Finding the best mortgage lender takes plenty of research and shopping around. You can choose from many options, such as banks, local credit unions, mortgage brokers, and online lenders. Making things more complicated, each lender has a different approach to rates, loan terms, down payment requirements, closing costs, and more.
The home-buying process is about taking things one step at a time. In this blog post, you will learn about the different types of mortgage lenders, how to compare mortgage lenders, and what to ask to find the right mortgage for you.
What Are the Different Types of Mortgage Lenders?
Due to the variety and number of available lenders, selecting a mortgage lender can be one of the more time-consuming aspects of the home-buying process. Here are some of the most common types of mortgage lenders and what you should know about each of them:
A direct lender can be a bank, credit union, online entity, or an organization that provides mortgages directly to the borrower. In other words, the mortgages are created, funded, and managed by the direct lender. The loan’s rates and terms are also established by the lender and can differ significantly from lender to lender.
One benefit of working with a lender is the partnership. Borrowers work with one loan officer who processes their application until closing.
On the other hand, rates and terms vary widely between lenders, making some borrowers feel like they’re taking a gamble.
Mortgage brokers are independent, licensed professionals who evaluate a borrower’s financial portfolio to match them to the right lender. Brokers do not fund loans, set interest rates or fees, or make lending decisions. Instead, they receive a small percentage of the loan amount for their services, which the borrower pays through the mortgage costs.
A good mortgage broker will work with multiple lenders on a borrower's behalf, providing more opportunities for competitive interest rates. On the other hand, the broker’s commission can potentially create a conflict of interest if they select a mortgage to prioritize their commission over the benefit to the borrower.
A correspondent lender is one that originates and funds the loan, but then sells it to a larger lending institution in the secondary mortgage market to act as the loan servicer (the one who collects payments). Although the borrower benefits from an array of loan products, the entity managing the mortgage is unknown until after the sale. This option lacks the personability of a trusted advisor.
Wholesale lenders do not interact with a borrower directly. Instead, they work with mortgage brokers to offer loan products at discounted rates. They rely on brokers to assist borrowers in applying for a mortgage.
Although the loans are discounted and provide favorable terms, going through a third party comes with many obstacles and the potential for miscommunication.
7 Factors to Consider When Choosing a Mortgage Lender
By now, you might have a good idea of the type of lender you would like to partner with. However, if you choose to cast a broad net and work with different types of lenders to find the best mortgage for your situation, use these seven factors to compare each option:
1. Size of the Loan Relative to Property Value
This is also called a loan-to-value (LTV) ratio. This figure measures the appraised value of the property against the loan you want. The lower your LTV ratio, the less risky you appear to a lender, improving the odds that you’ll obtain a competitive mortgage.
2. Interest Rate
The interest rate determines the cost of your mortgage over time, making this one of the most important factors to consider. The down payment impacts the rate. The larger the down payment, the less risk on the lender, resulting in lower interest rates.
3. Points Paid on a Loan Origination
Origination points are part of origination, which is a step-by-step process every borrower completes to obtain a mortgage.
Origination points are the fees that borrowers pay lenders to compensate for evaluating, processing, and approving a mortgage loan. These fees are negotiable among lenders and a way to pay closing costs.
4. Loan Terms
Loan terms are the terms and conditions of borrowing money. The terms detail your obligations when taking out a loan, including the repayment period, interest rate, loan fees, penalty fees, and other conditions that may apply depending on the type of lender.
5. Down Payment Requirements
One of the biggest up-front expenses when buying a home is the down payment. This is the portion of the purchase price paid at closing. Typically, the less money down, the more you will pay in fees and interest over the lifetime of the loan.
Different loans have different down payment requirements. For example, many government loans don’t require any down payment, whereas most conventional loans require 3 percent or more.
6. Mortgage Insurance
Mortgage insurance protects a lender if a borrower defaults on payments or is unable to meet the contractual agreements of the mortgage.
Mortgage insurance is required on most conventional loans if the down payment falls below 20 percent of the loan amount.
7. Closing Costs and Other Fees
Throughout the home-buying process, the realtor, lender, and other third parties perform many services. The fees and costs for these services are paid for at closing, including the application fee, closing fee, credit report fee, and more.
Partner with a Customer-Obsessed Loan Officer
At radius, we have more than two decades of making mortgages better by improving access to home financing for all homebuyers, embracing cutting-edge technology to maximize efficiency, and always providing a personal touch.
Finding the right Loan Officer is just the start of the home-buying process. For more information on buying a home, check our e-book, 11 Essential Home-Buying Tips from Real Mortgage Loan Officers.