Deciding to buy a home helps open a new chapter for you and your family. But before you can turn the key on your new dream abode, you need to find a mortgage lender to help you pay for the house.
The market is flooded with services claiming to be the “best mortgage lender” out there, so how do you decipher who is really “the best” to help you fund your new, or first, home?
It’s normal to need financing to pay for your home. In fact, 86 percent of homebuyers need some sort of financing, according to Genworth Mortgage Insurance. For first-time homebuyers, 94 percent require a mortgage and put a median of 6 percent down. For repeat buyers, 82 percent need financing and have a median down payment of 16 percent.
Choosing the right mortgage lender is important because you’re going to have a relationship with your financier for 15 to 30 years. Understanding term lengths, calculating your monthly payment, and securing prequalification may feel overwhelming at first. Still, you don’t need to be an expert to find the best mortgage lender for your goals.
“There is colossal pent-up demand for homeownership, both among young people who are ready to pair up and start families, and those who see owning a home as the next step in adulthood,” NerdWallet home expert Holden Lewis said in NerdWallet’s 2020 Homebuyer Report. “These folks feel optimistic, but are aware that there’s a lot they don’t know. They’re looking for guidance so they can feel confident about finding a good home they can afford and qualifying for a mortgage. According to estimates (before the Coronavirus), roughly 6 million new and existing homes will be sold in 2020, and well-informed buyers will have the edge.”
What Do Mortgage Rates Look Like Now?
The current state of mortgage rates plays an integral role in determining how much you can spend on a new home. When rates are lower, it’s easier to afford a more expensive home because you’re paying less interest. When rates are higher, you’re paying more in interest, which means you have to pay less towards the value of the home.
However, mortgage rates change constantly, especially in the current economic environment. According to Freddie Mac, over the last 45 years, mortgage rates have ranged from a high of 18.63% (1981) to a low of 3.31% (2012). What do these percentages translate to in dollars? The national median mortgage payment in 2018 was $1,566, according to Freddie Mac.
“That [Fed buying of MBSs] should stabilize rates and bring them back down lower,” Chief Economist Danielle Hale wrote on Realtor.com®. “They’ll [likely] go back to the low 3 percent [range]. Might we see rates below 3 percent? I wouldn’t rule it out.”
Despite the volatility, these low rates are not guaranteed to stay, so it’s a great time to take advantage of them. You’ll need to shop around for lenders to know which one is best for you.
“Just don’t expect zero or negative mortgage rates in America anytime soon,” Peter Warden, The Mortgage Reports Editor, wrote. “Still, they’re not unthinkable later this year or next, especially if the effects of COVID-19 force the Fed to make its rates negative. But we’ve (got) a long way to go before that becomes a realistic prospect.”
What Can I Be Doing To Get The Best Mortgage Rate?
Before you set out to find the best mortgage lender, there are a few things you can do to help yourself get the best interest rate. Start by furthering your mortgage education and expanding your toolbox to evaluate which lender is genuinely the best for you.
Start by taking steps to improve your credit score. If you’re able, pay down any debts and keep making on-time payments. To get an idea of where you stand, the average FICO score on all closed loans increased to 742 in March 2020, up from 738 the month prior, according to Ellie Mae.
Now, it’s time to understand what price point of a home you can afford. Calculate what type of monthly payment you feel you can handle with your current finances and the ideal length of the loan’s term.
Once you have this information, you’ll be on your way to buying a home and deciding which mortgage lender is best for you.
Before engaging with any potential mortgage lender, there are three big questions every potential homeowner should ask themselves:
- What can my monthly payment be?
- What would this deal cost me at the time of closing?
- Am I likely to get approved for this home loan?
During this time, start initiating communications with different lenders and comparing mortgage rates.
How Do I Calculate My Monthly Payment?
The expenses that come with owning a home are more than just your mortgage payment. So it’s essential to calculate all your expenses before committing to a hefty monthly loan payment.
When you choose a new place to live, food, childcare, transportation, and education costs, all may change. You’ll also want to budget for any home repairs and an emergency fund in case any large appliances in the house breaks. These are essential pieces to determine your overall monthly budget and what you can afford.
“Buying a home is one big step in adulting. Maintaining a home is another,” Lewis says. “If you can afford to spend roughly 2% of a home’s value each year on maintenance, you can feel pretty confident that you can handle owning that home.”
The inflation-adjusted price of childcare increased by 49 percent from 1993 to 2018, according to the Bureau of Labor Statistics’ Consumer Price Index. This increase puts the national average cost of full-time center-based care for children ages 0– 4 at $882 per month, per child, according to Child Care Aware of America.
“In many states, childcare can cost as much as or more than housing and has skyrocketed over the last few decades,” Freddie Mac reported.
If you’re moving from a city where you relied heavily on public transportation, and now you’ll need a car, factoring in your car payments, insurance and gas, also affects your housing budget.
If you’re moving to a new area, you’ll want to investigate costs like these before committing to a hefty monthly mortgage payment.
When calculating your monthly payment, remember that a more substantial down payment can help reduce your monthly payment and reduce the total interest you pay over a lifetime. Anything you can smartly do to increase your down payment will help lower your monthly costs.
Once you have determined your monthly budget, stick to it, and only look at homes in your price range. You may have to consider a smaller home for a shorter commute or opt for the large house with a longer commute to stay within the confines of your budget.
How Do I Determine What Closing Costs Will Be?
Closing costs, and how long closing actually takes, can surprise some first-time home buyers.
Closing typically takes about 40 days from when your mortgage loan processing begins, according to Ellie Mae, a technology company serving mortgage lenders.
At closing, all deal parties will sit to sign an array of paperwork in regard to the mortgage, right-to-cancel provision, promissory note, and escrow disclosure.
In addition to bringing a photo ID to the closing, you’ll need to bring the Closing Disclosure and a cashier’s check or be ready to make a wire transfer to pay the closing costs. Though in the wake of COVID-19, many states are working to allow online closing and electronic signatures for home closings.
At closing, you’ll need to pay:
- The Lender origination fee and any third-party fees that you have not paid before closing.
- A prorated portion of property taxes, based on the time of year you’re moving in.
- Any interest that will accrue before your first mortgage payment. This interest is usually quoted in a 15-day period.
- A portion of your homeowner’s insurance coverage.
- Your title insurance premium.
- Any homeowner association fees, if applicable to your house.
All of these payments are outlined in your loan estimate when you applied for a mortgage. So when you’re pre-approved, ask your lender what these costs would be. It’s key to determine the closing costs ahead of time you’re able to write the check on closing day with the proportionate amount of money in your account.
How Likely Am I To Get Approved For This Home Loan?
To signal that you’re a serious buyer, most sellers want to see you’re pre-approved for a mortgage. Once you apply to be pre-qualified for a mortgage, the lender will issue you a letter of prequalification. This letter will help increase the likelihood a seller will accept your offer on a home.
If you have never purchased a home before, you might be worried if you’re likely to get approved.
Your FICO score, the amount you can currently produce for a down payment, and your annual income are just a few factors that will affect if you will get pre-qualified for a home loan. The better your FICO score, and the larger the down payment amount you have, the better interest rates lenders will typically give you.
If you’re a first-time homebuyer, don’t fear. All current homeowners at one point were a first-time homebuyer, and there are a range of options out there specifically to help you buy your first home.
In fact, before the start of the COVID-19 pandemic, the first-time homebuyer market was robust, reaching a seasonally-adjusted rate of 2.18 million, according to Genworth Mortgage Insurance, a unit of Genworth Financial, Inc. That 2.18 million mark is the fastest pace of growth in the first-time homebuyer market since 2006.
“Housing affordability continued to improve,” Tian Liu, Genworth Mortgage Insurance’s Chief Economist, wrote in the company’s First-Time Homebuyer Market Report. “Rates stabilized in November and December but ended lower compared to Q3 and a year ago, benefiting first-time homebuyers. In 2019, housing supply not only expanded (but it also) expanded where it is needed the most: in the $200,000–$250,000 price segment. Partly due to expanded supply, home price growth slowed for the first time since 2014.”
The report found that the average first-time homebuyer is aging, and is now over the age of 30 when purchasing their first home. However, due to crippling student loan debt and the 2008 financial crisis, this group hasn’t had time to save the typical down payment amount needed to purchase a home at the age their parents previously did.
“A 20 percent down payment is beyond what most first-time homebuyers can save before their peak household formation age of early to mid-30s,” Liu wrote. “That is why, historically, a large majority of first-time homebuyers (80 percent) have used some form of low-down-payment mortgages, including conventional, FHA, VA, and USDA loans.”
What’s The Difference Between Pre-Approval And Pre-Qualified?
There’s a lot of nuanced lingoes you’ll encounter in the home buying process. Being “pre-approved” and “pre-qualified” are two of those terms that may seem similar but mean different things.
To get pre-qualified, you’ll tell a lender your necessary financial information, such as your credit score, debt, pre-tax salary, and any assets you have. This will enable the lender to give you an estimate of how much you will be able to borrow. All of this information is self-reported by you, the buyer, and the lender doesn’t typically check your credit report or verify any of this information. Pre-qualified is a crucial first step in the home buying process to help you better understand the price of a home you can afford.
Pre-approval is the next step that verifies all the prequalification information. To get pre-approved, you’ll need proof of your debt, income, assets, and your credit score and history. To start the pre-approval process, you need to dig out your W2’s, tax returns, and bank statements.
Even if you get pre-qualified, but then the information you provide during the pre-approval process doesn’t match, lenders may deny you.
You should get pre-approved before you start shopping for a home. Your pre-approval letter will indicate the maximum amount you’re allowed to borrow. Having a pre-approval letter will help speed up your deal, signal you’re a serious buyer, and reduce the likelihood of your sale falling through.
During the pre-approval process, you may want to discuss locking in your rate with your lender, as mortgage rates fluctuant daily, if not hourly, in these current economic times. Of course, locking your rate can protect you from an inflated rate when you’re reading to sign your loan, or perhaps it went down a little, and you missed out on those percentage points. It’s hard to know, so it’s a personal decision based on your tolerance for risk.
Being seen as a serious buyer is particularly important in a seller’s market. Sixty percent of Americans who bought a home in the last five years had to make more than one offer before closing, according to NerdWallet. Thirty-seven percent had to make three or more offers.
When lenders check your credit score, it is considered a “hard inquiry.” Typically, multiple hard inquires for this purpose won’t hurt your credit score.
It’s important to know that typically a pre-approval letter is only valid for 90 days, so if you don’t find your dream home in that timeframe, you may have to repeat the process in case any of your financial information changed.
What Factors Determine My Interest Rate?
When it comes to interest rates on your mortgage, it’s far from a one-size-fits-all solution.
Multiple factors will determine what a mortgage lender sets your interest rate at, including if you’re a first-time homebuyer, your FICO score, your loan type, and the total loan amount. Other factors that affect your interest rate might surprise a novice buyer, such as the state and county you’re purchasing in if this is your primary residence or a rental property, the property type, and the lock period.
These are just a few of the most impactful factors that will help set your rate, but there are dozens of other more individualistic elements that can cause your interest rate to be set higher or lower.
Outside factors will also determine the interest rates banks are willing to give.
For example, when the Federal Reserve slashed its interest rate to zero during the start of the Coronavirus pandemic, banks were flooded with mortgage refinancing applications. While homeowners expected the rates to be low, the Fed has more of a trickle-down effect with mortgage rates rather than a direct correlation. Because of the influx of applications, banks had to artificially inflate the rates to deal with the backlog.
Supply and demand for mortgage loans do have some effect on what the interest rate is set at. And in general, when economic times are good, rates are higher; when they’re bad, rates are lower.
“Daily mortgage rates are effectively unpredictable. Because they remain untethered from markets — and markets from reality,” Warden wrote for The Mortgage Reports. “Still, we hope the Fed will hold the line against investors who’d like those rates to be significantly higher. And that a trend that’s benign will eventually emerge, punctuated with rises that aren’t too frequent, too sustained, or too sharp.”
Given the vast unemployment rates due to the Coronavirus and the pending 2020 election, rates are likely to remain on the lower side for some time. If you are lucky to be in a good financial situation, it can be a good year to buy a home at a low-interest rate.
How Do I Find A Mortgage Lender As A First-Time Homebuyer?
If you have good credit, a steady income, and a down payment, you’re on a steady track to being approved for a mortgage as a first-time homebuyer.
But many are still worried. NerdWallet found that 42 percent of non-homeowners said their low income was preventing them from buying at this time. And 75 percent of Americans believe it’s more challenging to afford purchasing their first home today than it was 25 years ago.
“Prerecession, the number of first-time buyers, was higher, in part, because buyers had more options,” said NAR President John Smaby, a second-generation Realtor® from Edina, Minnesota, said in a new report from the National Association of Realtors®, the 2019 Profile of Home Buyers and Sellers. “However, over the past few years, we have unfortunately experienced a scarcity in housing inventory, especially at the middle- and lower-end of the market.”
For first-time home buyers struggling to produce a large down payment, there are a plethora of resources available to first-time homebuyers to help them purchase their first home. Even if your equity is low and perhaps your credit history is underdeveloped, don’t count yourself out.
For buyers that don’t have the best credit, a Federal Housing Administration (FHA) loan helps ensure your loan so the lender can offer you a better interest rate. This program assists first-time homebuyers who need to make a lower down payment (as low as 3.5 percent of the total purchase price). This program, which also helps seniors, allows lower closing costs and approves applicants at a lower credit score threshold. In March 2020, the average FICO score for FHA purchased homes was 677, compared to an average FICO score of 742. That’s a considerable difference, allowing more people to buy a home.
If you’re a veteran, you may qualify for a VA loan, which offers no down payment loans for borrowers with a military connection. The VA guarantees a portion of the loan to help private lenders offer a lower interest rate and more favorable terms to those buyers associated with the military. VA FICO scores were 712 for purchased homes in March.
If you’re eyeing a property in a rural area, a USDA loan offers 100 percent financing on a property in an eligible rural area as defined by USDA. You’ll have to check online to see if the property you have in mind is eligible.
For a more conventional loan, Fannie and Freddie Mac, which was created by Congress, can give you a loan with just a 3 percent down payment. These programs perform an integral role in the housing market by providing “liquidity, stability, and affordability to the mortgage market.”
“Low-down-payment loans are not going anywhere anytime soon,” Liu wrote for in the First-Time Homebuyer Market Report. “When comparing lenders, see if they have a few different options of low-down-payment loans to help you decide which route is best for you.”
In fact, in 2019, the median down payment was 12 percent for all buyers, 6 percent for first-time homebuyers, according to the 2019 Profile of Home Buyers and Sellers report from the National Association of Realtors®.
Because your interest rates will be affected by where you’re looking to buy your home, states offer first-time homebuyer programs, too. This assistance is specifically for residents in each individual state.
If you’re looking to channel your inner Chip and Joanna Gaines, a home renovation loan can enable you to buy a ‘fixer-upper’ at a lower cost and remodel it all with one loan. Some of the homes are in areas that need revitalizing, so you can get in early on a potential good long-term investment.
“We have seen that younger buyers are eager and willing to take on homes that need a little more TLC if it means getting a slightly better price,” Liu wrote in the report.
The Good Neighbor Next Door Home program offers price discounts on specific properties for buyers who are police officers, law enforcement, firefighters, EMS workers, and educators. The program is also sponsored by HUD to reward frontline workers for their service in the community.
HUD also has a Dollar Homes program that sells foreclosed homes. The government sells these vacant homes with a current market value of $25,000 or less for $1 after the house is on the market for six months. The idea is that HUD makes it possible for communities to fix up the homes and put them to good use at a considerable discount.
REX Home Loans also welcomes first-time homebuyers. REX has non-commissioned loan advisors, so this enables REX to offer lower interest rates to our customers and keep the customer’s best interest at the forefront. Even if you have a few credit issues, REX can help guide you through the process and enable you to be able to buy that home you want.
“The housing market is in the middle of a multi-year boom in the first-time homebuyer market,” Liu wrote in the First-Time Homebuyer Market Report. “The market has exceeded 2 million first-time home buyers each year for the past three years, which is unprecedented in the past 26 years. In part, this represents a long-overdue rebound from the trough earlier in the decade. The first-time homebuyer market offers important insights into the housing market. With 38 percent of home sales and 56 percent of purchase loans in 2019, it is a market too big to ignore.”
How Do I Choose My Loan Term?
Deciding the term of your loan affects the value of the home you can afford.
There are a few different types of mortgages, such as a fixed-rate mortgage, a 30-year term, a 15-year term, or a 10-year term.
The most commonly selected loan is a fixed-rate mortgage, according to Freddie Mac. A fixed-rate mortgage locks your interest rate in for the life of the loan, meaning the rate won’t go up or down. Primarily, this protects against inflation, so if mortgage rates increase over time, your mortgage rate will not change. However, the inverse is also true.
For first-time homebuyers, a 30-year term provides an affordable option that’s also seen as stable and flexible. In general, a 30-year term offers a lower monthly payment but a higher interest rate compared to shorter-term loans, which means you’ll pay more interest during the 30-year term.
Some buyers will select a 15-year fixed-rate mortgage to speed up paying back the loan, but this means your monthly payments will be higher. The biggest pro of a 15-year term is that you build equity faster than when you select a 30-year mortgage. If you can afford the higher monthly payment, the total amount you pay for the home and loan will be lower than that with a 30-year mortgage because the interest rate is generally lower with a 15-year term.
Deciding what term loan length is right for you will depend on what you can afford, but also your personal goals for how long you want to live in the property or when you want to be debt-free.
To help you do the math on your dream home, Freddie Mac has a fixed-mortgage calculator to help you see the differences in your monthly payment and the total amount paid of the term of the loan when you adjust the term length, cost of the home, and interest rates.
“A home might be a good investment, but it depends on which home you buy when you buy and how long you own it,” according to Lewis. “In the past eight years, home values have gone up steadily in most places. On the other hand, if you bought at the height of the housing boom in 2007, it could have taken the better part of a decade for your home’s value to recover from the subsequent crash.”
How Do I Compare Mortgage Lenders?
To evaluate which mortgage lender is offering you the best rate, it’s not quite as simple as comparing based on the interest rates. First, you’ll want to try and get approved by two to three lenders to be able to compare their total packages.
Reaching out to multiple lenders is a natural part of the mortgage process. In fact, 36 percent of borrowers considered three or more institutions in the last year, compared to three to five years ago, according to Ellie Mae’s 2019 Borrower Insights report.
But 50 percent of borrowers don’t compare mortgage rates. Not comparing lenders is a mistake. By comparing five lenders, a buyer could save on average $430 in interest payments in the first year of homeownership alone, according to NerdWallet.
Going through the pre-approval process with a lender doesn’t require you to use them for your mortgage; this is all a part of the comparison shopping process.
Comparing mortgage lenders is extra work, but saving even a few percentage points on your rate can save you money. But it’s not just interest rates you need to compare; there are other factors you’ll want to weigh in your decision of whom to sign with.
Consider the lender’s products and loan type, as well as the lock period they’re offering. Next, consider the loan amount they’re willing to grant, the interest rate, and the term of the loan. Remember that mortgage lenders charge fees, too, so comparing the fees is a vital part in determining which mortgage lender is best for you.
These parts will affect what your monthly payment will be with a specific lender. Then, evaluate any discount points, lender rebates, and credits they offer. Finally, ask the lender for an estimate of the closing costs so that you can calculate the total picture.
Some other factors that can impact whom you chose for your mortgage can be based on personal preference. For example, how important is the online experience for you? If you’re someone who wants to pay online or message with your broker digitally, you’ll want to ask these questions about their services upfront.
Desiring a smooth online mortgage experience is important to about 50 percent of borrowers, who said they chose their lender based on whether they offered an online application or portal, according to an Ellie Mae survey. That same survey found that 47 percent of respondents said a lender’s ability to allow access to an online portal for uploading documents electronically affected their decision on whom to choose as a lender.
Ellie Mae’s report found that borrowers’ top three reasons for liking mortgage online application processes were: a quicker time to close (66 percent), a more straightforward application process (61 percent), and information was more readily available (54 percent).
Many factors go into mortgage rate comparison, but it doesn’t have to be hard. Give yourself time to make the comparison, use online tools to help you compare, stay organized, and don’t be afraid to ask your lender as many questions as you want.
How Can REX Home Loans Help Me?
REX Home Loans offers quick a pre-approval process to help jump-start your search for your dream home. We offer competitive rates by removing the high cost of commissions for our loan advisors. This means that your interactions with our trusted mortgage professionals won’t feel like a high-pressure sale, because they don’t get paid more for you choosing to go with REX Home Loans.
REX Home Loans also wants to ensure you close on time and know what your closing costs will be. Our mortgage professionals will be there for you every step of the way and celebrate with you when you turn the key to enter your new home.
REX Home Loans even offers you the ability to apply for a mortgage online, eliminating the need for in-person meetings. Applying for a mortgage online also helps you compare more rates during your home buying search.
If you’re in the 47 percent of borrowers category who said they prefer to work directly with a person, pick up the phone for some human-to-human connection and talk with one of our experienced mortgage brokers to get pre-qualified for a home loan.
The brokers at REX Home Loans understand this is a crazy, unprecedented time, and if you’re looking to buy a home, some extra guidance and reassurance can go a long way in making the process smooth, and something to look forward to.
“Homebuyers have been on a dizzying, twisty journey,” Lewis said “A year ago at this time, mortgage interest rates were low, and competition for homes was fierce. Rates moved higher in much of the fall, reducing affordability and knocking some buyers out of the market. Now rates have dropped again. Because so much of the homebuying experience depends on timing and location, it’s not surprising to see a wide array of sentiments across recent and prospective buyers.”