and isn’t insured by a government agency. They typically require a credit score of at least 620, a 3% down payment, and a DTI ratio lower than 50%. If you put down less than 20%, you’ll have to pay private mortgage insurance (PMI).
Government-Backed Loans
These are mortgages insured by various federal agencies, meaning they have more favorable requirements, fees, and terms.
- FHA loans: Insured by the Federal Housing Administration, this mortgage is geared toward low- and moderate-income households, especially first-time homebuyers. You need a credit score of at least 580 and a 3.5% down payment.
- VA loans: Backed by the U.S. Department of Veterans Affairs (VA), you must be serving or have previously served in the millitary. However, spouses may also be eligible. The VA hasn’t set a minimum credit score, but 580 and above is what most lenders require. This loan doesn’t require a down payment.
- USDA loans: This mortgage type is for low-income borrowers looking to buy a home in rural areas. Like VA loans, USDA loans don’t require a down payment. However, you must meet specific income requirements.
Jumbo Loans
As the name suggests, jumbo loans are for borrowers looking for home loans above the conforming loan limit. The requirements may be more stringent, and expect higher down payments.
Shop Around for a Lender
Once you know the type of mortgage you need, it’s time to shop around for a lender. There are different types of lenders.
The first option is direct lenders like banks, credit unions, and online lenders who will work directly with you from start to finish. Begin with your financial institutions to see if they offer better rates and terms to existing customers.
You can also opt to work with mortgage brokers who will find the best mortgage deal. However, you’ll need to pay a fee, which typically ranges between 1% and 2%.
Another option is hard money lenders, who often offer short-term loans based on the amount of equity you have in the home. Since such lenders only offer short-term loans, you can expect higher interest rates and steeper fees.
Remember to ask potential lenders any questions you might have about the product you’re interested in. Clarity will help you narrow down your list.
Pro Tip: Do all your shopping the same day, as mortgage rates change daily. This way, you’ll gather all loan estimates the same day, making comparing lenders easy. Also, make sure you’re comparing the same mortgage product.
Get Pre-Approved by Multiple Lenders and Compare Rates
Finally, you want to get pre-approved by your preferred lenders to see the size of mortgage you qualify for and what you’ll pay for it. During pre-approval, lenders will do a thorough review of your credit score and finances. They’ll also require some paperwork from you, which will vary by lender.
Compare loan terms, down payment requirements, origination fees, mortgage insurance, closing costs, and third-party costs (if any) to find the best lender for your needs.
