Choosing a Mortgage Company: A First-time Home Buyer’s Guide

If you’re a first-time homebuyer, the process from pre-approval to settling into a new house can be overwhelming. As thrilling as house hunting can be, it’s hard to know where to begin. Before attending a single open house, you should be sure that you can qualify for financing. That’s where your mortgage lender comes in, and while many mortgage companies exist, they’re not all the same.

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Does it matter what mortgage company you use?

The first step to homeownership is for you, as a new home buyer, to choose a mortgage company that fits your needs.

This guide outlines the general criteria for selecting a mortgage company to help first-time buyers navigate the maze of lenders.

First and foremost, new homebuyers must have a handle on their financial standing, which includes credit score, outstanding debts, monthly income, and money in savings accounts. This information starts the conversation with the mortgage company. It identifies available funds for a mortgage payment and the loan type you are eligible for, and would be the best for your financial situation. It also provides the framework for a realistic budget.

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What types of loans do mortgage companies offer?

Of the many mortgage options, each has its individual terms, interest rates, and standards. Once exploring each option, you need to determine which aligns best with your plans and financial goals. Some mortgage companies may be better suited to specific loan types. A little research will go a long way with matching you up with the right lender, and the right mortgage loan.

The most common loan and mortgage types include:

Fixed-rate mortgage (Conventional Loan) – This is the most popular type of mortgage in the U.S. About 90% of home buyers choose a 30-year, fixed-rate loan. The interest rate on this type of mortgage does not change. It remains the same for the term of the loan.
Adjustable-rate mortgage (ARMs) – ARM loans often offer a below-market “teaser” rate that rises with market adjustments. Monthly payments can change. Over time, ARM rates can surpass fixed rates, and therefore, ARMs are best suited to those who don’t plan to stay in a new property for more than a few years.
Federal Housing Administration (FHA) – This loan is designed for low-to-moderate-income borrowers, with down payments as low as 3.5% for a credit score of 580 or higher. They also stipulate a debt-to-income (DTI) ratio of 50% or less and require mortgage insurance for all applicants, regardless of the down payment amount.
Department of Veteran’s Affairs (VA) – Active military, veterans, and their spouses are eligible for VA loans. They do not require mortgage insurance or a down payment. Their rates are usually lower than FHA home loans and fixed-rate mortgages.
U.S. Department of Agriculture (USDA) – With interest rates as low as 1%, these loans assist low-income applicants in purchasing homes in rural areas.

How to pick a mortgage company

There are several things you can do that make choosing a mortgage company a lot easier, and ultimately will make the entire process much smoother.

Seek trusted guidance

First-time buyers should tap into their network and consult friends, family, and colleagues about their experiences with their mortgage lenders. Their insight can provide references and contacts to those new to the process and help them solidify their action points. Online reviews of mortgage companies and dedicated housing and real estate forums can assist with identifying the most reputable lenders within the search area and narrowing the list.

Compare all offers

With a short list of potential mortgage companies, buyers can compare rates, terms, and fees. Mortgage costs include interest rates, closing costs, and loan origination fees. Mortgage insurance, if applicable, will also apply to the monthly payment, and property taxes, while not part of the loan, are usually included as well. Evaluating all costs and terms brings the complete picture into focus. You can see if a low-interest offer has higher up-front expenses and vice versa.

Do your own research

Independent research will help you identify and refine your goals for selecting a mortgage company, but you should also talk to a few. Phone calls, face-to-face, or virtual discussions present an opportunity to speak to a professional about the entire mortgage process. You can ask questions and learn about other mortgage options that you weren’t previously aware of. It is also another chance to gauge the fit between you, as a buyer, and a potential lender.

Getting pre-approved

You should request a pre-approval for a mortgage once you’ve decided on a few preferred lenders. A pre-approval letter is a ticket to start house shopping! Preapproval requires personal information such as a social security card, pay stubs, bank statements, debt payments, and tax and investment paperwork. The lenders submit an offer to you outlining the total loan amount, the monthly payment, the interest rate, and the mortgage terms. You should thoroughly read the offer and seek clarification if needed.

Beyond the financial aspects of the loan offer, you should factor in the pre-approval experience with the lender into your final decision. Ask yourself these questions:

Did the lender offer support and guidance?
Were their responses prompt?
Was the communication clear and transparent?
Did they offer you multiple options to choose from?

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After the loan

Your relationship with the lender will last the life of the mortgage unless it is sold to another company or refinance your home. If your initial conversation, or your pre-approval process wasn’t smooth, or the answer to any of the above questions was “no”, buyer beware! It may be best to keep looking.

With due diligence in conducting research, seeking guidance, and comparing offers, you, as a first-time home buyer can find the mortgage company that is right for you. Buyers should look beyond mortgage rates, for a mortgage partner who will support you through the process and the life of the loan. Following these steps can get you one step closer to realizing the dream of happy home ownership.