How to Choose the Right Mortgage Lender
A mortgage is probably the biggest loan you will ever take out, seeing as you are using it to pay off an asset worth hundreds of thousands of dollars. In all likelihood, you will be paying your mortgage for fifteen to thirty years, with interest vastly inflating the amount you end up paying over this time. As such, you should take particular care when choosing a mortgage lender.
However, most potential homeowners don't know what to look for when choosing a mortgage lender. Different lenders will try selling you on different factors, and some of these may be important to you, while others are irrelevant when trying to find the best mortgage rates.
Over the past year or so, with the pandemic causing the Federal Reserve to lower rates, there has never been a better time to take out a mortgage. Rates hit record lows in January 2021, leading to an uptick in home buyers – and consequently sky-rocketing house prices. But with recent inflation hitting record highs, experts expect interest rates to be raised as well, and mortgage rates are already inching upwards. Therefore, if you want to take advantage of low rates, it is best not to wait too long.
Most mortgage lenders will provide similar rates, with industry standards keeping them in line with each other. But that does not mean all mortgage lenders are created equal or are right for you. To help you get started on your journey, here are some tips for choosing the right mortgage lender in 2022.
Minimum Qualifications for a Mortgage
Different lenders have different minimum requirements for buyers of homes. This means that even if one lender rejects you, others may accept your application. For this reason, it is important to know what minimum qualifications you may be confronted with when dealing with different lenders.
These qualifications will focus on the following main issues:
What Is a Reliable Borrower to a Lender?
It is impossible for mortgage lenders to truly know if they can rely on you to repay the loan. After all, past behavior does not necessarily tell them anything about your future circumstances. However, most lenders will take the following measures to determine whether they are ready to trust you with a loan:
Almost all lenders will use your credit score to predict your future behavior. This may seem unfair, as your circumstances could have drastically changed in the past few years, but it is standard practice and unlikely to change in the near future.
Some lenders place more importance on credit scores than others, and a bad credit score will not disqualify you from all loans. It is important to note that so-called "hard" credit score checks can lower your credit score further. For this reason, you should avoid mortgage lenders that require these checks unless you are confident that they are the right fit.
Checking your own credit score does not negatively impact it. You can avoid wasting your time with companies that will not lend to you by knowing your score.
Your Debt-to-Income (DTI) ratio is another factor lenders use to determine whether you are a reliable borrower. Lenders consider individuals with high levels of debt to be high risk. Your DTI ratio is calculated by dividing your total debt by your gross monthly income.
Most lenders look for a DTI ratio below 45%, although some will go as high as 50%. Not all lenders will disqualify you based on your DTI ratio, but most will give it a high level of importance.
Can You Afford the Home?
Having proven yourself to be a reliable borrower is all well and good, but mortgage lenders will still require evidence that you can actually afford the home. Unfortunately, simply being able to afford monthly mortgage payments is not enough.
Mortgage lenders will require the following:
A Minimum Deposit
When purchasing a home, you will need to put down a deposit. Mortgage lenders will not give first-time buyers 100% of the home's value. This is a major reason many renters struggle to become homeowners, even if they pay the equivalent of a mortgage in rent every month. If you have savings available, you need to determine how much you are willing or able to let go of as a deposit on your new home.
Some lenders demand higher deposits than others. Look for home loans that only require as much as you have available for a downpayment. Some lenders will allow a downpayment of as low as 3%.
Understandably, lenders will check your monthly income, which is a major factor in determining whether you can afford the loan. Of course, you will have done the math beforehand as well, and if you could not include mortgage payments in your budget, you wouldn't be trying to buy the home.
However, this can get complicated. If your monthly income comes entirely from one consistent source, proving your ability to afford the home is relatively easy. But if you are self-employed or run a business, or get additional funds from a family member, you will have to provide evidence of your income over the past year or so.
This may be an issue if your business has only recently started bringing in enough money for you to afford a mortgage. Even if you have good reason to be confident in your ability to maintain this income level, proving that to the lender is more difficult.
As mentioned earlier, multiple lenders checking your credit score can negatively impact your ability to borrow. Before applying for a mortgage from different lenders, ascertain whether you meet their requirements yourself.
Compare Mortgage Lenders Online
You can go about finding a mortgage by speaking to your bank or well-known companies. However, while they may provide good options, you will better get the right mortgage if you compare as many lenders as possible. To do so, you should use online tools and resources, and this is what you should be looking for:
Fair Mortgage Rates
The first and easiest factor to check is whether they provide mortgage rates in line with the industry standards. The exact rates offered to you will depend in part on your credit score and other factors. But they should not differ too much from the rates you will find in a Google search.
This way, you can find out the general rates provided by most lenders. Then, when you assess a potential lender, you will be able to determine whether their offer is high, low, or average. You should also compare different lenders, seeking out the lowest rates available. Remember, if you are buying the home as an investment property, your interest rates will typically be higher.
Credit Score Requirements
Once you know your credit score, you should assess the different companies and meet their minimum qualifications. Rule out any that require a higher credit score than yours. This does not automatically leave you with the best options for you but filters out those not worth pursuing.
The same is true with companies that require different deposits on a new home. Do not waste your time applying if you cannot afford to pay the deposit a certain company asks for. When it comes to DTI ratio and monthly income, follow the same principle.
A mortgage is probably the biggest loan you will ever get, and it is a commitment of up to thirty years and will be a major factor in your budgets throughout those years. For this reason, your lender needs to be more than a once-off service provider, and their customer service should not become non-existent once they have provided the funds. Unfortunately, too many companies take this approach.
Customer service is extremely important when getting a mortgage. You cannot rely on the fact that they have been good thus far. Rather, read customer reviews. Expert reviews only go so far because the experts reviewing the company are not actually using the company. Only customers know what happens once the loan is provided.
It is important to remember that customer reviews are not always impartial, and it is often the most disgruntled customers who leave reviews. That can make it seem like a company is worse than it is. However, if you find a large number of customer reviews that complain about service in similar terms, you should try to find a different lender.
It is also worthwhile taking care when reading positive reviews. If they sound too generic or similar to the company's PR copy, they may well have been sourced by the company itself.
The Better Business Bureau (BBB) is a non-profit organization that assesses whether businesses follow best practices. They exist to help consumers avoid businesses that are trying to scam them or who provide such bad service to cause major issues. Their assessment is particularly important when using financial service providers.
Any mortgage lender you are considering should have a good score from the BBB. Their scores range from A+ to F. Ideally, the company you choose should have an A+ rating, but this is not strictly necessary. If they do not have an A+ rating, check the reasons why. In some cases, the issues will simply not apply to you.
That said, if the BBB has given a company an F rating, it is a good idea to avoid them, even if their issues seem irrelevant to you. You do not want to get a loan from a company that utilizes bad business practices, as they will ultimately impact you in some way down the line. If you are unsure about a company, you can contact the Miami BBB directly.
Traditional vs. Online Lenders
Another factor to consider when choosing a mortgage lender is whether they are traditional or online lenders. Traditional lenders have been around for far longer than online lenders, but this is not necessarily a good thing. In many cases, they have not updated their services to cater to modern needs.
Traditional lenders will require more paperwork and usually make you wait for longer before informing you whether your application has been approved. Online lenders require far less paperwork and make it easy to share documents in an online format. They tend to have quick turnaround times and provide more guidance along the way.
If you want to go with a traditional lender for their longevity, remember that the world has changed a lot over the past twenty years, and the ability to adapt is more important than a long history. Nonetheless, some of the most trustworthy companies – including your bank of choice – are traditional lenders.
Finally, you may find lenders who seem ideal but whose minimum requirements you do not meet. In certain cases, you can improve your status to meet those requirements over time. For example, you can work on your credit score by taking out credit and making regular payments. You can also save money to meet the minimum deposit requirements over the next few months.
The problem with this approach is that you will likely miss out on the low mortgage rates currently available. On the other hand, it might help to wait before applying for a mortgage to see if housing prices begin to drop as rates gradually increase.
This should help you find the best mortgage lenders. For now, the rates are better than you are likely to get for a long time (if ever again). That does not mean you should jump into a mortgage, especially if you cannot find a good lender that accepts your credit score. Rather than settling for a subpar lender, wait until you are in a better position to buy a home.
Ultimately, you should be happy with the lenders available to you. If they are not up to your standards, you should never have to settle for less.