Most 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.
How much money do I need?
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.
If you’re 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.
To 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.
Would I qualify for a conventional loan?
Most home 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.
The 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%.
If I don’t quality for a conventional loan, what are my options?
Most home 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.
Federal 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.
Meanwhile, U.S. Department of Agriculture loans let borrowers put as little as 0% down, but these loans are available only in certain rural locations.
Veterans 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.
Am I willing to hire someone to do the legwork?
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.
Typically, a 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.
Am I comfortable getting a mortgage online or prefer hands-on guidance?
Online 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).
Another 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.
Nonetheless, “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.
Do I want to work with a small or large lender?
Choosing 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 Atlanta.
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 applications faster.
Another 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.)
To better weigh all your mortgage options, head to realtor.com/mortgage to compare lenders and learn more.