Finding the Right Mortgage Lender
You’re on the verge of buying a home and need to know how to find a mortgage lender. Choosing the right lender can save, or cost tens of thousands of dollars based on the lender that you choose. Not to mention in a competitive market a lender with a great reputation can help get your offer accepted!
With a home being one of the largest purchases (if not the largest) you’ll ever make in your life, it’s important to get this one right. The home buying process can be overwhelming and knowing where and how to find a mortgage lender can be stressful. Within the DMV we recommend local lenders as the best option for most buyers. Compared to a market like NYC where we have found big banks are the best option.
This discussion is going to walk you through what you need to know, and how to find a mortgage lender that sets you up for a successful home purchase.
We’re going to walk you through:
- Leverage your local community
- Credit score
- Understand budget
- Understand mortgage options
- Compare rates and terms
- Get pre approved
- Work with your realtor/legal team to review
Leverage Your Local Communities for Lenders
With the digital age has come an abundance of options when it comes to how to find a mortgage lender. You can leverage online tools that’ll find you low rates in minutes; It’s not a bad tool to have in your arsenal, but within the DMV local lenders are the best option for most homebuyers.
Note: Local Lenders are not to be mistaken with credit unions which are in general on one of the worst options to use in the DMV.
Why Local Lenders?
- Local Lenders have a deep understanding of the local market.
- Local Lenders have better relationships with real estate agents that can help get your offer accepted.
- Local Lenders are focused on long term relationships they need referrals to grow their businesses so they focus on the customer experience
- They have a higher successful close rate because of their understanding of the market and flexibility.
- They only use Local Appraisers (This is incredibly important once you have a home under contract)
- They have the ability to move quickly in a fast paced environment. For example the average local lender can go from contract to close in 21 Days while lenders like PenFed, USAA, Rocket Mortgage, and PNC can require over 45 Days!
Ultimately, staying away from larger banks, credit unions and online lenders will get you the best results during this stage of the homebuying process in the Washington, DC area.
Credit Score
Regardless of the mortgage lender that you choose, one of the first things that they are going to ask you is about your credit score. So what is it and why is it important?
You probably already know what a credit score is but just to touch on it briefly, your credit score is the number that indicates how creditworthy you are. Credit scores generally range from 300 to 850 and it gives your lender the ability to see how likely you are to pay your bills.
One of the most popular scores used is the FICO credit score. Using the FICO credit score as our example, we know they use the following factors to come up with your credit score:
- Payment History
- Length of Credit History
- New Credit
- Amount Owed
- Mix of Credit Accounts
Let’s touch on the factors that go into your score.
Payment History
Payment history refers to your ability to pay your bills on time over the length of time in which you’ve had credit. Payment history is one of the primary and most influential factors on your overall score. A lengthy and high-quality payment history is a great indicator that you will be able to pay your bills into the future.
Length of Credit History
The length of your credit history is another important factor that takes into account how long you have had established credit. This takes into account:
- How long your various accounts have been open.
- How many accounts do you have available?
- How long since you used each account.
As counterintuitive as it may sound, you need credit in order to increase your credit score. Opening an account, keeping your balance as low as possible, and consistently making payments on-time will do wonders in helping you increase your credit score.
But with that said, that leads us to our next factor which is New Credit.
New Credit takes into account the amount of inquiries/attempts you make to open new credit accounts.
While it’s fine to open a few, you wouldn’t want to try to open too many new accounts in a short period of time. This can often lead to a negative impact on your credit score and really isn’t a great look to lenders if you don’t have much of a credit history.
Amount Owed
Coming in as the second most important factor in your credit score is the amount owed. So, what does the amount owed take into account?
Amount owed looks at the total amount across all credit accounts that is owed, how many accounts of yours that carry balances, and something called the Credit Utilization Ratio. The Credit Utilization Ratio takes into the account the percentage of your total credit balance that you are using, specifically on things such as credit cards.
For example, if you had a $10,000 limit on your credit card, you wouldn’t want to max that out as it could have a negative effect on your credit score. Conversely, using a small amount and making on-time payments can have a positive effect on your credit score.
Credit Mix
Lastly is your Credit Mix, it’s one of the smaller factors in deciding your credit score but it does have an impact. A credit mix is just the various types of accounts you have open, often times, what is thought to be a good mix includes some of the following;
- Credit card
- Mortgage
- Student Loans
- Retail Store Card
While it’s somewhat important to keep your credit mix in mind, really, it’s more important to ensure that you are making regular payments on these credit lines as missing payments would have a larger impact on your credit score.
Back to our original point, why is this credit score so important?
Lenders often have minimum credit score requirements in order to qualify for a loan. The higher your credit score, the better terms you can receive on your loan and in the long term, likely save yourself a significant sum of money.
Understand Your Budget
Understanding your budget is a crucial step in the home buying process and specifically when looking for a mortgage lender. Any lender is going to review your financial information before giving you a loan but you really want to understand your finances before even talking to a lender.
Here’s how much money you actually need to buy a home.
Not only is a mortgage lender going to lend you the funds you need to buy your dream home, but they can also help you make sense of your finances. They leverage debt-to-income ratios, review your credit score, and more to determine if you both have the funds and are credit worthy enough to lend to.
They can also help you determine which mortgage option is best for you. We are going to talk about some of your options next but depending on your finances and credit history, there are different types of mortgages that best fit your goals.
Understand Your Mortgage Options
Something that a lot of borrowers often overlook when it comes time to buy a house is the different types of mortgages that you may want to explore with your lender.
We talked about these in depth in our “4 Options for Your First Home Mortgage in DC” guide but just as a refresher let’s talk about the 4 most popular loan options, specifically the following:
- Fixed Rate Mortgage
- Adjustable-Rate Mortgage
- Conventional Mortgage
- Federal Housing Administration (FHA) Mortgage
These are some especially important terms to understand before talking to a lender, that can give you an idea of what you’re getting into.
Fixed Rate Mortgage
A fixed rate mortgage is the most popular rate structure on a mortgage loan. The Fixed Rate on the loan refers to a static interest rate over the lifetime of the loan.
A Fixed Rate allows for predictable and budget friendly payments and is the most popular option for that reason. With a fixed rate mortgage, you won’t see any fluctuations in your mortgage due to external conditions such as change in monetary policy.
Lenders sometimes have more strict requirements for Fixed Rate mortgages and depending on the interest rate, can sometimes be more expensive than an adjustable-rate mortgage (another type of loan we’ll talk about later) over the lifetime of the loan.
Adjustable-Rate Mortgage
As we noted in our “4 Options for Your First Home Mortgage in DC” guide, “Adjustable Rate Mortgages (ARMs) are a type of loan where, opposite to the Fixed rate loan, the loan has an interest rate that varies throughout the life of the loan.”
An ARM adjusts to market conditions scheduled every couple of years, and while this can be beneficial depending on the interest rate environment, it also doesn’t provide that predictable and budget-able monthly payment that the Fixed Rate Loan does.
In the end, ARMs can be beneficial in a lower interest rate environment where you could have a lower payment than you would on a fixed rate loan but they also can be more expensive if interest rates get too high and the rate on your loan gets adjusted in the wrong direction.
Conventional Mortgage
A conventional mortgage is a mortgage provided by a lender that isn’t backed by the US Government. It’s the most common type of mortgage but since it’s not backed by the US government, requirements for obtaining this type of mortgage are more strict.
The great part about conventional mortgages is that you can buy whatever you want with them, assuming you have the credit history and capital. They aren’t restrictive as other loans such as the FHA Mortgage can be (another type we’ll talk about next)
Federal Housing Administration (FHA) Mortgage
An FHA mortgage is meant for those first-time home buyers or buyers with lower annual income.
FHA loans are backed by the US Government and as such have more relaxed credit requirements to qualify for a loan. Someone who may get turned down for a conventional loan could still have a good shot to obtain an FHA loan.
While FHA loans are easier to obtain, opposite to the conventional loan, they are a bit more restrictive. FHA loans can only be used to finance a primary residence and as such, couldn’t be used to finance a vacation home or investment property.
Compare Rates and Terms
Another important step that we see borrowers skip far too often is the process of comparing rates and terms of mortgages.
When you’ve decided it’s time to buy a house and are talking to lenders about financing your house, be sure to shop around and talk to more than one mortgage lender. Different lenders are going to be able to offer you different rates and terms on your mortgage and you want to find what’s most beneficial towards you.
Often we see borrowers just stick with the first loan they can qualify for, but the reality is that they could have potentially gotten a lower interest rate somewhere else had they shopped around.
The interest rate is one of the most important parts of a loan and the lower you can get it, the more money you can save in the long run. Lets not forget, a mortgage is often a long term commitment, with the most popular mortgage length being 30 years!
Finding the lowest interest rate and most favorable terms is a crucial step in finding the correct lender for your financing needs.
Get Pre Approved
Getting pre approved allows you to compare and get a better understanding of the terms/rates that you’ll likely be working with. Having a few options will allow you to choose the lender that works best for your goals.
This is where working with your local lenders helps because your Realtor will already have a list of lenders for you to look at. Then, all that’s required of you is filling out the necessary information with the lender. Some things that you’ll need include:
- A drivers license
- SSN number(s)
- Residential history with references from past landlords
- Paystubs
- Tax returns (W-2, 1099)
- Bank statements
- List of financial accounts (checking, saving, brokerage, 401k, etc.)
- Any debt/liabilities (credit card, student loan, auto loan, etc.)
- Employment history
- Down payment information (how much you’re putting down and where it’s coming from)
- Any liens against you (if applicable)
It may seem like a lot, but luckily you only have to gather this information once and then it’s just a matter of sharing it with the potential lenders.
Lastly, as you’re getting preapproved it’s best to wait before opening any new lines of credit as all of the submitted information will be verified should you decide to move forward with a certain lender after the preapproval.
Work with Your Realtor
Again, your Realtor is the foundation of your team before making the big purchase. You’ll have plenty of documents to go through and it’s important to ensure that you’re reading the fine print.
From comparing lenders to reviewing your overall closing costs, your realtor is there to help ensure that everything aligns so that there aren’t any surprises.
Final Thoughts
There are two pieces to getting the most out of your mortgage lender and finding the right one.
- Leverage local lenders
Local lenders will have established relationships with your Realtor and provide trust in the engagement. They typically prefer to work with local consumers, and it can be helpful if you need to pop into the office to speak to someone.
- Understand the aspects that go into lending
By having the right Realtor that complements your understanding of everything that goes into the lending process, you’ll be able to set clear goals and communicate them to your Realtor and mortgage lender.
Let us know how you’re finding the best mortgage lender, or if you need some help along your home buying journey.
Next, let’s dive into some of the programs designed to help get you in your first home.
