Buying a home requires more than simply showing up at an open house, liking what you see, and signing documents to get your keys. In fact, the homebuying process is naturally complex. It requires experts to guide you through your purchase agreement to a successful closing.
One of those experts is your home lender. Your lender will be the financial professional who authorizes the mortgage loan so that you may buy your home. But like real estate agents and event title companies, who you choose to work with matters, and homebuyers should shop around to find the lender that fits their needs best.
What Are Home Lenders and Why Do They Matter?
Choosing your lender can make or break your homebuying experience. Lenders are responsible for evaluating the buyer, proposing loan terms (if the applicant qualifies), and working hand-in-hand with real estate agents and title companies to ensure a successful closing.
Investopedia defines a home lender as someone, or a financial institution, that provides funds to leverage assets with the expectation that the loan amount is repaid with added interest. Since there is so much money at stake, homebuyers should shop around and find a lender who is an expert in the loan approval process and handles challenges when needed.
How Home Lenders Evaluate Buyers
Lenders must determine if you’re eligible to buy a house before proceeding with any purchase agreements, title work, or scheduling a closing date. They start this process by requesting documents from the applicant that prove the buyer’s eligibility by reviewing:
- Proof of identity (driver’s license)
- Credit scores
- Bank statements (checking, savings, and retirement accounts)
- Proof of additional assets, like another home or investment property
- And any other documents related to your proof of income and financial health
At the end of your loan evaluation, your lender will determine your ability to repay and where you fall in terms of risk. The less risky you are, the better terms you will be offered to buy a home.
Loan Terms: What Home Lenders Offer
After your evaluation, your lender will determine the terms of the loan, given your financial profile and level of risk. They will outline your different options, which can include a smaller or larger down payment amounts, higher or lower interest rates, a change in the term of repayment, and optional discount points.
Homebuyers should ask a lot of questions and ensure that their lender clearly explains all mortgage options to minimize surprises that can affect closing.
Serve as Part of the Team to Reach a Successful Closing
Lenders work closely with title companies and real estate agents throughout the homebuying process, as they are necessary parties during the transaction. A successful closing day is usually the result of the collaboration of these three parties.
Working with Home Lenders, Agents, and Title Companies
Home lenders come in many different shapes and sizes. You can choose a large bank for a streamlined application process, or opt to work with your local mortgage broker, who will provide a more personalized experience.
According to Nerdwallet, the decision of choosing between a bank and a credit union is not always based on loan terms, but rather more on convenience. In the end, not all lenders are the same, and choosing one type of lender over another may strongly influence your loan terms and fees.
Types of Home Lenders to Consider
- A bank – A for-profit institution with the latest technology, more locations, and a streamlined loan application process. Banks prioritize their shareholders and stock price, so loans tend to be a bit more expensive when going through them.
- Credit union – A credit union is a nonprofit, member-owned institution. They usually offer better interest rates and terms to their members, but have limited amounts of locations and may restrict service to members living within certain geographic areas.
- Online lender – All conversations and explanations of loan details are done over the phone, email, or using their online system. The technological advancements make the process of applying for and securing mortgage options much faster than when using a traditional lender. Some buyers prefer this route, as it helps them secure lower fees and interest rates, since the operating expenses tend to be lower than those of those in a physical location.
- Mortgage broker – A mortgage broker has access to better rates through connections with their network of lenders. Additionally, they have access to various mortgage products that can help make homebuying a reality for those in unique situations, like FHA and USDA loans. They provide personal and hands-on guidance from one individual, which homebuyers might find more favorable when dealing with complex financial decisions.
Different Mortgage Products and Options Explained
After submitting your application, your lender will present different mortgage options based on your eligibility. These options can impact different types of mortgages, as well as the way interest is affected by market rates. Here are our types of mortgages that you may qualify for:
- Conventional loan
- FHA
- VA
- USDA
Each loan type may have a different structure for the interest rate: either a fixed-rate or an adjustable-rate mortgage. A fixed-rate mortgage keeps interest rates constant throughout the life of the loan, while an adjustable-rate mortgage changes throughout the life of the loan with the national interest rate. Your lender will explain which type of loan you qualify for and whether the interest rate is fixed or adjustable.
Key Factors to Compare When Choosing Home Lenders
Buying a home is expensive and comes with a long list of line items, but if possible, it is best to keep closing costs to a minimum. When choosing your lender, consider how other fees can affect your closing costs and overall loan.
Apart from fees, you will want a lender who is responsive and focuses on providing excellent customer care throughout. It is common for there to be a lot of back and forth before closing, as there are multiple parties and a lot of money at stake. Choosing a lender who is available for questions and to meet with the other parties will make the closing process much easier.
How to Strengthen Your Mortgage Application
Qualifying for a mortgage requires the buyer to have a good financial profile. Applicants who receive the best loan terms have a stable income, a strong credit score, assets, and a low debt-to-income ratio.
However, if you need to improve your financial profile, there are ways to strengthen it before speaking to your lender. Potential buyers should focus on generating more income and spending less where possible. They should also focus on improving their credit score.
While it takes time to achieve, improving your credit score is not impossible. Homebuyers should reduce their credit card spending and do what they can to limit credit card debt. When buyers reduce their credit card debt, they are decreasing their debt-to-income ratio, making them a more desirable candidate when applying for a home loan.
Choosing the Right Home Lender for a Smooth Closing
Selecting the right lender will make the homebuying process much easier from initial application to close. A good lender will guide you through your evaluation, explain your mortgage options, and walk alongside you until closing day. Homebuyers should consider the kind of mortgage lender they need, know what mortgage product they are looking for, and weigh different factors that might affect their eligibility for a home loan.
