6 steps to choosing the right mortgage lender

Searching for a new home can be thrilling, but securing a mortgage? That’s a different story. Unless you propose a cash offer, finding the top mortgage lender is just as important as identifying the ideal place to settle down. By investing time in research, you could save significant amounts in interest and fees throughout your loan period. Here are steps on how to select a mortgage lender to actualize your homeownership aspirations.

Check out the leading low- and no-down-payment mortgage lenders.

Mortgage lenders need assurance regarding your ability to meet monthly payments. Generally, they prefer at least two years of sustained, verifiable income. Yet, in some cases, they might consider applicants with less than two years’ employment history.

Self-employed applicants who can provide proof of income and tax returns, along with those who recently changed careers, attended college, or faced serious medical issues, might still qualify. Lenders also occasionally make allowances for those who took parental leave, cared for dependents, or went on sabbaticals.

You may also be eligible for specialized home loans, like non-qualifying mortgages, designed for individuals with specific financial situations.

The higher your credit score, the more favorable the terms. With a score of 740 or greater, you unlock the most competitive rates and minimal fees; however, a score of 620 is typically sufficient to qualify for a conventional loan.

If your credit score is lower, you may still be successful with a government-backed home loan option. FHA loans allow for a credit score of 580 (or 500 with a 10% down payment). VA and USDA loans don’t necessitate a specific minimum credit score, but individual lender criteria may apply.

Find out about the credit score needed to buy a house.

Additionally, lenders evaluate your debt-to-income (DTI) ratio. Here’s how it is assessed:

• Front-end ratio: This indicates the portion of your gross income allocated to housing costs, ideally around 28%. Calculate it by dividing your estimated monthly mortgage payment (including any escrow) by your gross monthly earnings.

• Back-end ratio: This reflects the percentage of your income that goes toward all monthly debt obligations. Depending on the loan type, it should be between 36% and 50%. Compute it by dividing the total of your monthly debt payments (including the expected mortgage payment) by your gross monthly income.

Explore the 28/36 rule — How your debt affects home affordability.

A lack of a 20% down payment isn’t necessarily problematic. Certain loans demand just 3% down or even none at all. However, offering more can often yield better interest rates and lower monthly payments. Just ensure that these funds are readily available.

Having mortgage reserves can improve your standing if a lender is uncertain. These are available cash and liquid assets remaining post-down payment, giving lenders confidence that you have a financial fallback option during hardships.

Discover how much money you need to buy a house.

For conventional loans, a credit score of 620 is standard, usually with a down payment of about 3%. However, you will need to pay private mortgage insurance (PMI) until you achieve at least 20% equity in your home.

Here are some mortgage products that facilitate homeownership:

• FHA loans: Insured by the Federal Housing Administration, FHA loans require a 580 credit score and a 3.5% down payment (or 500 credit score with a 10% down payment). You will have to pay mortgage insurance throughout the loan’s life.

• VA loans: These loans, backed by the Department of Veterans Affairs, are available exclusively to military-related borrowers and can provide up to 100% financing. While no defined minimum credit score exists, a score of 580 or higher is typically preferred.

• USDA loans: These loans, offered by the U.S. Department of Agriculture, target homebuyers in rural areas with no down payment requirement. However, income limits apply, and lenders typically prefer a credit score of at least 640.

If you’re looking for funding beyond what a conventional loan provides, Jumbo loans cater to borrowers seeking to purchase luxury properties or reside in high-cost markets. Be ready for stricter eligibility standards compared to standard and government-backed loans.

Get acquainted with different mortgage loan types.

Traditional banks, credit unions, and online lenders typically fall into this group. You will engage directly with these lenders throughout the mortgage process. Some offer down payment assistance programs or adaptable loan choices to support your approval chances. Begin your search with your financial institution to inquire about any perks available to existing customers, and don’t hesitate to seek recommendations from friends and family.

Following closing day, some direct mortgage lenders manage your loans, which entails handling your monthly mortgage payments. Others might outsource this to a distinct loan servicer.

Mortgage brokers streamline the process of finding the best mortgage deal. These licensed professionals scout for suitable lenders within their networks to align with your needs and budget. Usually, a fee of 1% to 2% of the loan amount is charged for their service, either by you or the lender.

Do you have a substantial down payment but are struggling to qualify for a conventional loan? A bridge loan or hard money loan might be viable alternatives.

Bridge loan lenders extend short-term loans based on the equity in your current residence. A bridge loan can be beneficial for homeowners purchasing a new residence while awaiting the sale of their former home. However, brace for higher interest rates, increased fees, and a shorter repayment period.

These loans aren’t as prevalent as conventional mortgages, though some major lenders like Rocket Mortgage offer bridge loans.

Hard money loans act similarly to bridge loans, but your credit history plays a lesser role in eligibility. A hard money loan is often suitable for individuals with poor credit histories, as these loans are typically offered by private companies rather than traditional banks.

Learn more about Rocket Mortgage’s bridge loan program.

Prospective lenders on your list should be willing to respond to any inquiries regarding the home buying process. A lack of transparency could be a warning sign to look elsewhere.

Not sure how to proceed? Here are some questions to ask your mortgage lender to guide you:

• What mortgage types do you provide?

• What is your preapproval application processing time?

• Do you offer a rate lock, and what’s its duration?

• At what point do you provide a good-faith estimate?

• Who will be my primary contact throughout the process?

• What are your operating hours?

• Is assistance available in person, or is it limited to phone or online?

• Will I receive updates via a client portal for my application?

• Is eClosing an option?

• Do you provide down payment assistance programs?

• What are your escrow requirements?

• What level of support is available post-closing?

• What payment alternatives do you provide?

• What are your lending standards for various loan products?

• What interest rates and APRs are currently available?

• What costs will I encounter at closing?

• Will you service the loan, or will it be sold post-closing?

• Are there any prepayment penalties involved?

• What does the underwriting process look like for typical clients?

• How long does underwriting generally take?

• What’s the usual timeline from preapproval to the closing stage?

Thinking about going with a mortgage broker? Clarify their processes. Specifically, how do they determine which lender best suits your situation? Also, check the cost of their services and who pays their commission.

Here are prime mortgage lenders for first-time buyers.

Step 5: Obtain preapproval and compare loan offers

Most lenders permit you to apply for preapproval online and submit necessary documents. If not utilizing a broker, apply with at least three lenders. Every preapproval involves a hard credit check, but your credit score will only see a slight impact if all applications occur within a 45-day timeframe.

Assess the quotes regarding rates, origination fees, mortgage insurance expenses, and estimated closing costs to identify the most suitable lender for your situation.

Don’t neglect to review online ratings for your preferred options. They provide insight into their operational styles and customer service quality.

If you find yourself daunted or are considering other solutions, take a break from your search and reach out to a broker for guidance.