Home Buying a Home How to Choose the Right Lender for Your Mortgage

How to Choose the Right Lender for Your Mortgage

by Angela Brown
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When buying a home, one of the first questions your real estate agent will ask is if you’re already working with a lender. Unfortunately, many first-time buyers aren’t aware that they can, and should, get pre-approved for a loan before they begin looking seriously at homes. And those who do know may be confused about how to shop around for the right lender. 

A 2020 National Association of Realtors Confidence Index Survey revealed that the most common problem, by far, that home buyers encountered when purchasing a home was obtaining financing.  In such a competitive housing market, even slight issues with financing could potentially cost you the home of your dreams. That’s why it’s essential that you do the proper research and take the time you need to find the best lender possible for your home purchase. 

Touring homes and finding the perfect neighborhood are the glamorous parts of house hunting. While it’s important to find the right house, ignoring the less glamorous, but arguably more important, need to choose the right lender can be costly. 

Key takeaways:
  • When shopping for the right mortgage lender, it is important to ask questions to promote transparency about their fees, qualifications, and who they represent during a transaction.
  • Also be sure to ask potential lenders questions related to your specific situation, such as whether you qualify for any down payment assistance programs, what your interest rate and closing costs might be, and if they’ve worked with buyers with similar financial circumstances. This will ensure that they are qualified to assist with your individual needs.
  • Finally, it is crucial to understand the lending process and what you can do to ensure that you will close on time.

If you’re feeling hesitant about digging into the lending part of buying a home, this article will give you a complete look at all the questions you should ask when shopping for a lender.

Here’s what to ask before choosing a mortgage lender

Often, home buyers start their search for a mortgage lender based on a recommendation from their real estate agent. If you’re working with an agent you like, it’s easy to assume the lenders they recommend are your best options. However, agents may not always have the best understanding of your finances or the variety of lending solutions available from competitors outside their personal sphere. While looking through the list of lenders your agent recommends is a good start, it’s best to do your due diligence and shop around for the lender, loan product, terms, and rates that will best serve your particular needs. It could save you thousands (or even tens of thousands) down the road.

Ideally, you should meet with multiple (at least three) brokerages or lenders before deciding who will finance your loan. First, do some research, including looking at customer reviews and checking out the broker website. Then, narrow down your choices to a few you’d like to talk with. When you’re ready, here are some questions that can help you find the lender that best fits your needs:

1. Are you licensed where I’m buying a home?

Licensing requirements vary by state, and not all lenders are licensed to operate in every state. Make sure to find out if a lender you like can work with you before you begin the application process.

2. How long have you been working in the mortgage industry?

There’s nothing wrong with giving a newer mortgage lender the chance to help you with your loan. Everyone starts out new. However, if you have a complicated financial situation or you’re trying to get the best deal possible, working with experienced lenders can often make the homebuying process much smoother. 

3. Who do you represent during a transaction?

The answer to this question could differ depending on whether the person (often called a mortgage loan originator or loan officer) consulting you on your loan application works for a specific financial institution, like a bank, or a brokerage offering products from a variety of different lending partners. You can think of loan originators like sales representatives. Those who work for a specific lender are usually paid a commission for each loan they originate within that institution. By contrast, loan originators who work for a brokerage are paid for finding you competitive rates among variety of different lending partners.

4. Have you worked with buyers with similar financial circumstances as me before?

If you have unique finances, choosing a lender that has handled transactions similar to yours is key to making the purchase process more efficient. For example, if your primary income is from self-employment, choosing a lender with experience in this area can be helpful.

5. Does you have a record of closing on the types of property I’m interested in?

This question is especially important if you’re choosing a property that is managed by an HOA or condo association with a high proportion of renters, potential for lawsuits due to lower construction quality, or questionable financial health, as these factors affect property values and may pose a higher risk to the lender. Having the right lender can also make a huge difference when shopping for properties in areas that could qualify for special loans. For example, if you purchase a home in a rural area, you could qualify for a USDA loan, which offers a no-down payment option. You’ll want to consider lenders who are able to secure the type of loan you need for the home you want to purchase.

6. What type of loan programs do you offer? 

In response to a more competitive housing market, some lenders have begun offering financing solutions – including rent-to-own and cash-backed offer programs – to help would-be homeowners compete against bidding wars and all-cash buyers. While these programs are not the norm, most lenders offer a least a few types conventional and government-backed mortgage loans like VA, USDA, and FHA loans. Do your research to make sure the lender you choose offers the type of loan program that works best for you. 

7. Will you keep my loan or sell it?

Most buyers don’t know that lenders can sell their loans to another lender. This happens when a lender wants more cash on hand to loan to other customers. Your payments and interest rate would stay the same even if your loan is sold to another lender — however, the party that you write your mortgage check out to might change. Your lender should notify you as soon as possible so you can send your monthly payment to the right lender. 

8. What fees do you charge? Can you give me an estimate?

Not all loans are created equal. Different lenders charge different fees. Some lenders offer loans without loan origination fees, and some offer promotional rates to entice customers. Make sure you know what fees you’ll pay so you can budget accordingly. 

9. What type of credit check will you pull on me today?

There are two types of credit checks: a soft pull and a hard pull. A soft credit check, generally conducted during the loan pre-approval process, doesn’t affect your credit score. It gives the lender basic information to estimate how much of a loan you can afford. A hard credit pull, which can affect your credit score, offers lenders a more detailed look into your credit history and is required for loan underwriting and approval. Once you submit a loan application and the lender conducts that first hard credit pull, you generally have a window of about two weeks to continue applying for competing loans before your credit takes another hit.

10. What commission do you make from my loan?

While it’s not often talked about loan officers generally take about 1% of the total loan amount in commissions. So, on a $450,000 loan you would pay an extra $4,500, baked into the APR and other fees. These fees may be less if you work directly with a lender, though the options offered by a direct lender are usually more limited than those offered by a broker with access to several lenders. In certain instances, you may be able to find a non-commissioned loan advisor who will walk you through your options without charging a personal fee.

In addition to learning more about any lender you’ll work with, you should ask a few questions about the type of loan you could qualify for with each lender. These questions can help ensure you save as much money as possible. Additionally, understanding how each company manages interest rates, down payments, and private mortgage insurance will allow you to budget appropriately. 

11. How much of a down payment will you require?

The answer to this could vary depending on the type of mortgage loan you take out. For example, an FHA loan could require a down payment as low as 3.5%, where a jumbo loan could require 15-20%. Down payment assistance (DPA) may also be available to help new homeowners put additional money down upfront in exchange for a more reasonable monthly payment.

12. Do I qualify for any down payment assistance programs?

Any good lender should be able to help you find out about different down payment assistance programs available to buyers in your area. These programs may include federal or state grants (which don’t need to be paid back) and secondary loans with deferred payment or forgiveness options. DPA programs often vary by state and county. If a lender hedges around the issue, consider working with a loan advisor who’s more willing to help.

13. What type of loan is best for my financial situation?

This can be a particularly helpful question if you’re unsure about which type of loan is best for your circumstances. Someone with their primary income reliant on self-employment income might be better off with a different type of loan than a couple with two traditional types of employment. Similarly, someone with outstanding credit and a larger cash down payment may qualify for a different loan than someone with poorer credit and less of a down payment. However, there are generally options available for a variety of different financial scenarios.

14. Can you explain the APR for this loan?

Ask your lender to explain how APR is calculated for a particular loan. Your interest rate reflects the yearly interest you can expect to pay on a loan and is largely determined by market trends and your personal credit score. By contrast the APR, or Annual Percentage Rate, is the actual percentage you will pay on top of the principal. APR includes both your interest rate and additional fees like closing costs, loan origination fees, broker fees, and private mortgage insurance (PMI) broken down into a monthly percentage. 

15. What interest rate are you offering and why?

Lenders offer different interest rates and APRs based on various factors like market trends, your credit score, and their personal lending fees. Ask them to explain how they settled on the rate they’re offering and whether that involves the purchase of discount points, which are essentially interest and fees paid up front to get a lower monthly rate (and therefore payment) over the course of your loan.

16. What is the highest rate I could face if I choose an adjustable-rate mortgage (ARM)?

Unlike a fixed-rate loan, an ARM (adjustable rate) loan changes interest rates at set periods of time. While an ARM loan typically offers very loan introductory rates, your rate will fluctuate with the market. There is a cap, however, So ask your lender about the worst case scenario and then decide if you can still afford the loan.

17. Will I need private mortgage insurance?

For most loans you will need to pay for private mortgage insurance if you can’t put down at least a 20% down payment. Your lender will be able to give you more details about your specific loan.

18. What can I expect my monthly payment to be?

Based on your interest rate and your estimated loan amount, your lender should be able to give you a rough estimate of your monthly mortgage payment. This can be a great tool when comparing lenders. 

19. Are there prepayment penalties on this mortgage?

If you want to pay your loan off early, you want to make sure your lender doesn’t charge a fee. Some lenders will charge a fee to help recoup some of the lost interest they would have made had you paid your loan out over time. 

20. Can you estimate my closing costs?

Closing costs can encompass a variety of expenses — including title fees, attorney fees, lending fees, pre-payments for taxes and HOA dues, etc. — above and beyond the purchase price of your home. A rough estimate from you lender can help you prepare to cover the cost when it comes time to sign the final papers for your loan. 

21. Do I need to sign my paperwork in person?

Many lenders are doing all loan paperwork online to help prevent the spread of COVID-19, and some lenders offer the service as a convenience for their customers all the time. Talk to your lender to see if you’ll need to show up in person to sign any documents so you can plan ahead. 

22. How can I help make the process go faster?

Your lender can let you know what paperwork – including bank statements, pay stubs, proof of insurance, and more – you need to prepare ahead of time so you can avoid delays in loan approval. 

Finding the Right Mortgage Lender

Buying a home can be an intense experience, especially for first-time buyers who aren’t familiar with the process. As housing prices continue to rise, buyers face increased uncertainty about whether they can afford a new home, especially when they begin to consider closing costs and other fees. At REX, we’re working to make homeownership more affordable by shifting real estate’s focus and profits back towards consumers.

Out team at REX Home Loans has carefully selected a well-rounded list of lenders who are capable of helping home buyers through just about any scenario, from shaky finances to tight timelines. And, we have access to all of our lenders’ products and rates to ensure you are getting the best options available to you. With REX, you get better rate transparency, a more customer-focused experience, and a streamlined process — adding up to real savings and greater peace of mind.

Because REX’s approach brings brokerage, mortgage, title & escrow, insurance, and home services together under one roof, we are able to offer home buyers better service, a simplified process, and significant savings compared to traditional real estate brokerages. Our aim is to ensure that you feel secure and included every step of the way.

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