Buying a home is an expensive endeavor, and most people need to finance their purchase by mortgaging. If you’re in the market for a home, it’s important to understand the different types of mortgages available, as well as the pros and cons of each.
All lenders are not created equal, and it’s important to choose a high-quality mortgage lender who will offer you the best terms and conditions. Read further to learn about the different types of mortgage lenders and how to choose the best option for you.
Different Types of Mortgage Lenders
The first step in finding good mortgaging options is to understand the different types of lenders that exist. There are four main categories of mortgage lenders: banks, credit unions, mortgage brokers, and direct lenders.
Direct Lenders
In general, direct lenders are companies that fund loans directly. These include banks, credit unions, and online lenders. Direct lenders typically have the best interest rates and terms, but it may be more difficult to qualify for them than other types of lenders.
Banks
A bank is the most common type of mortgage lender. When you go to your local bank to get a mortgage, you’re working with a direct lender. Banks can approve and fund loans in-house, which means they have more control over the loan process.
Banks typically have the lowest interest rates and closing costs, but they also have stricter eligibility requirements for mortgaging. To qualify for a mortgage from a bank, you’ll usually need a high credit score and a low debt-to-income ratio.
Credit Unions
In many ways credit unions are similar to banks, but they’re owned by their members. Credit unions typically have lower interest rates and fees than banks.
To qualify for a mortgage from a credit union, you’ll likely need to be a member of the union. Some credit unions have open membership, while others require you to work in a certain industry or live in a certain area. For example, teachers, government workers, military personnel, and medical professionals often qualify for membership in specific credit unions.
Mortgage Brokers
A mortgage broker is a middleman who connects borrowers with lenders. They don’t fund loans themselves but instead work with a network of banks, credit unions, and direct lenders. Mortgage brokers can be a good option if you have trouble qualifying for a loan from a direct lender. They can also help you compare rates and terms from multiple lenders.
However, mortgage brokers typically charge higher fees than other types of lenders. They may also steer you towards lenders that pay them higher commissions, which can cost you more in the long run.
Different Types of Mortgages
Finding the ideal mortgage program for your needs is just as important as selecting a lender. Understanding your options on the market can help you make an informed choice.
Fixed-rate Mortgage
A fixed-rate mortgage has an interest rate that remains the same for the life of the loan. This type of mortgage is a good choice if you plan to stay in your home for a long time and if you want the stability of knowing that your monthly payments will never increase.
Adjustable-rate Mortgage
An adjustable-rate mortgage, or ARM, has an interest rate that changes over time. The initial interest rate is usually lower than a fixed-rate mortgage, but it can go up or down depending on market conditions.
This type of mortgage might be a good choice if you plan to sell your home in a few years or if you expect your income to increase over time.
Mortgage Refinancing
The mortgage refinancing process is when you replace your current mortgage with a new one. You might do this to get a lower interest rate, to change the term of your loan, or to convert from an adjustable-rate mortgage to a fixed-rate mortgage. If you want to refinance your home, look for a lender that specializes in this type of financing.
How to Find a High-Quality Mortgage Lender
Now that you understand the different types of mortgage lenders and mortgage programs, it’s time to learn how to find the right lender who suits your needs.
Interest Rates and Fees
The first things you should compare are the interest rates and fees offered by each lender. Mortgage interest rates can vary significantly from one lender to the next, so it’s important to shop around.
Generally, you’ll get the best interest rates from direct lenders and credit unions. The economy has a big influence on mortgage rates as well. During a recession, rates tend to be lower, while during periods of economic growth, they tend to be higher.
You should also compare the fees charged by each lender. These can include origination fees, application fees, and closing costs.
Eligibility Requirements
The next thing to consider is the eligibility requirements of each lender. As mentioned earlier, banks and credit unions typically have stricter requirements than other types of lenders.
Once you review the eligibility, be realistic about which type of lender you can qualify with. There’s no point in applying for a loan from a credit union if you don’t meet their membership requirements.
If you are in a specialized field, check to see if any lenders cater to your industry. You might be able to qualify for a loan based on your profession.
Loan Programs Offered
Consider the types of loan programs each lender offers. Some lenders only offer conventional loans, while others also offer government-backed loans like FHA and VA loans.
An FHA loan is a good option if you have a low credit score, while a VA loan is a good option if you’re a veteran or active-duty military member. VA loans allow veterans to buy a home without making a down payment. FHA loans are great for first-time home buyers since they only require a down payment of 3.5%.
Be sure to choose a lender that offers the type of loan you’re looking for. For example, if you want an FHA loan, you won’t be able to get one from a bank that only offers conventional loans.
Customer Service
Compare the customer service offered by each lender. This includes factors like the availability of customer support, the turnaround time for loan approvals, and the overall ease of the application process. Some lenders can do a preliminary approval within 24 hours, while others may take a week or longer.
The lender you choose should make the process as easy and stress-free as possible. After all, buying a home is already a big enough challenge without having to deal with a difficult lender.
Financial Stability
Finally, make sure you choose a financially stable lender. This is important because you don’t want to end up working with a lender that might not be around a few years down the road.
One way to gauge a lender’s financial stability is to look at their call report. According to the Federal Deposit Insurance Corporation, this is a report that all FDIC-insured institutions are required to disclose. It includes information on the institution’s assets, liabilities, and capital. During the crash of 2008, many lenders failed because they didn’t have enough capital to cover their losses.
You can also check out reviews of the lender online. See what other borrowers have to say about their experience working with the lender.
Finding a quality mortgage will require some research. While there are many good lenders available, you should do your research to find the best lender for your particular situation. From first-time homeowners to those looking to refinance, anyone can find a great lender by following these tips. Contact our team at Canal Bank to learn more today. We look forward to hearing from you!
