Even if you're skilled in making sound financial decisions for yourself and your household, you may not feel up to task when it's time to choose the best mortgage lender for your new home purchase. Particularly if you're a first-time homebuyer, a search for the right lender may have you scratching your head and wondering where you should even start.
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With the wealth of information available to consumers in this digital age, some online research on reputable websites can be a real help in your search, but don't overlook the value of personal interaction, which can go a long way toward helping you form an opinion — favorable or not — of prospective mortgage lenders.
How to Evaluate Mortgage Lenders
Before you make a final decision on the best mortgage lender to handle your home loan, use a multipronged strategy to evaluate numerous lenders. Ask for referrals from family, friends and your real estate agent and read online reviews. Zillow's lender directory allows you to perform an online search for licensed lenders by zip code, loan officer or lending institution.
Choosing a mortgage lender shouldn't solely depend on online interactions, research or reviews. Use a telephone conversation or an in-person meeting to give you an intuitive first impression of lenders. Online research, emails and texts are useful tools, but you can't evaluate a loan officer's tone of voice or inflection through these methods.
Hearing someone's voice and making eye contact (if you're meeting in person) can help give you a better feel for different lenders when it's time to make initial contact. Go ahead and speak to someone directly early in your lender evaluation process because simply hearing someone's voice may rule in or rule out a prospective candidate. For example, loan officers should certainly be knowledgeable about the loan products they offer and which product(s) are the best fit for you, but they should also be courteous and patient when answering all your questions.
Questions to Ask Mortgage Lenders
The Federal Trade Commission (FTC) has an online mortgage shopping worksheet that you can download and print. This two-page worksheet includes questions to ask prospective lenders, and it provides space to enter the answers from two lenders. (If you want to evaluate more lenders, you'll just use two worksheets.) For each lender, the worksheet also includes space to compare two different types of mortgages.
Questions on the FTC worksheet cover many bases, including mortgage terms, closing costs, discount points, down payment requirements, interest rate lock-in details, interest rate and annual percentage rate. Other questions on the worksheet are geared toward specific types of mortgages, which will help fine-tune your mortgage lender search, such as fixed-rate versus adjustable-rate mortgages and whether a lender offers Federal Housing Administration (FHA) loans, Veterans Administration loans and conventional mortgages depending on the type of loan you're seeking.
If you're looking for an adjustable-rate mortgage, enter details on the worksheet, such as the initial rate, the maximum rate and the payment caps each year as well as over the life of the loan. This worksheet also addresses the mortgage fees and costs that each lender charges, such as credit report fees, application fees and appraisal fees.
In addition to the questions on this worksheet, you may also want to ask a prospective lender some general questions, such as:
- Are you licensed with the state? (Don't take this for
- What is your estimated time frame for the mortgage process (including
applying, qualifying, underwriting, appraising and closing)?
- Will you be my primary contact during the entire process, or
will you hand it over to someone else at a certain stage (such as
- How much of the process can be handled online, and how much must be handled in person?
If you're also evaluating mortgage brokers in addition to direct lenders, it is recommended that you ask these questions:
- Who are some of your best lenders — ones that have closed
mortgage loans for your clients?
- How are you paid for brokering mortgages? (Note that some brokers are paid commissions by the lender, and others are paid by the borrower.)
- How much will you make on my mortgage loan?
Types of Mortgage Lenders
Many borrowers who begin a dedicated search for the best mortgage lender are surprised to find different types of lenders. Direct lenders are financial institutions that lend money by providing mortgages direct to consumers. Examples of direct lenders include banks, credit unions and savings and loans.
Another type of mortgage lender is a mortgage broker, which facilitates transactions between borrowers and lenders without actually lending the money to fund a mortgage. Brokers don't make decisions about the details of a mortgage, such as the interest rate, and they also do not fund loans. Correspondent lenders, on the other hand, do fund the mortgages they originate, but they immediately sell the mortgages to secondary lenders after the loans close.
Wholesale lenders work with third parties that facilitate funding, including mortgage brokers, without ever having direct contact with mortgage borrowers. Portfolio lenders, including community banks and credit unions, fund mortgages from their depositors' accounts.
Another type of mortgage lender is the private investor — an individual or group — who funds mortgages that are secured by the real estate itself. Also called hard-money lenders, private investors typically require short loan terms, higher interest rates, steeper loan origination fees and higher closing costs than other types of mortgage lenders.
Mortgage Lender Pros and Cons
Many borrowers prefer a traditional mortgage lender, such as their bank, because that's where they have their checking, savings or other type of account. Borrowers likely already have a rapport with the officers at their bank, a familiarity which may make it easier for applicants to ask questions. A benefit of choosing their local bank to fund a mortgage is that the borrowers may be able to negotiate a lower interest rate than from another lender. However, this isn't always the case, and a bank just across town may offer a better rate on the same mortgage product than a borrower's own bank.
Although many people prefer personal interaction instead of online communication, the opposite is true of many other people. Because of the prevalence and ease of using online forms, numerous borrowers prefer going through the mortgage process without leaving their homes. Shopping online for mortgage lenders and/or brokers, completing and submitting online mortgage applications, uploading required documents and even attaching a digital signature to certain documents are big-time benefits for many borrowers, particularly millennials buying homes. The downsides to online mortgages include the absence of online mortgage companies in some states and the lack of all types of available mortgage products.
Mortgage brokers do much of the shopping for you by looking for the best rates and mortgage products from a number of potential lenders, which are suited to each borrower's needs. When the bottom line for many borrowers means finding affordable mortgage payments, a mortgage broker may be the perfect go-between to facilitate this transaction. On the downside, brokers may not work as hard for you unless they're actually under contract with you as your exclusive agent. Another consideration is that unless your lender pays the broker commission, you'll pay this fee yourself.
A mortgage is a product, so after you've shopped mortgage lenders and compared rates, fees and other costs, you should negotiate the loan terms. If you're working with mortgage brokers, make sure they are negotiating with lenders on your behalf. Even if your credit score is less than desirable, seasoned mortgage professionals can teach you how to lower your debt-to-income ratio and/or find a mortgage product that works for your financial situation. By doing a little legwork to find the best mortgage lender and mortgage product, you may be able to save thousands of dollars.