Choosing a Lender

Understand Your Financial Situation

Before you start shopping for a lender, take a close look at your financial situation and consider these things:

• Credit Score: Your credit score will significantly influence the mortgage rates you’re offered. Check your credit report and address any errors or issues.

• Debt-to-Income Ratio: Lenders will look at your debt-to-income (DTI) ratio to assess your ability to manage monthly payments. Calculate your DTI and aim to reduce it if necessary. You can calculate your DTI by adding up all your monthly recurring debts (student loan, car payment, credit card payment, etc) and then divide your debt by your gross monthly income (which is your amount before any taxes or payments like insurance or 401k contributions come out).

• Down Payment: Determine how much you can afford to put down. A larger down payment can result in better loan terms. But keep in mind you will also have to pay closing costs at the time you buy your home which are in addition to your down payment.

Research Different Types of Lenders

There are various types of mortgage lenders, each with pros and cons.

• Banks: Traditional banks offer a wide range of mortgage products and sometimes offer in-house portfolio loans that you can't get elsewhere and may have special benefits, but sometimes their times to close are longer and their customer service isn't as good as other options.

• Credit Unions: These member-owned institutions often provide competitive rates, personalized service, and in-house loan products that could get you a better rate or a unique program like doctors loans or no PMI loans.

• Mortgage Brokers: Brokers can help you find the best deal by comparing offers from multiple lenders.

• Online Lenders: Online lenders may technically be a bank, credit union, or mortgage broker, but may offer a streamlined process and lower rates due to reduced overhead costs.

Compare Mortgage Rates and Fees

Interest rates and fees can vary widely between lenders. Here’s what to compare:

• Interest Rates: Even a small difference in rates can significantly impact your monthly payments and the total cost of the loan.

• Points: Some lenders offer lower rates if you pay mortgage discount points upfront. Calculate if this makes sense for your situation. In high interest rate environments, make sure you specifically tell your lender if you are ok paying points or not as some may automatically include them in your estimate to make it seem like you are getting a better rate.

• Closing Costs: Compare fees such as origination fees, appraisal fees, and other closing costs that the lender has control over. These can add up quickly. But note that several of the closing costs will be out of the lender's control, like title fees and withholding for taxes and insurance.

• Loan Terms: Look at the different loan terms available (e.g., 15-year vs. 30-year fixed-rate mortgages) and decide which fits your financial goals.

• Special Considerations: Different loan types may have additional quirks. For example, a VA loan may only need 0% down, but the VA funding fee will be added to the amount of your loan and you will have to pay it back when you sell. An FHA loan may require less down up front, but there is an additional FHA funding fee you pay when buying your home. With conventional loans, you can get rid of your Private Mortgage Insurance (PMI) when you pay off enough of your mortgage, but the PMI on an FHA loan cannot be removed without refinancing. Make sure to review these pros and cons with your lender before making a final decision on what loan type to use.

Evaluate Customer Service

Good customer service is crucial, especially during the complex mortgage process. When interviewing loan officers, consider the following:

• Responsiveness: How quickly does the lender respond to your inquiries? Are they available during evenings and weekends?

• Transparency: Are they clear and upfront about rates, fees, and terms? Do they provide you the kind of quotes you ask for or do they send you something you didn't want?

• Reviews: Check online reviews and ask for recommendations from friends or family who have recently bought a home.

• Experience: Make sure the lender you hire has experience working with your specific loan type as not all are as well-versed as others.

Ask the Right Questions

When speaking with potential lenders, ask these important questions:

• What types of loans do you offer?

• What is the interest rate and APR for the loan?

• What are the estimated closing costs?

• Are there any prepayment penalties?

• How long will the approval process take?

• How quickly can you close once I'm under contract?

• Are you a direct lender or a wholesale broker?

Consider the Long-Term Relationship

Think about the long-term relationship you’ll have with your lender:

• Servicing: Will the lender service your loan, or will it be sold to another company?

• Support: What kind of support and resources do they offer for borrowers after closing?

• Refinancing: Do they offer discounts if you refinance your loan with them if interest rates drop?