Most homebuyers worry about one thing – how to finance their first-time home purchase. This is where mortgage brokers and mortgage lenders come in.
Like financial advisors, mortgage lenders and brokers will help you assess if you can afford a residence of your own. However, these professionals focus more on your ability to pay back a loan, not your overall financial health.
To feel more confident about your home purchase, you’ll need the right partners. Before you start looking for a lender or mortgage broker to assist you, it pays to understand what these professionals do.
Here’s a primer on mortgage lenders, mortgage brokers and how they can help you fund that first big investment.
What are mortgage brokers?
Your mortgage loan may be the largest loan you might ever take, and this entails mortgage shopping. This is where mortgage brokers come in.
Mortgage brokers are the experts who can assist you in looking for a lender, shopping for the most affordable interest rates, and getting loan approval.
Mortgage brokers need to take a pre-licensure class and pass the SAFE Mortgage Loan Originator Test to get a license. Specific requirements vary per state, but mortgage brokers usually need to have at least a high school diploma. Every year, these professionals also need to comply with the continuing education requirements.
Brokers will assess the state of your finances and match you with a lender. These professionals have a network of lenders that they work with. They are also privy to different loan programs and specific lender requirements.
Your mortgage broker serves as a middleman between you and the lender. So, they will assist you in the entire loan processing stage.
They should also:
- Find loan programs with affordable payment schedules that would fit your budget
- Suggest mortgage lenders and loan programs that you are eligible for
- Recommend solutions to issues that may come up during the loan processing stage
- Collect documents for pre-approval
- Keep you updated with the status of your loan until it is settled
If there is a Mortgage Bankers Association, there is also a dedicated organization for mortgage brokers known as the National Association of Mortgage Brokers. NAMB is an organization that represents the interests of mortgage professionals and homebuyers. The association started in 1973 and is composed of members from different groups in the real estate finance industry, small business owners, account executives, and loan originators. NAMB encourages its members to follow a professional code of ethics in their dealings with clients and lenders.
How much do mortgage brokers make?
Mortgage brokers, like other sales professionals, earn a commission. Some brokers charge clients for the services they provide for a client. Other brokers receive a certain fee from the mortgage lender who financed their client’s home loan.
Experienced brokers earn around $55,000 a year but professionals committed to the trade earn more.
What are mortgage lenders?
Mortgage lenders are financial companies such as banks, credit unions or cooperatives that provide financing for a real estate purchase. Some mortgage lenders focus on financing residential properties, others prioritize financing on commercial real estate loans.
The most common types of lenders you may encounter while shopping for residential loans include the following.
- Veterans Affairs Lenders. VA lenders offer mortgage loans to veterans and active-duty members of the US Armed Forces eligible for VA Home Loans. Since the US Department of Veterans Affairs guarantees these loans, interest rates for VA loans are usually lower.
- Federal Housing Administration Lenders. Federal Housing Administration lenders is a collective term for financing companies offering housing loans backed by the FHA.
- Private mortgage lenders. A private mortgage lender is not your traditional mortgage lender. These lenders usually offer interest-only loans with terms ranging from 6 months to three years. Homeowners only need to pay the monthly interest on the loan but they have to pay the principal in full at the end of the loan term.
- Reverse mortgage lenders. Some lenders offer a unique home equity loan known as the reverse mortgage to individuals who are 62 years old and above. In a reverse mortgage, you receive a lump sum or installment payments from your mortgage lender. You’ll only need to pay back this loan if you sell your home, move, or when you die- in which case, your family is now responsible for the loan.
How do mortgage lenders operate?
Each mortgage lender should have a specific guideline in processing loan applications. However, most of these financing companies are part of an organization. Being part of an organization that fosters best practices among mortgage lenders and helps members stay up-to-date with relevant and vital information in the real estate finance industry.
Big names in the mortgage lending industry such as Chase, Barclays, and Bank of America, for instance, are part of the Mortgage Bankers Association. MBA is a national association that promotes fair and ethical lending practices. Being part of an organization is also a valuable networking resource for mortgage bankers.
Mortgage Lenders vs Mortgage Brokers
A mortgage lender could either be a bank or financing company that offers loan products. Mortgage brokers, on the other hand, are licensed professionals who can help you find a mortgage lender.
After you decide on a particular lender, a broker helps you with the application process. Brokers act as a middleman between you and the mortgage lender.
Brokers will assess your financial status to find loan products you are eligible for. Each mortgage lender will also set a criteria that you need to meet to be eligible for a loan.
How do mortgage lenders determine if I’m qualified for a loan?
A mortgage lender will assess whether you qualify for a loan based on your income, assets, employment, and credit history. You have to supply documents such as your payslip, tax returns, and bank statements to support your loan application.
Aside from income and assets, lenders also look at your Fair Isaac Corporation score or FICO score. Your FICO score which could range from 300 up to 850 is based on your credit report.
This score reflects your payment history, length of credit history, available credit, new credit and number of inquiries among other factors.
Experian considers a FICO score of at least 670 as Good. As a general rule, borrowers with high FICO scores are eligible for lower rates and better loan terms.
Your FICO score along with your current employment and income sources help mortgage lenders assess your creditworthiness.
Which FICO score do mortgage Lenders use?
Since most people have three FICO scores, which one do mortgage lenders actually use?
First off, a mortgage lender will determine if your FICO score is usable. A usable FICO score is based on solid and sufficient information pertaining to a borrower’s credit history.
An underwriter which is employed by the mortgage lender will determine if a score is usable or not. If the FICO score is usable, mortgage lenders will use the following criteria to determine which score to use.
- If two scores are the same, mortgage lenders will use that FICO.
- If all three scores are different, lenders use the middle score.
If you don’t have a usable FICO score, you may have difficulty in qualifying for a mortgage. You may have to ask someone with a good credit rating to be a guarantor. It’s also advisable to consult a mortgage broker to see if you have other options.
What are my options if I have a bad credit history?
Bad credit is a serious obstacle for anyone who plans to get a home loan. If your FICO score is between 500 and 579, you have poor rating while a FICO score lower than 500 indicates bad credit. However, current standards consider any score below 620 as unfavorable.
Mortgage lenders tend to charge higher interest rates for borrowers with unfavorable credit because they pose a higher risk of default.
Lenders can offer as little as 3.9% to borrowers with good credit ratings while individuals with bad credit can pay as much as 9.5% per year! However, this should not discourage you from applying for a home loan.
Having a bad credit score makes it more challenging to get approved for a loan but it is not impossible. You have the option of fixing your credit score through a credit repair or debt management program.
One way of improving your credit score is by undergoing credit repair. If there are errors in your file, you can correct the wrong information in your credit report by submitting a dispute. Your credit report may be updated after 30 days.
You can also try to reduce your amount of debt. It would also be good if you can pay off past due accounts. However, this might take a long time, possibly years! What you can do for now, to up your chances of getting that home loan are the following.
Do your homework
Research lenders that offer reasonable interest rates to borrowers with bad credit. Having a low credit score may limit your options but that doesn’t mean that you have to grab the first one that gives you an offer. There might still be a better offer out there. You can also consult your mortgage broker to see if he or she works with a lender who is willing to work with you.
Make a sizeable down payment
The probability of getting your mortgage loan approved will be higher if you make a bigger down payment. A lender may be willing to offer acceptable rates if you make a 15% to 20% down payment.
Bad Credit Mortgage Lenders
Borrowers with a bad credit history should not lose hope and think that they’ll never qualify for a home loan. There are still a lot of options out there even for those with bad credit. Here are a few private home loans and government-sponsored or insured home loans.
Rocket Mortgage provides loans for home purchase, refinancing and debt consolidation. This lender offers low down payment loans to borrowers with credit scores as low as 580. You can also avoid paying private mortgage insurance with the PMI advantage program.
Wells Fargo has a program that helps borrowers with low income and limited credit history. They give options for minimal out-of-pocket expenses and loans that do not require monthly mortgage insurance.
CitiMortgage offers low or no down payments and flexible credit guidelines to help low and moderate-income borrowers. They also offer refinance programs. Moreover, closing costs can be added to the loan.
FHA Home loans
FHA home loans refer to loans offered by an independent lender that is insured by the FHA. The lender faces reduced risk when they approve a housing loan application made by someone with a poor credit history. Borrowers with credit scores as low as 500 can qualify for this type of loan. Most FHA loans require a 3.5% to 5% down payment. But if a borrower’s credit score is between 500-579, he or she needs to put down a down payment of at least 10%.
VA Home Loans
Active or retired members of the U.S. Military can qualify for this type of loan. This is coursed through the Department of Veteran Affairs (VA). This is also made through an independent lender, but insured by the VA. The minimum credit score requirement is typically 620. However, there are certain situations when someone with bad credit (minimum of 580) can qualify. Benefits include no down payment and exemptions from private mortgage insurance premiums and other fees.
USDA Loans or Rural Home Loans
This loan is designed for low-income homebuyers in rural areas. The U.S. Department of Agriculture (USDA) provides 90% guarantee to a qualified lender, reducing their loan risk. Thus, lenders don’t require any down payment from qualified borrowers. However, you can only apply for a USDA loan if you are financing your primary residence.
What fees do mortgage lenders charge?
Mortgage lenders earn through the interest they charge on a loan. If a borrower gets a $500,000 loan for 30 years at 5% annual interest, the mortgage lender earns around $25,000 on that loan in just one year.
Aside from interest, lenders also charge fees better known as origination fees for processing your loan. Lender fees are a component of the total closing costs you pay when you get a loan.
Most lenders charge origination fees as a percentage (usually between 1.5 to 2%) of the total loan. So, if you borrowed $200K, and processing charges are 2%, total origination fees would be 4,000 ($200K multiplied by 2%).
Some lenders include administration fees, application fees or underwriting fees in the origination cost. When charged separately, these fees could range from $450 to $1,000.
Your lender may also charge you for the following:
- Wire Transfer Fee. This fee covers expenses related to wiring funds to a settlement agent and is typically between $25 to $100.
- Funding Fee. Government-backed mortgage programs like the Veterans Administration program charge a funding fee which could range from $695 to $1,295 on top of the normal mortgage lender fees.
- MERS Fee. Some lenders charge a Mortgage Electronic Registration System (MERS) of about $13 to $25 to register the mortgage.
How can I find mortgage lenders near me?
Prior to diving in and buying a new home, you should look for the best mortgage lenders out there. You should conduct your own research and consult people you can trust before you decide on a mortgage lender.
Start your search online if you have no idea where to start shopping for the best mortgage lenders and loan programs.
Don’t forget to compare rates, terms, customer service, availability of online applications, and loan tracking. It would be ideal to narrow down your search to 3 lenders before deciding. You may also want to search for lenders offering lower rates and incentives to first-time home buyers.
Quicken Loans is one of the biggest mortgage lenders in the US. It is also very popular since it operates nationwide. Quicken Loans offer very competitive rates and they make it easy for borrowers to apply for a mortgage online. With their online application, everything happens automatically when you connect your bank accounts. The quick and simple process makes it very attractive to borrowers.
SoFi started out as a student loan refinancing company and has branched out to other financial areas including mortgage loans. The loan application process starts with a pre-qualification that takes around two minutes to finish. They don’t put too much weight on credit score and gives value to college degrees and your earning potential. What’s really good about SoFI is that you don’t have to pay an origination fee.
New American Funding offers mortgage loan products to borrowers with low credit scores or those who are self-employed. Unlike other online lenders, New American Funding does manual reviews, they don’t just approve or deny based on computer algorithms. This company considers other factors such as good savings and high income of borrowers. However, they require a minimum credit score of 580.
If you’re planning to get an FHA or VA loan, CitiMortgage is a good choice since this company offers low down payment. loans to low-income earners. CitiMortgage is part of the Citigroup which includes one of the biggest retail banks in the country Citibank.
If you are seeking an FHA loan with a low-down payment, then PennyMac may be right for you. PennyMac is a direct lender with a focus on the online lending business. They offer a range of loans which include USDA, FHA, and VA. PennyMac also offers low down payment loans for first-time homebuyers.
What’s the best way to look for mortgage brokers near me?
Don’t hire the first mortgage broker you come across because you need one.
One way to look for a good mortgage broker is to ask friends or family members for referrals. It would be best if they actually worked with the mortgage broker.
Your real estate agent or financial advisor can also help you look for a reliable mortgage broker. Ask your agent or advisor for mortgage brokers they recommend.
When looking for a mortgage broker, it would be wise to talk to several brokers first to find someone who can help you with your financial needs.
Here are some questions you can ask when you interview mortgage brokers, to help you assess their qualifications.
1. How many years have you been a mortgage broker?
2. Can you tell me about the loans you have helped get approved? How many are they?
3. What kind of service do you usually provide?
4. How can I communicate with you? How long do you usually respond?
5. How many lenders do you have in your panel?
Pick Your Mortgage Lenders and Brokers with Care
When you purchase a new home, you need to be financially ready. Taking small steps such as saving as much as you can, checking your credit score, and managing expenses and payments are important.
But when it’s time to look for home financing, you need to do sufficient research on available loan options! Mortgage brokers are the most qualified professionals for this job.
Making a conscious effort to find the right mortgage broker and mortgage lender helps you finance your new home without getting burdened with loan installments that don’t fit in your budget.