For most home buyers, there’s no buying a house without getting a mortgage – and there’s no getting a mortgage without getting a mortgage lender.
Think of mortgage lenders as the gatekeepers to homeownership.
If you pay with cash, you can skip right past the lender. But if you’re like the rest of us – read on.
First things first: Don’t fear the gatekeeper.
The person handling your mortgage application will be motivated to help you buy a home. Maybe they truly enjoy helping dreams come true, or maybe they’re just determined to close on the deal (spoiler alert: most lenders have both mindsets).
A lender can help you:
- Understand the loan options you currently qualify for
- Spot areas of your finances that could be improved to help you get your preferred loan type and better loan terms
- Handle the mortgage application and approval process
Mortgage lenders should compete for your business. Buying a home is a big investment in money, time and emotions.
Making Sense of Mortgage Lenders
Figuring out who to get a mortgage through can be confusing. Let’s simplify things with a breakdown of the different types of mortgage lenders.
Direct lender: The gatekeeper
Direct lenders are the most common types of mortgage lenders for residential home buyers.
They offer their mortgage loans directly to customers and set the terms for them.
Whether you negotiate loan terms or not, you’ll need to accept the lender’s requirements for proceeding with the loan – or else you ain’t proceeding into that dream home!
That’s why knowing how to find the best home loan lender is so important.
Types of direct lenders include:
- Retail banks: Retail banks offer a wide variety of financial services on top of mortgage loans, making it possible for account holders to take care of all their money-related business in one place. You can apply for a mortgage at a bank even if you don’t have an existing account there.
- Credit unions: Similar to banks, but their mortgage rates and fees are often lower because they’re nonprofit organizations. The thing is, to get a mortgage through a credit union, you have to become a member. Some offer membership to anyone in the community, but some don’t.
- Online mortgage lenders: Because these lenders do everything online, they may offer lower overall loan costs (including interest rates) and lots of loan options – but you may have to sacrifice the personalized customer service you’d get with an in-person lender.
- Mortgage bank: These privately owned companies specialize in lending out money for home purchases. They have the widest variety of loan options available and can provide more flexible down payment and closing cost assistance.
- Savings and loans: S&Ls are local banks that offer the same types of banking products and services as retail banks but place more emphasis on residential mortgage products.
- Mutual savings banks: These local banks are focused on the financial stability of their communities, and although they focus on savings accounts, they also offer low-cost, fixed-interest mortgage loans to lower-income members.
Each direct lender offers its own down payment requirements and loan terms, including interest rates and fees.
If you’re a member of a retail bank, credit union, S&L or mutual savings bank, be sure to get a mortgage offer from them when you begin comparing lender offers. They usually offer more flexible loan options for account holders.
Compare what they offer you to the offers you get from mortgage banks or online lenders.
Mortgage loan officer: Your new BFF
A mortgage loan officer works for the lender and is the actual human being you work with during the entire loan process – from the preapproval and loan application to the closing.
A great loan officer helps you navigate the ups and downs of the home buying journey. They can be everything you need: from your guide to your advocate to a straight-up finance wizard.
They’ll help you:
- Gather your financial info and credit history and assess which loan options are right for you
- Guide and support you through the loan application process
- Button up your application and make sure it’s as accurate and favorable toward you as possible before it’s sent to the lender’s underwriter (the person who has the final say in approving your loan)
Loan officers are the folks you’ll be negotiating loan terms with, including interest rates and closing costs.
So you’ll probably agree that – from the very start – it’s important that you develop a good relationship with your loan officer.
Mortgage broker: A networking and negotiating machine
Mortgage brokers don’t provide loans, but they do all the heavy lifting to get you one.
A mortgage broker is a skilled professional hired by a home buyer to help them find a lender and act as their go-between.
They can save buyers a lot of time and, in many cases, money by working their network of lenders to find the ones best suited for the buyer’s unique needs.
If you decide to work with a mortgage broker, you or the lender will have to pay the broker 1% – 2% of the loan amount. If the broker ends up getting you an interest rate that saves you thousands of dollars over the life of the loan, their potential fee may well be worth it.
But it’s not a given that they’ll find you the best deal. And they can’t guarantee a lender’s loan terms.
Bottom line: Make sure you vet brokers hard before you commit to working with one. Start by asking your real estate agent if they can recommend anyone. And double-check a broker’s professional license status through your state’s licensing agency.
And last, but definitely not least, confirm who pays the broker: you or the lender. (Please say “lender,” please say “lender”! )
Learning About Loan Types
Knowing the different mortgage loan types and understanding them is the foundation of any happy home purchase.
School yourself on loan types before you speak to a lender so you can have a more productive conversation right off the bat.
Types of mortgage loans
- Conventional loan: A relatively low-cost loan (backed by Fannie Mae and Freddie Mac) with higher credit score and DTI requirements than government loans.
- Federal housing administration (FHA) loan: A government-backed loan that’s popular with first-time home buyers who have lower credit scores and not much saved for a down payment.
- Department of veterans affairs (VA) loan: A government-backed loan that offers friendly terms, low interest rates and no down payments to qualifying active-duty service members, veterans and their families.
- Jumbo loan: This loan type is geared toward buyers purchasing houses over $548,250. Jumbo loans have higher credit and income documentation standards than conventional loans and they are not backed by any organization or government agency.
There are also loan programs available to home buyers who may need assistance paying for closing costs or down payments. These are usually offered by state and local governments – as well as nonprofits – and are designed for first-time home buyers with low-to-moderate incomes.
Fixed-rate loan vs. Adjustable-rate loan
When you take out any type of mortgage loan, you will typically have the option to select either a fixed-rate or an adjustable-rate mortgage (ARM).
Your lender can help you figure out which of these two mortgage rate structures makes the most sense for you based on your current finances and how long you plan to live in the house.
- Fixed-rate mortgage loan: In a word: predictable. You always know what you’re going to pay every month because the interest on a fixed-rate loan never changes.
- Adjustable-rate mortgage loan: In a word: unpredictable. You start with a low, fixed mortgage rate for the first 5 – 10 years, but after that, your rate becomes a variable rate that changes every year.
In general, both are good options.
An ARM might be helpful if you don’t plan to stay in your home past its initial fixed-rate phase. A first-time home buyer purchasing a temporary starter home might be attracted to the lower interest of an ARM.
Mortgage loan repayment terms
A loan’s “repayment term” refers to how long the borrower has to pay the loan back. Mortgage repayment terms are typically 15 years or 30 years. Some lenders offer 10- or 20-year mortgages.
Opting for a longer loan term will make your monthly payments lower. But that might also make the overall cost of your loan higher because you may end up paying more interest over the life of the loan.
Finding the Best Home Loan Lender for You
Now that you have a clearer view of the mortgage landscape and your options, it’s time to track down the lender that’s going to get you into your new home.
Besides reviewing your credit report and bank statements, you should ask yourself:
- What’s my house budget?
- How long do I plan to live in the house?
- What kind of home am I looking for? Do I want a primary residence, a vacation home, a single-family house, a mobile home, or even a tiny home?
Your answers can help you target your search to lenders who can handle the specifics of your home purchase type.
Maybe you need a mortgage lender that specializes in jumbo loans. Or maybe you need a lender that’ll actually finance a tiny house (most mortgage lenders won’t, but some personal loan lenders will).
Keeping the specifics of your situation in your mind can help you quickly filter through the loan options lenders present.
Shopping for lenders
Comparing lenders should start with a quick online search or by asking your real estate agent who they’d recommend.
Then get the tea on each one:
- Compare their mortgage rates, which are usually published in “rate tables” on their websites.
- Look for lenders who also publish their loan fees and any fine print about the interest rates they feature on their site (transparency FTW!).
- Compare their online reviews (try Google and the Better Business Bureau).
- Find out what loan types they specialize in.
- Read the loan officers’ bios. Are they experienced? Catch a vibe off the quotes in their bios. Are they giving people-person, down-to-earth vibes? Or do they seem too eager to talk about their success?
Once you’ve found a few lenders that seem like good fits (we suggest comparing three), reach out to them and see how they handle questions like:
- How long does it usually take to get preapproved, apply and close on one of your loans?
- What are your down payment requirements?
- What are your lender fees?
- Do you offer no-closing-cost mortgages? Are you open to negotiating or waiving fees?
- What’s your policy on mortgage discount points?
- What are your policies around mortgage insurance?
- What’s your preferred way to communicate – text, email, phone?
Get preapproved for a mortgage and choose a lender
Mortgage preapprovals come with two major benefits. The first benefit is that you can use the preapprovals to compare lenders.
Compared to the numbers on the lender’s website or what they’ve estimated, lender preapproval offers provide you with more accurate estimates of the interest rates, fees and monthly payments.
Many home buyers also choose to negotiate with their favorite lender at this point if they think they can get a better deal on any of the loan terms. Having multiple preapproval quotes gives you leverage to negotiate.
And the second benefit? With a preapproval in hand, sellers know there are lenders out there willing to give you a loan.
Negotiating with lenders
So let’s be real. Negotiating doesn’t come easy for everyone. Some of us don’t have the time or the confidence – or it just makes us uncomfortable. If that’s you, hiring a mortgage broker to negotiate rates might be a good option.
Staying Serious About Credit and Debt
Mortgage lenders take credit scores and debt seriously. A lower debt-to-income (DTI) ratio and a higher credit score will put you in a stronger position when you’re negotiating with lenders.
Your credit score will also play a big role in determining which loans and down payment options are available to you. Knowing this can help you narrow down your lender search.
You can request a free credit report every 12 months.
Before you start looking for a mortgage lender, you’ll want to – at the very least – calculate your DTI and review your credit score and payment history.
Want to get next level and own your house hunt?
Give yourself time to lower your debt and strengthen your credit before getting mortgage preapprovals.
Mortgage Lenders: The Heroes of Home Buying
The type of loan and terms a lender offers you (or doesn’t offer you) can be pivotal to your goal of buying a house without breaking the bank.
Don’t settle on a lender. Choose a lender that will champion your cause. A great lender can make your dream of owning a home a reality with loan terms that are ideal for you.
Knowing where to go for a mortgage and following the steps we’ve outlined can help you find and work with a lender who will make your home buying experience as enjoyable and wallet-friendly as possible.