With a national median price tag of more than $250,000, buying a home is the biggest of big-ticket purchases. With so much on the line, it makes perfect sense that home buyers are eager to pore over online listings and spend weekends touring open houses.
But one crucial part of the home buying process is typically given too little attention. Less than one-third of home buyers comparison shop for the best mortgage deal. Granted, putting effort into finding a lender isn't as fun as checking out crown moldings and floor finishes. But it comes with a potentially big payoff. For instance, you might be able to snag a lower interest rate shopping lenders. The difference between a 4% and 4.25% interest rate on a 30-year mortgage can mean saving more than $10,000 in interest costs over the life of the loan.
It's also smart to find a lender who is ideally suited to help you find the best loan deal. Some lenders are experts in helping first-time buyers who likely don't have the "standard" 20% down payment, and may not yet have a high credit score. Other lenders are better set up to work with self-employed borrowers, or buyers who need an extra-large loan.
Tips for Finding the Best Mortgage Lender:
Know Your Credit Scores
While there are many different types of mortgages and mortgage lenders, one common thread is that your credit scores will play a big role in determining what type of deal you might qualify for. Some lenders prefer to work with borrowers with sparkling credit scores, and others also welcome borrowers with lower credit scores.
Checking your credit scores is a smart first step, so you can understand what a lender is going to look at. An Experian survey found that nearly 75% of people who know their scores report they are confident about buying a home, compared to 50% for people who don't know their scores.
Find the Right Mortgage Fit
Lenders often specialize in certain types of loans. Knowing what type of loan you need will help you focus your search.
- Conventional Mortgages. Mortgages that are not guaranteed or insured by a government agency are called conventional mortgages. Most home buyers take out a conventional mortgage.
Most lenders who offer a conventional mortgage aren't going to hold onto the loan for very long. What typically happens is that conventional mortgages are packaged into bond-like investments called mortgage backed securities. What's that got to do with you? A lender who intends to sell off your mortgage needs to make sure the loan meets the requirements for being packaged into a mortgage-backed security. Among the requirements:
- A mortgage limit of $424,100. In some high-cost areas the conforming loan limit can be as much as $636,150 in 2017. You can find your county limit online.
- A sizable down payment. There are conventional loans available that require a down payment of just 3%, but typically conventional loans require coming to the table with at least 5% to 10%. A 20% down payment is required to qualify for the best conventional loan terms. When you apply for a a conventional mortgage with a down payment below 20% you will also be required to purchase private mortgage insurance (PMI), which is arranged through your lender. The PMI is protection for the lender, in the event you don't keep up with payments. Once your have at least 20% equity in your home-either, the PMI payment can be waived.
- Solid Credit Scores. The average FICO® Credit Scores for borrowers who qualified for a conventional mortgage in mid 2017 was 754. FICO® Credit Scores range between 300-850.
- A manageable debt load. Lenders will calculate what percent of your monthly income (before tax) will be eaten up by the mortgage and other loans you're paying off, such as car loans and student loans. This is known as your debt-to-income ratio (DTI). Recently the average DTI for conventional mortgages was 35%.
- Government-Insured Mortgages. About one in four borrowers in early 2017 obtained a mortgage that was insured by either the Federal Housing Administration or the Veterans Administration. These loans often have more lenient requirements than conventional mortgages. Eligible service members may be able to qualify for a VA-insured mortgage that does not require a down payment. And the average FICO credit score for FHA-borrowers recently was 683. Learn more about FHA-insured mortgages.
- Portfolio mortgages. About 20% of the mortgages given to borrowers in early 2017 were loans that the lender intends to hold onto as an investment, collecting the interest payment from the borrower. Lenders looking to hold "portfolio" loans can be more flexible sizing up a borrower's financial situation because they don't have to worry about turning around and trying to sell off the loan. These lenders can be a smart option if you have what lenders consider a unique situation, such as being self-employed (typically there are more and different hoops to jump through than if you are a regular W-2 employee) or you need to borrow more than allowed under conventional loan limits.
Shop Different Lenders
You've also got plenty of choices on where you shop for a lender. Asking family, friends, and colleagues for recommendations is always a good first step. The best leads will be from people whose financial situation mirrors yours. Your well-off uncle may rave about the lender he worked with on buying a vacation home, but if you're looking to buy your first home, you might be better off working with a lender who is fluent in low-down payment loans and first-time buyer assistance programs.
It doesn't hurt to check what sort of deal you might qualify for at the bank or credit union where you currently park your checking and saving, but don't assume that's the best you can do.
Tip: If you're looking to refinance your mortgage, you are under no obligation to go back to the original lender.
If you think a portfolio loan may work best for you, be sure to check out credit unions and community banks, which often are looking to invest in mortgages.
And if you are working on boosting your credit scores, online "non-bank" lenders are worth a look-see. According to the non-partisan Urban Institute, in early 2017 these lenders typically required lower credit scores and allowed higher debt-to-income ratios.
Questions to Ask a Lender:
- What types of loans do you specialize in?
- How long will it take to get a mortgage pre-approval?
- How quickly can you close the loan?
If You're Not into DIY Mortgage Shopping
If you don't have the bandwidth or interest to shop around for the best lender, you might want to consider working with a mortgage broker. A mortgage broker is a go-between who will do the shopping for you.
A good mortgage broker works with a wide group of lenders, and will seek out lenders that are likeliest to offer you the best terms. The mortgage broker's fee is typically 1% to 2% of the loan amount.
A mortgage broker who saves you 1/8th of a percentage point or more on your mortgage rate, or matches you with a lender who will work around any financial blemishes, can be well worth it. Just be sure to ask around for recommendations, and insist on connecting with at least two or three recent clients to get their feedback.
Get a Few Loan Estimates
Consider applying to at least three different lenders, so you can compare offers. Federal regulations require lenders to get back to you within three days with a three-page standardized loan estimate that breaks down the loan terms you might qualify for. This makes an apple-to-apple comparison of loan terms possible. Spending a few minutes learning what to look for in a loan estimate will help you home in on the mortgage lender that can help you snag the best deal.