July 15th, 2019 7:02 AM by Jackie A. Graves, President
house hunts involve not only finding your dream home, but also selecting the
best mortgage lender to finance this massive purchase.
So what do we
mean by "best"? A mortgage with a low interest rate and fees,
obviously, but it's more than just the money. Ideally you want a mortgage
lender who won't leave you buried in paperwork, or confused by a slew
of obscure terms you don't understand.
In a recent
survey, about 1 in 5 U.S. home buyers said they came to regret their choice in
a lender. Don't want to be one of them? Then be sure to ask yourself these
questions below to home in on your perfect match.
A mortgage is
by no means a one-size-fits-all product. Indeed, your budget plays a
significant role in what lender you should choose.
looking to get a big loan, you’ll want to search for a lender that specializes
in jumbo loans. In a
nutshell, these are mortgages that exceed the loan limit of conforming loans,
which is $424,100 in most areas. If you live in a high-cost area, the
conforming loan limit is $636,150. But, after the housing crisis, many mortgage
lenders pulled out of the jumbo loan market. After all, extra-large home
loans pose a greater risk to the lender.
get a ballpark figure of how much money you need—and the type of house you can
afford—plug your income and other numbers into an online home affordability calculator.
buyers obtain conventional loans, since these mortgages tend to offer the
lowest interest rates. But in order to qualify for a conventional mortgage,
borrowers need to meet certain requirements—like, for instance, a credit score
of at least 620, a down payment of 5% to 20%, and a maximum debt-to-income ratio of 43%, says Todd
Sheinin, mortgage lender and chief operating officer at
Homespire Mortgage, in Gaithersburg, MD.
DTI ratio is how much money you owe in monthly debt obligations (on student
loans, credit cards, car loans, and hopefully soon a home loan), divided by
your monthly income. So, let’s say you're paying $500 to debts and pulling in
$6,000 in gross (meaning pretax) income. Divide $500 by $6,000 and you've got a
DTI ratio of 0.083, or 8.3%. However, that's your DTI ratio without a monthly
mortgage payment. If you factor in a monthly mortgage payment of, say, $1,000,
your DTI ratio increases to 25%.
buyers who don't qualify for a conventional loan do still qualify for other
types. The main options include FHA loans, VA loans, and USDA loans. Generally the requirements for
these are looser—meaning lower down payments, lower credit scores, and higher
DTI ratios. However, they still have their limits.
Housing Administration loans, for example, let home buyers put down as little
as 3.5%, but borrowers generally need a minimum credit score of 580, says Tim
Lucas, editor at MyMortgageInsider.com.
U.S. Department of Agriculture loans let borrowers put as little as 0% down,
but these loans are available only in certain rural locations.
Affairs loans also require no money down, but are available only to veterans,
active-duty service personnel, and select reservists or National Guard members.
If you quality for these loans, they're great options.
To find the
best mortgage lender, it's essential that you shop around. However, there's one
alternative: Hire someone to do the shopping for you.
You can do
this by hiring a mortgage broker—an
industry professional who can shop for multiple lenders simultaneously on your
behalf. The caveat: Sometimes mortgage brokers get their commission paid by the
borrower (that’s you) based on an agreed-upon fee that becomes part of your
closing costs, while other times brokers get paid by the lender that's
ultimately chosen to fund the loan.
mortgage broker’s commission is around 1% to 2% of the loan borrowed (or $1,000
to $2,000 per $100,000). The upshot: Though you might have to pony up cash to
use a broker, this person can help you not only find a lender but also
negotiate for you—meaning you don’t have to do any haggling yourself to nab a low-interest home loan.
mortgages are growing in popularity, particularly for younger home buyers: One
recent survey by NerdWallet found that 64% of millennial mortgage applicants
would prefer to get it all done digitally. Though online lenders often offer
lower mortgage rates and fees, they’re not right for everyone.
If you care
about the kind of one-on-one, face-to-face service you get when you work with a
local mortgage lender, be aware that you don’t typically get that with an
online lender (although many online mortgage lenders do employ loan
officers you can speak to on the phone).
reason an online lender may not be a good fit: Many don’t employ mortgage
specialists who know the ins and outs of your local market, which can be a
disadvantage if you’re applying for a complicated loan, such as a mortgage for
a self-employed borrower.
“online lenders are great for conventional scenarios: salaried borrowers
without financial or credit complications, and properties that are typical for
the area in design, lot size, condition, and amenities,” says Richard
Redmond, author of “Mortgages: The Insider's Guide.”
The moral of
the story: You’ll have to weigh your loan needs and comfort level of completing
the entire mortgage process online before choosing an online lender.
between a small lender, like a local credit union, and a larger national
lender, such as Bank of America or Wells Fargo, is mostly a matter of
preference. But knowing which you’d prefer can help you find the right lender
to fit your needs. If you like personal service, it may make sense to choose a
small mortgage lender in your local area. Indeed, the bigger the bank, the more
business it does, which means you're just one of thousands of clients, so it
may not bend over backward to attend to your every whim, says Bruce
Ailion, a mortgage broker at Re/Max Town and Country in
If you don't
have much time to waste, a larger lender may be a better choice, since the
bigger banks have in-house underwriters and larger teams to process mortgage
factor consider: Large lenders may have more payment options such as online
payment or automatic mortgage deduction. Also, big banks often let you do
everything online, from your mortgage application to account management. (Many
local lenders don’t have as well-oiled online banking systems.)
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