If you want to buy a house (or refinance an existing mortgage), you need to partner with a financial institution. Borrowers have many lender options in 2022, but that doesn’t mean all of them are worth it — the best one for you varies based on where you live, what you’re looking for and other factors.
Once you know the type of loan you want, you should get pre-qualified with a few lenders and compare their offers, according to Jennifer Ashley (NMLS ID: 492958), a mortgage loan officer with ConsumerAffairs.
If you feel confident in a lender, it’s time to get preapproved, find a house and get on with the mortgage process.
The first step to taking out a mortgage is deciding what kind of lender you want to work with. If you already have a local bank or credit union you like, this could be a great place to start.
If not, you’ll need to choose from various banks, credit unions, mortgage banks, mortgage companies and mortgage brokers, which aggregate and help you compare offers.
Sometimes, it comes down to whether you want a more personal, local relationship (such as with a credit union) or more advanced digital features (like with an online lender or broker).
“Pretty much everybody has a mobile app these days,” Ashley said, adding that some homebuyers may choose to work with a bigger mortgage company or bank for 24/7 support, the ability to upload documents and other online features.
Mortgage banks are national banks, like Bank of America and Chase, that offer a variety of mortgage types, including conforming home loans, which adhere to guidelines set by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency; government-backed loans, like FHA and VA loans; and nonconforming loans, including jumbo loans.
Mortgage companies, like New American Funding and Better, are corporations that are licensed to offer home loans but don’t have a “bank” behind them. Like mortgage banks, mortgage companies offer different types of loan options for home purchasers.
Mortgage brokers are intermediaries between direct lenders and borrowers. Brokers collect your information and shop around for offers from various lenders. They then present these offers to you for comparison.
Local banks or credit unions are options for those who prefer face-to-face service. Along with personal service and local knowledge of the housing market, you might find that local banks and credit unions offer special loan products and promotions for existing customers.
What to know about loan servicing
A loan originator is responsible for creating your mortgage; the servicer is responsible for the administrative aspects of managing the loan until you pay it off. It comes down to a difference in where you make your payments.
Ask who will service the loan before you get preapproved.
When you choose a company that also services your loan, “you maintain one relationship,” Ashley said. The same company sends out your mortgage statements and handles all the day-to-day tasks, such as tracking principal, interest, taxes and insurance (PITI) and managing escrow accounts.
If your lender sells your mortgage to a servicer, you'lll make your payments to whichever company buys it. Sometimes loans can be sold five times without the borrower realizing, and “half the time, they’re not even told that it's going to be sold,” Ashley said.
If your lender is also a servicer, it probably holds onto the majority of its loans, Ashley said. The only advantage to choosing a company that doesn’t service all its loans is that you might have access to a wider range of loan products than a full-service bank.
2. Consider all your mortgage options
While your lender will help you choose a loan option, it’s essential to understand the different types of mortgage loans before choosing one that works best for you. The best loan for you will vary based on your credit score, how much of a down payment you can put down and other factors.
Types of mortgage loans
One of the first things a lender will do when you apply for pre-qualification is review your credit file with a soft inquiry and determine the best mortgage loan for you based on your credit history and income.
It helps to have an idea of what you want before you start getting pre-qualified. Compare the different types of options for purchase and refinance loans below.
Purchase loans
Most people choose between a conventional or FHA loan. FHA loans (backed by the Federal Housing Administration) are popular with first-time homebuyers because it’s relatively easy to qualify and the down payment requirement is as low as 3.5% (those with lower credit scores may need at least a 10% down payment). Repeat buyers are also eligible for FHA loans.
If you’re buying a house, it’s worth seeing if you qualify for certain government-insured loans. For example, veterans should consider a VA loan. In some states, the Section 184 Indian Home Loan Guarantee Program helps American Indian and Alaska Native families finance a house.
You can also find construction loans to finance building a brand-new house.
In 2022, the maximum amount you can get through a conventional conforming loan (the most common loan type) in most areas is $647,200. Jumbo loans are for amounts above this conforming limit, up to $10 million or more. You need a pretty good credit score to qualify for a jumbo loan, however.
A refinance loan pays off your first mortgage. You then start paying off a new loan rather than your original mortgage. If you’re refinancing an existing home loan, you have a couple of primary options:
Cash-out: This loan lets you cash out on the equity that you’ve built up since you bought your house. The funds can be used to pay for home improvements, debt consolidation and other expenses.
Rate and term: Rate-and-term refinancing replaces your first mortgage loan with a new one that has a better rate and/or a different term. It might make sense if current refinance rates are relatively low or you want to change your loan term.
Your credit score plays a big part in determining what loans you qualify for. Minimum requirements vary by loan type:
Conventional: 620
FHA: 500 to 580
VA: 580 to 620
USDA: 620 to 640
Jumbo: 680 to 700
Your credit score also affects your interest rate. Lenders are more likely to offer you lower rates if you have a higher credit score. Most consider any score over 740 to be a very good credit score to buy a house.
Knowing your credit score prevents you from being surprised when it’s time to be approved for a mortgage.
“Sometimes, people think they have a 700 credit score, but they actually have a 640,” Ashley said.
When you check your credit, it’s important that you get the most up-to-date history. Go to www.annualcreditreport.com to get a free credit report once a year from each of the three big reporting companies.
There are ways to fix your credit if it’s not where you’d like it to be. Paying off old debts and lowering your credit utilization rate will have positive effects on your score.
Loan terms and interest rates
It’s hard to shop for rates because you won’t truly know what rate a lender will offer you until you’re preapproved. Still, it makes sense to think about what you’re looking for.
Longer versus shorter term: The term is how long you have to pay off your home loan. The majority of mortgages are paid over a 30-year period. There are benefits and drawbacks to both 15- and 30-year terms.
Adjustable versus fixed rates: With a fixed rate, you pay the same interest rate over the entire loan term. Adjustable rates fluctuate after a specified introductory period, which makes payments less predictable. There are pros and cons to choosing a fixed or adjustable rate.
3. Get pre-qualified
If you already know what kind of loan you want, look for lenders that can offer that product or work with a broker to help you get pre-qualified.
At this step, Ashley recommends comparing three lenders. You can ask for referrals from your real estate agent or builder. She also suggests reading plenty of mortgage lender reviews.
Some of the most important factors to consider when you compare mortgage loan offers are closing costs, discount points and down payment requirements:
Closing costs: These costs typically include origination fees, the property appraisal, title fees, taxes and various other costs, some of which go directly to the lender and some the lender collects on behalf of third parties, such as county recording fees.
Discount points: You can buy down your rate by paying mortgage points. It’s a one-time purchase made at closing. Most lenders will offer 0.25% off your interest rate for every point. One point is usually equal to 1% of your total home loan. Some lenders limit the maximum number of points you can use.
Down payment: Your minimum down payment is determined by the type of loan you get. Some lenders offer down payment assistance. The amount you put down can affect other terms of the loan, including whether you have to pay mortgage insurance.
5. Ask the right questions
Once you find a lender you like, make sure you understand how the process works, including how long it takes to close, before getting preapproved:
How long does it take to close?
Whether you’re getting a purchase loan for a home or refinancing an existing mortgage, the process takes about the same amount of time: between 30 and 60 days. How long it takes depends on factors such as the lender you work with, the type of loan and housing market conditions. Some lenders might offer a guarantee to close your loan within a certain time — and compensate you if it takes longer.
How long is the interest rate lock period?
Ideally, you close before the rate lock expires. You’re likely to get a better rate if you lock in your loan for fewer days, Ashley said. Lenders charge a fee to extend this period (costs vary).
How much of the process can be done online?
Many lenders now have online applications, allowing you to fill out information, securely upload files, view updates and review mortgage loan documents at any time. This helps facilitate effective communication between the mortgage lender, you, your real estate agent and the title company.
Some of the best online mortgage lenders also offer e-closing, where you can sign closing paperwork electronically, which speeds up the process.
Do I need an escrow account?
Most likely, you'll need one — unless you put more than 20% down. You used to be able to decide whether you wanted to put your taxes and insurance in escrow, but that changed after the mortgage crisis from 2007 to 2010, Ashley said.
Is there a prepayment penalty?
The answer should be no. “Most [lenders] aren't even allowed to have a prepayment penalty anymore,” Ashley said.
6. Get preapproved
Once you narrow it down, it’s time to get your official preapproval letter, which shows you how much you're conditionally approved to borrow, the interest rate and other loan details. Here’s what you need:
Your driver’s license or state-issued ID
30 days of pay stubs
Two years of W-2s (from all employers)
Two years of tax returns
Two most recent bank statements (all pages, all accounts)
Your most up-to-date credit report
In general, preapproval requires a hard credit inquiry (pre-qualification involves a soft credit inquiry). If you apply for preapproval from more than one lender — not a bad idea if you want to compare loan offers in detail — you have a 45-day window when all credit checks are treated as a single inquiry, according to the Consumer Financial Protection Bureau.
Most preapproval letters last 60 to 90 days, so you don’t want to complete this step until you're close to putting in an offer on a home. If the letter expires, you may have to apply again for preapproval.
Bottom line
When looking for a mortgage lender, you have options — starting with the type of lender you want to work with. There are mortgage brokers and mortgage lenders, as well as mortgage companies, local banks and credit unions. Decide how important it is for your lender to also be the servicer of your loan.
To recap, here are other questions to ask yourself:
What kind of loan do I want? Conventional loans are home loans that aren’t insured by the government. Government loans are issued by private lenders but are guaranteed by the government in case you default. It’s worth checking whether you’re eligible for special government home loan programs, including a VA or USDA loan. Learn more about the different types of mortgage loans on our site.
Where should I get pre-qualified? Ask for referrals and read reviews before you get pre-qualified with a lender. It’s smart to get pre-qualified with several lenders to find out how much you might be able to borrow.
Is this the best deal I can get? It doesn’t hurt your credit if you shop around for multiple lenders within a 45-day period.
Sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
