Mortgage Lenders and Pre-Approvals: The first step on your home-buying process

Written By Jon

Purchasing your first home is an exciting milestone, and one of the most crucial steps in this process is choosing the right lender. The lender you select will not only provide the financing for your home but also influence your overall home-buying experience. As a realtor, I work closely with lenders to ensure that your home-buying needs are met efficiently and effectively. I can recommend a lender to you, but remember, your lender works for you, and it is your choice who you work with and how.

Understanding the Basics

This overview is designed to help you start your lender search with some basic knowledge. Once you identify your lender and meet with them, they will likely go over loan types, origination fees, closing costs, and much more. You don't have to know this information backwards and forwards—it's just helpful to have an initial familiarity with the landscape. Your lender will guide you through the details, ensuring you understand the terms and options available to you.

The Importance of Getting Pre-Approval Letter (and what it is)

Consulting a lender before shopping for a home is essential. Interest rates and your personal finances will influence your budget, so getting pre-approved is a must before submitting any offer or even scheduling home viewings. A pre-approval is an evaluation by a lender that determines if a borrower qualifies for a mortgage loan, and it specifies the loan amount for which the borrower is approved. During this process, the lender reviews the borrower’s financial information, including income, assets, debts, and credit history. This assessment provides the borrower with a clear budget for house hunting and demonstrates to sellers that the borrower is a serious and credible buyer. Once the lender has determined what you qualify for, they will send you a Pre-Approval Letter that states what you are approved for. You can share this letter with your Realtor who will attach it to any offer you submit. 

Once you identify a house to purchase, and how much to offer, I recommend acquiring an updated pre-approval letter specific to that property. This updated pre-approval will list the house address and confirm that you are approved for the exact amount you are offering. This small update will not require additional paperwork and can be done very quickly (especially if the amount you are requesting to be pre-approved for is the same or less than you were originally pre-approved for. This specific approval shows the seller you are ready to buy their house, not just any house. For instance, if you are approved for $350,000 but want to put an offer on a $325,000 house, it’s better not to reveal your maximum budget. Instead, showing you are approved for $325,000 demonstrates seriousness without revealing how high you can go.

Choosing the Right Lender

When it comes to choosing a lender, you have several options, each with its own benefits and potential drawbacks:

Banks & Credit Unions

Banks offer stability and a wide range of financial services, making them a convenient option for many homebuyers. However, bank hours can be restrictive, making it challenging to acquire last-minute pre-approvals for offers outside of business hours. Additionally, banks may have higher origination fees compared to other lenders.

Credit Unions are not-for-profit institutions that may offer lower interest rates and fees. They often provide personalized service and favorable terms for their members. However, similar to banks, credit unions may have limited hours, which can be a challenge when you need pre-approvals quickly. Origination fees at credit unions might be lower compared to other lenders.

If you already have accounts with a particular bank, using them for your mortgage needs can streamline the process. Existing customers may benefit from discounts or more favorable loan terms. The convenience of managing all your finances in one place can simplify your financial life.

Mortgage Brokers

Mortgage brokers act as intermediaries between borrowers and lenders, shopping around to find the best mortgage rates and terms on your behalf. They often have flexible hours and can work closely with real estate agents to ensure a smooth process. Mortgage brokers may charge higher origination fees due to the extra effort they put in to find the best deals for their clients. The strong relationships brokers build with real estate agents can result in smoother transactions and potentially better loan terms.

A realtor can often have a more beneficial relationship with a mortgage broker than with a traditional bank due to their flexible hours and personalized service. This collaboration can lead to smoother transactions and potentially better loan terms, as we coordinate to address any issues that arise during the process.

Savings and Loan Associations

These institutions are community-focused and can offer competitive rates and personalized service, making them a good choice for first-time homebuyers looking for a more tailored experience. However, they may have a more limited range of products compared to larger banks or brokers, which can be a drawback if you need specialized services. Additionally, the smaller scale of savings and loan associations may mean higher origination fees compared to larger institutions.

Different Types of Home Loans for Buyers

Conventional Loans

Conventional loans are the most popular type of home loan issued to borrowers. Offered by private lenders, they are not backed by the government. Conventional mortgages divide into two subsets: conforming loans, which adhere to Federal Housing Financing Agency (FHFA) guidelines, and non-conforming loans, which do not. Due to the added risk taken on by the lender, non-conforming loans typically have higher rates. A jumbo loan is an example of a non-conforming loan due to its loan amounts exceeding the limits set by the FHFA. The two most common conventional loans are 30-year and 15-year fixed-rate mortgages.

The terms of your loan will drastically impact all aspects of your mortgage. With a 30-year mortgage, you’ll have lower monthly payments and a higher interest rate than you’d have with a 15-year mortgage, meaning you’ll pay more in interest over the life of the loan. With a 15-year mortgage, you’ll pay less interest but have higher monthly payments. A 15-year mortgage can save you money over the life of the loan because you’re in debt for half the time; however, the higher monthly payments may be unaffordable for some.

Government-Backed Loans

Unlike conventional loans, several loans are backed by the U.S. government. These unconventional loans can often provide a path to homeownership for borrowers who don’t have the credentials to qualify for a conventional loan. FHA and USDA mortgages are two common types of government-backed loans. Instead of having to make a 20% down payment on a conventional loan to avoid private mortgage insurance (PMI), an FHA loan allows buyers to qualify for a mortgage with a down payment as little as 3.5%. USDA loans enable buyers to purchase a home with reduced interest rates. VA loans offer several benefits for active service personnel and veterans, including not having to purchase mortgage insurance.

Manufactured Home Loans

Specialized loan products are available for purchasing manufactured homes, providing affordable homeownership options. Manufactured homes are often located in parks where you rent the land. Since you only own the building and not the land, the sale is technically closer to a personal property sale than a real estate sale. You can still use unconventional loans like FHA, and Fannie Mae and Freddie Mac loans, but you may also be looking at a Chattel loan, which is specifically for movable personal property not permanently attached to land. These options often have shorter terms (15-20 years) and higher rates. While the list price of a manufactured home might be lower, the higher monthly payments due to shorter terms and higher rates, in addition to space rent, can sometimes make the monthly payment more expensive than a stick-built house and land with a higher list price.

Fixed-Rate vs. Adjustable-Rate Mortgages

Fixed-rate mortgages allow you to lock in a specified interest rate for the life of the loan. With an unchanging monthly mortgage payment, a fixed-rate mortgage makes financial planning easier. Adjustable-rate mortgages’ interest rates will go up and down based on market conditions. Many ARMs start with a fixed-interest rate period followed by a variable interest rate until the loan amount is paid off. Keep in mind that a sudden change in your financial situation could make your monthly ARM payments unaffordable, which could result in a loan default.

Other Home Loans

There are other more niche financing options available for prospective homebuyers. For example, a construction loan can be useful if you’re planning on building a home. Balloon mortgages and sub-prime mortgages can make homeownership feasible for those who aren’t financially prepared for the typical repayment structure of a mortgage. These loans, however, come with greater risks. Talk to a mortgage broker to understand the terms of these agreements before making a final decision.

Understanding Loan Origination Fees

Loan origination fees are charged by lenders for processing a new loan application. These fees typically range from 0.5% to 1% of the loan amount and can impact the overall cost of your mortgage. It’s important to understand these fees and factor them into your budget when comparing different loan offers. Some lenders, like mortgage brokers, might have higher origination fees due to the personalized service they provide.

So what’s next?

Hopefully you have a better idea of what you are getting into. Now to start reaching out to lenders! Here are several I recommend.

Any questions?

Don’t hesitate to reach out! I’m always available via text, phone, email, or contact form here on my website!

 
Jon

Real Estate Agent, 3D Graphics Designer, Coffee Roaster, Pug dad.

https://jonwgk.com
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