Buying a new home is not an easy process. Deciding on a suitable mortgage lender is as important as deciding on a good home. It is important to understand the different types of lenders available in the market to determine which one can meet your unique needs.
When you start to look for the best lender for you, you will quickly realize that there are way too many options to choose from. However, it is worth figuring out which type of lender can bring you the most amount of value, as each one differs in terms of benefits and disadvantages. Picking the right kind of lender will save you a lot of grief in the long run, so making an informed decision is vital to you enjoying a seamless experience.
What Do Mortgage Lenders Do?
In simple words, a mortgage lender lends you the amount of money you require to buy your new home. There are different types of lenders in the market; credit unions, independent lenders, brokers, banks, etc. The one thing they share is that they require repayment in full. This repayment comes with interest, which accumulates over time and is over and above the principal amount you owe.
At What Point Do You Require a Mortgage Lender?
It is crucial to see to it that you are out of debt before you approach any mortgage lender. You should always keep an emergency fund that can cover around 3 to 6 months’ worth of expenses or the equivalent of 10% to 20% of your down payment amount. This will help you if there is an unexpected financial crisis. Also, it is very important that you know how large of a mortgage you can afford.
Different Types of Mortgage Lenders
Mortgage brokers act as the middlemen between you and mortgage lenders. They do not actually lend you the funds themselves. That would be the job of the mortgage lender. They come in useful for when you need to shop around different lenders and loan packages. Since they have ties with multiple lenders, this makes them a great asset for when you are looking to compare and shortlist from a pool of options. Their job is to connect you to the right lender.
What Are the Cons to Using a Mortgage Broker?
When a deal is completed, mortgage brokers have to be paid around 1% to 2% of your entire mortgage value. It is important to be cautious with these brokers because they might lock you into loans that you cannot afford. This is because the bigger the loan amount, the bigger their compensation from the lender.
Additionally, brokers might do the mortgage shopping and comparative analysis for you, but you should note that they do not work with all the lenders available in the market. So, if you could get a better deal with Company X, but your broker did not have ties with them, you would miss out on that deal altogether.
Direct lenders are responsible for approving and funding loan applications. The biggest advantage you get from dealing with a direct lender is that they look after the entire mortgage process for you. This includes processing your documents to appraisals and the underwriting of your mortgage. The quicker your mortgage lender works, the sooner you can close the deal on your new home. In return, all you need to do is pay them a small fee to finalize the loan approval.
Credit unions are essentially not-for-profit organizations. Members own part of the credit union and the only way you can join one is if you are invited to. These organizations can also give out mortgages, usually at lower rates and closing costs than other institutions. The only catch is that you have to be a member first.
It is also possible to take out a home loan through a bank. This is especially true if you have a long-standing relationship with one of them. As a valued customer, they might even be willing to lower their rates and closing costs for you. Banks, like credit unions and direct lenders, also rely on the in-house processing of mortgages.
The bottom line is that every borrower must take time to compare the offerings provided by all types of lenders and brokers out there. Comparing the interest rates and the lock-in periods will help you narrow down the best deal for your budget and secure the home of your dreams.