Like most people, you probably don’t have 100’s of thousands to millions of dollars just lying around for when you’re ready to buy a home. Your only other option outside of a cash offer is getting a loan, or as they like to call it in the real estate world: a mortgage. A mortgage is defined as a legal agreement between you and a bank (or other creditor) that they will loan you the money with interest to make your purchase, and in return, they temporarily own the title on your home until you have paid in full. Now, although it may sound simple, it can get complicated fast. From the types of loans you could get, to what you need to do to find the right one, we want to equip you with the necessary knowledge to get you into your next home! Keep reading on for more.
TYPES OF LENDERS
Direct Lenders – These are probably the first ones that came to mind. These are the banks, and credit unions. This is considered direct because you don’t go through a mortgage broker. The good thing about direct lenders is that everything is in-house so its like a package deal with everything involved in approving the loan, but that doesn’t always mean their that rates will always be your best option.
Mortgage Brokers – Independent professionals that work as the middle man between you and the lender and upcharge to get a commission from the sale. They don’t directly determine the rates because they are only licensed for lending.
Portfolio Lenders – This is a bank or institution that will keep the debt of your loan in-house via a debt portfolio rather than reselling it to government-sponsored agencies.
Correspondent Lenders – These will fund the loan in-house and resell it to larger lending institutions.
Wholesale Lenders – These lenders are more business-to-business, so they work with the institution/broker rather than you directly. They offer loans to them at a discounted rate to then sell to you.
Hard Money Lenders – Private investors that will offer you a short term loan. These lenders are more focused on the investment value they can get from loaning money for your property. They may charge more in additional fees and usually want repayment back a lot quicker than the other loans.
Now that you have a good idea of the types of loans that are available, here are some tips of how you can choose the right mortgage lender for you.
STRENGTHEN YOUR CREDIT & FINANCES
Before you even go searching, make sure that your credit is up to par. Pay off any collections, stay up to date with your bills, and only open new lines of credit when necessary, especially if you are close to the time of looking for the mortgage lender. This will be the driving factor of what you will qualify for, outside of your income and assets. Take a look at your debt-to-income ratio, and make sure it isn’t too high. Aim for about a 40% ratio or less. The goal here is to get lower interest rates so that you pay less over the life of the loan.
After doing this, you want to take a look at your budget. Much like we discussed on pg. 14, make necessary sacrifices to stick to your budget and know how much you can afford way before looking for the mortgage lender. One thing you can do is designate an hour or two monthly or quarterly, where you write down all of your expenses into a spreadsheet, and allocate your money between necessities such as your bills, groceries, rent, savings etc. to give you a solid visual of how you should budget your money.
KNOW YOUR MORTGAGE OPTIONS
Knowing your options is vital to picking the right one for you. Do your research to help narrow it down. Most people think you automatically need 20% down for a home, which isn’t the case. An FHA loan for example, is only 3% down, and in special cases if you qualify, some loans may even be no money down. Keep in mind though, that less than 20% down may be slightly higher interest rates and require mortgage insurance, so do whatever option is best for you.
