Whether you are a first-time homebuyer or not, it is certain you are looking for a mortgage lender to take your loan application. You might have done researches, gotten a preapproval, ask for referrals, and done all you are supposed to do. But all these are not enough to make the right choice. The question is: how do you choose the most appropriate lender to take on the greatest deal of your life? Here are five tips to help you choose the best fit.
Types of Loan
There are different types of mortgage available to home buyers. Identifying each one of them can make it easy for you to make the right choice. Mortgages are classified into two main types – the conventional and the Government-backed mortgage.
It referred to the mortgage from private lenders and not insured or backed by the government. A conventional mortgage is more expensive than the government-backed mortgage. Also, the loan requirement is usually higher than the other type. For example, you are required to make a down payment of up to 20% of the principal amount. Similarly, your credit score, loan to value ratio and other expenses are higher.
The government-backed loan is insured and backed by the federal government and they include:
Federal Housing Administration (FHA) mortgage insurance program
The department of housing and urban development (HUD) controls the Federal Housing Administration (FHA) mortgage insurance program. The FHA mortgage requires a down payment of around 3.5-percent. However, the only disadvantage is that you are required to pay mortgage insurance, and this makes it more expensive even more than the conventional loan.
Veteran Affairs (VA)
The U.S. Department of veteran affairs manages this type of government-backed mortgage. Unlike the FHA mortgage, it is only offered to military service members (both serving and retired) and their family members. It requires no down payment. This means that if you qualify for the loan, you can apply for a mortgage with zero-percent down payment.
The U.S. Department of Agriculture (USDA) Guarantee loan program
The U.S. Department of agriculture also organizes a loan program to support people living in the rural area. The loan scheme is managed by the rural housing services (RHS). It is available to those who have steady, low- or median-income source and who are not able to secure financing through other conventional means. It does not require a down payment of more than 3.5-percent.
For most people, buying mortgage has proven to be intimidating and overwhelming especially when it comes to selecting the type of rates. Therefore, as a borrower, the interest rate is one of the important ways to choose a mortgage lender. Let’s check out the two types of mortgage rate.
Fixed-rate Mortgage is the type that has a fixed rate throughout the repayment period. This means that your monthly payment is fixed, and you know the total cost of your mortgage for the entire term. However, on the other side, it is non-adjustable. If you want to take advantage of lower interest rate, you will have to refinance, and this will require you to pay another closing cost.
Adjustable-rate Mortgage (ARM) is the type of loan in which the interest rate varies throughout the term of the loan. It is also referred to as a hybrid mortgage because the interest rate is initially fixed for a certain period after which reset periodically. Unlike the fixed-rate mortgage, the adjustable rate mortgage changes as the market interest rate changes.
Typically, the ARM is usually represented as two numbers. The first number indicates the number of years the interest rate will be fixed while the second number shows when the rates will adjust. For example, a 5/1 ARM represents a fixed rate for the first five years while followed by a variable rate that adjusts once a year.
The Closing Costs
Apart from the down payment and the interest rate, other fees are required from the buyer for the successful completion of the transaction. The closing cost normally takes between two to five percent of the home’s purchase price. Let’s check out some standard fees you will always see on the estimate and closing disclosure.
Origination fee covers the lender’s administrative cost and it is usually between 1- to 1.5-percent of the principal amount. You should know that some lenders do not charge this fee but increase the interest rate to cover the charge.
Inspection and appraisal fee are usually paid to an appraisal firm to inspect and estimate the property’s market value. It is used to evaluate your Loan to Value (LTV) ratio. According to the Federal Reserve, inspection and appraisal fee costs about $300 to $700.
Underwriting Fee is charged to research the borrower’s information. It is a way to verify your loan history, credit scores, and other financial information. It allows the lender to decide if you can be offered the loan or not.
Private Mortgage Insurance (PMI) covers your mortgage and pay the lender if you stop paying your mortgage. If your down payment is less than 20-percent of the principal price, your lender might ask for the PMI.
Check the Terms and Condition
Carefully reading the fine print is also very important when planning to choose a mortgage lender. It helps you discover some terms and conditions that you may not agree with. This will also enable you to discover requirements and learn about other options that the lender might not remember to inform you. Below are documents your lender might require from you when considering your loan application.
- Credit Report
- W-2 for the previous two years
- Social Security or disability statements
- Alimony and child support payments
- Bankruptcy discharge paperwork
- Profit and loss statements or 1099 forms (if you own a business)
- Proof of bonuses
- Your most recent federal tax return
- Pay Stubs and others as required by your lender
You’ve done research, visited referrals, compared rates and has decided on which to go for. But you are still not sure if the mortgage lender you pick is a good fit. Asking questions is the only way to know if he/she is a good fit.
Make a list of questions about what’s not clear and others you have, schedule a meeting with your preferences and check if they are good for you. By this, you can make the right choice and prevent any form of regret in the near future.
Selecting a mortgage lender can be overwhelming especially now that there are seas of lenders out there and others springing up every now and then. To find the right lender, it is important to be careful when making decisions, follow the tips, do extensive researches, and follow your gut.