Guide to choosing a mortgage lender
Should you take out a mortgage?
If you’re thinking about buying a home, you’re probably wondering if you should take out a mortgage. Here are some things to consider when making your decision:
- Your credit profile: Your credit score will affect the interest rate you are offered on your mortgage, so it is important to check your credit reports and score before applying for a loan. If you have good credit, you’re more likely to qualify for a lower interest rate, which can save you money over the life of your loan. But if your credit is between poor and average, you might want to put off buying a home until you can improve your score.
- Your debt to income ratio: Lenders will look at your debt-to-equity ratio to determine how much mortgage you can afford. It’s the amount of debt you have divided by your income. Most lenders prefer your DTI to be no more than 43%, but some may go as high as 55%. The lower your DTI, the easier it will be for you to pay your payments. If you have significant debt, delaying a home purchase until you pay off some of the debt may be a good choice.
- Your savings: In most cases, you will need a down payment of at least 3% of the value of the home to qualify for a mortgage. You will also need cash to cover closing costs and cash reserves to show that you can handle the payments. If your account balance is too small, you may find it difficult to qualify for a loan, or you may be unable to handle emergencies that arise.
What to do before applying for a mortgage
Before applying for a mortgage, there are a few things you need to do to ensure you have the best chance of being approved for a loan.
First, check your credit reports on AnnualCreditReport.com. Lenders will review your credit to determine your eligibility for a loan and to set your interest rate, so look for any errors or issues that could lower your scores. If you find any problems, you can dispute these errors with the credit bureaus.
Also consider how much house you can afford. You can use a mortgage calculator to see how your loan amount, interest rate and repayment term affect your monthly payments.
How to Compare Mortgage Lenders
When shopping for a loan, it’s important to compare mortgage lenders to ensure you get the best deal. Key points to consider include:
- APR: The annual percentage rate (APR) is the cost of borrowing money, and it is expressed as a percentage of the loan amount. It includes the interest rate as well as the fees that are charged by the lender.
- Advance payment: This is the amount of money you will need to pay in advance to obtain the loan. The higher your down payment, the lower your monthly payments will be.
- It’s time to close: This is the time it will take to process and close your loan. Some lenders can do this in as little as 21 days, while others can take 45 days or more.
- Client satisfaction: This is a measure of customer satisfaction with their experience working with the lender. You can find customer satisfaction ratings on sites like JD Power and Trustpilot.
- Credit score requirements: Most lenders have minimum credit score requirements, so it is important to check these before applying. If your credit rating is low, you may still be able to get a loan, but you’ll likely pay a higher interest rate.
How to Apply for a Mortgage
Once you have chosen a lender, you can apply for a mortgage.
If you apply online, you will need to provide personal information, such as your social security number, date of birth, and employment history. You will also need to provide financial information about your income, debts and assets. The lender may request additional documents, such as tax returns or bank statements.
Once you submit this information, the lender will perform a credit check and verify your employment. The lender will review your application and your credit to decide whether or not to approve you for a mortgage. If you’re approved, you’ll receive a loan estimate that outlines the terms of your loan, including interest rate, monthly payment, and closing costs.
If you decide to go ahead and buy a particular home, you will need an appraisal and possibly a property inspection. If everything looks good, the lender will work with you to set a closing date. At closing, you will sign the last of the documents and you will officially become the owner.
Frequently Asked Questions
What is a mortgage loan?
A mortgage is a type of secured loan used to purchase a home. The loan is secured by the property you are buying, so the lender can foreclose it if you fail to repay the loan. Mortgages are generally repaid over a period of 15 or 30 years.
What are the different types of mortgage loans?
There are several types of mortgages available to home buyers. The type of mortgage you choose will depend on your financial situation and your goals for the loan.
The most common types of mortgages are:
- Fixed rate mortgages: These loans have an interest rate that remains constant throughout the term of the loan. Your monthly payments will be the same each month, making it easier to budget for your mortgage payment.
- Adjustable Rate Mortgages: These loans have an interest rate that may vary over time. Your monthly payments may increase or decrease depending on market conditions.
- FHA Loans: These loans are guaranteed by the federal government and are available to home buyers with a low credit rating.
- AV loans: These loans are available to veterans and active military personnel.
- Giant Loans: These loans are used to finance homes that are priced above the conforming loan limit.
- USDA Loans: These loans are available to home buyers in rural areas.
Can you refinance a mortgage loan?
If your credit improves or mortgage rates decrease, you may be wondering if you can refinance to take advantage of lower rates. Mortgage refinancing is possible, but the process can be time-consuming, similar to applying for an initial mortgage, and may require you to pay closing costs.
How are mortgage interest rates determined?
Mortgage interest rate are determined by a number of factors, including the type of loan you choose, your credit score and current market conditions. You can find the best mortgage interest rates by comparing offers from several lenders. Be sure to compare not only the interest rate, but also the APR and terms and conditions of each loan, paying particular attention to any additional lender fees.
How we choose the best mortgage lenders
Our team evaluated 45 mortgage lenders and collected nearly 1,500 data points before narrowing down our top picks. We weighted 15 criteria and assigned a higher weight to those with a more significant impact on potential borrowers.
Top picks were selected based on factors such as quality of service (50% weighting), operational characteristics (32%), loan types (12%) and affordability (6%). We took into account important considerations such as whether or not the lender offers jumbo loans, the number of states the lender is licensed in, and the overall customer experience.
We also conducted a survey of 1,195 people who had taken out mortgages. We asked about customer satisfaction with various mortgage lenders and learned which features are most important from a customer’s perspective. This information helped to determine the weightings of the criteria used for scoring.
Find out more in our Complete Mortgage Lender Methodology.