Choosing the Right Lender

If you’re like most people embarking on a home-buying journey, one of your first steps will be finding a mortgage lender. There’s a lot to consider when it comes to choosing the right one — everything from interest rates, loan types and fees to service and experience.

When comparing lenders, it’s worth taking your time and choosing carefully. Purchasing a home is a big step, and you want a knowledgeable lending partner by your side as you weigh your financing options and navigate the paperwork involved. A good mortgage lender is a valuable resource and can make the home-buying process easier and less stressful. Let’s take a look at the steps you can take to find the right lender fit for you.

How to Find a Mortgage Lender

There are several types of lenders you can look to for securing your home loan, with the most popular being direct lenders and mortgage brokers.

Direct lenders. Banks, credit unions and mortgage companies are considered direct lenders and handle the entire mortgage process from origination to closing.

Mortgage brokers. Mortgage brokers work independently with a variety of loan originators, including direct lenders, to help clients find a mortgage that fits their needs.

Which type of mortgage lender you choose depends on your personal preference, the type of loan you’re looking for and your financial situation. There are many factors to consider when comparing your options. While interest rates are certainly a big one, there are other things to think about, such as fees, loan products, the process and the lender’s experience and reputation.

Here are some tips for choosing the right lender and how to best set yourself up for mortgage success.

Starting the Loan Certification Process

When choosing a lender, look for one that offers a written letter or certification you can provide to sellers to let them know you are qualified. This gives you a clear picture of your buying power and can help you make a stronger offer on a home. When you work with a lender that provides this, you’re doing much of the legwork involved in obtaining a mortgage contract without actually finalizing it.

Choosing Pennymac as your lender gives you access to our unique BuyerReady Certification process. This certification gets you even closer to your new home by confirming precisely how much of a mortgage you will qualify for.

While a BuyerReady Certification does not guarantee a closing, it is a conditional approval based on the information you provide us through the formal loan process. You’ll have peace of mind knowing your borrowing limit and be able to show realtors and sellers that you’re serious about purchasing. To receive a Pennymac BuyerReady Certification, you’ll submit a mortgage application and financial documents, which a Pennymac Loan Expert will review.

Here are some of the benefits of having a BuyerReady Certification:

• Shows sellers, realtors and lenders that you’re a serious homebuyer
• Helps inform your decision-making in terms of how much you can spend on a home and the types of financing you’ll be able to qualify for
• Gives you a competitive advantage over homebuyers who don’t have it

Important Mortgage Considerations

Whether you begin your hunt for the perfect lender and loan by visiting your local bank, searching online or surveying your family and friends, here are some key factors you’ll want to consider.

Interest Rates

Interest rates are among the most important factors to consider when comparing lenders. Your interest rate will determine how much you have to pay for your home loan, so take time to do the math when examining your options. Even a seemingly small difference between rates, such as an additional .5%, can add up to a considerable increase in your monthly payment. Over a 30-year term, you could be paying tens of thousands of dollars more in interest.

While interest rates aren’t the only factor to look at when choosing a lender, they are a significant one. Select a lender that offers a range of competitive rates and terms and will quickly lock in a rate when you find the one that works best for your budget.

Down Payment and Mortgage Insurance

Most, but not all, home loans will require a down payment. A home down payment is money paid upfront for the home at closing and is a percentage of the home’s purchase price.

A conventional fixed-rate mortgage may require a down payment of as little as 3%. A Federal Housing Administration (FHA) mortgage has a minimum down payment of 3.5%, while the U.S. Department of Veterans Affairs offers loans with 0% down.

When comparing mortgage lenders, be sure to inquire about which loans they offer, especially if you’re interested in a non-conventional loan, such as a FHA or VA loan.

Keep Mortgage Insurance in Mind

While there is flexibility in how much of a down payment you make, if you have a conventional loan and do not put at least 20% down, you’ll have to pay for private mortgage insurance (PMI). This is a policy that protects your lender if you fall behind on your payments or end up in foreclosure. It is paid monthly on top of your regular mortgage payment.

Lenders partner with certain PMI providers and may use different calculations to determine your PMI premium. If you anticipate that you’ll be paying PMI, be sure to factor those premium charges into your cost comparisons. Conventional mortgage insurance can be priced quite aggressively, especially if the borrower has a solid credit score. It’s a great option for those who want to keep cash in the bank for investing and/or reserves.

If you opt for an FHA loan, mortgage insurance — similar to PMI — is always required at first. How much and how long you’ll have to pay the extra monthly premium depends on the amount of your down payment. VA loans do not require any type of mortgage insurance but may have other mandatory fees.

Fees

When comparing lenders, you’ll want to specifically evaluate rates, as well as origination fees and discount points, which can vary depending on who you choose. The homebuyer usually pays the fees, although sometimes a seller will agree to a concession and pay for some. Don’t be afraid to negotiate any closing costs. See if the lender you’re considering will work with you to reduce some fees or make other favorable compromises.

Prepare for Meeting with a Loan Officer

Once you find a prospective lender, you’ll meet with a loan officer or expert in person, through email or over the phone to discuss your mortgage options. Your loan officer will help determine your short and long-term goals with your home purchase and offer options to tailor your loan to your current financial situation. This meeting will provide a foundation for your loan officer to match you with a home loan that meets your needs.

Being prepared will help you make the most of your meeting and facilitate the mortgage process. Before meeting with your loan officer, here are some things you can do.

Improve Your Credit Score

Your credit score is a major factor in determining what kind of loans you may qualify for and your interest rate. A lender will want to be confident that you’ll be able to repay your loan. Your credit score is based on the data in your credit report and is a numerical rating based on your credit history. It takes the following into account:

• Your bill-paying history
• Total amount of current unpaid secured and unsecured debt
• Your open loan accounts
• How long you have had your loan accounts open
• Credit account limits
• Collections, charge-offs and any derogatory debt

Typically, the higher your credit score, the more loan options you will have. A lower credit score can mean that mortgage choices may be limited to non-conventional loans with broader qualification requirements.

The following are three steps you can take to help boost your credit score:

Check your credit report. Request free credit reports from each major credit bureau (Equifax, TransUnion and Experian) and review them for accuracy.

Pay bills on time. Late payments for credit cards and personal or auto loans can negatively impact your credit score. Making consistent on-time payments is one of the most influential credit score factors. If this is an area of concern, consider setting up automatic payments and commit to paying at least the minimum amount due each month.

Reduce credit utilization ratio (CUR). Demonstrate responsible credit management by lowering your credit card balances as much as possible. Try to keep your credit utilization ratio below 30%, which indicates that you are using a smaller portion of your available credit. Calculate your CUR as follows: Credit Utilization Ratio = (Total Outstanding Balances on Credit Accounts/Available Credit/Total Credit Limit on Accounts) x 100.

Organize Your Finances and Documents

To prepare for your loan officer meeting, determine how much money you have for a down payment, as this will be important when evaluating your loan options and monthly payments. You will also be required to submit numerous financial documents, including:

• Photo ID
• Pay stubs
• Tax returns and W-2s and/or 1099s
• Bank statements

All the paperwork may not be necessary during your initial meeting. Still, a jumpstart on document-gathering can help streamline the mortgage application process when your loan officer is ready to review them.

Understand Which Loan Is Right for You

While your lender will look at your complete financial picture before presenting — and explaining — your mortgage options, it is a good idea to have a basic understanding of the choices available. The following are the most common types of home purchase loans:

• Conventional fixed-rate mortgages have a rate that never changes
• Adjustable-rate mortgages (ARMs) have a lower initial interest rate that transitions to an annually adjusting rate
• Jumbo mortgages are for buyers who need a loan that exceeds the current federal loan limit (updated annually)
• FHA mortgages are government-backed loans with more flexible lending guidelines
• VA mortgages are government-backed loans for eligible military members and their spouses

Each type of loan has its benefits and qualification requirements. When comparing home loans, you’ll want to think about:

• How long you intend to stay in the loan
• Your down payment and credit score
• Your income stability
• How much you intend to borrow
• How long you plan to stay in and/or own the home
• Your future plans, e.g., will you need more space for children or aging parents?
• Your budget

Assess Your Budget

After you apply for your mortgage, you’ll go through the underwriting process, whereby all your financial documents will be examined and verified. Because the loan officer will ultimately determine how much you can borrow based on your budget, it’s crucial to provide them with the most accurate information upfront during the application process. Providing inaccurate information before going into processing can impact your qualification on the back end. Taking these steps before your loan officer meeting may help improve your chances that you’ll receive a loan approval:

Review your debt-to-income ratio (DTI) with a licensed loan officer. Your DTI is determined by how much recurring monthly debt you have compared to your monthly gross income. Look at your credit card and loan payments. Having less of your monthly income allocated to debt is a positive indicator of being able to qualify for a loan.

Establish how much you can put down on a home. The higher your down payment, the less you’ll have to borrow.

Determine how much you can afford to pay every month. Your new home expenses are not limited to your mortgage. Consider other costs such as:

• Closing costs
• Insurance
• Property taxes
• Potentially higher utility expenses
• Any applicable mortgage insurance
• Homeowners association fees

You’ll also want to think about how your new mortgage will affect your long-term savings goals, such as saving for retirement or your child’s education.

Questions to Ask the Loan Officer

Whether you’re a first-time homebuyer or a seasoned homeowner, the mortgage process may seem a bit overwhelming. Meeting with a licensed loan officer is an opportunity to get your questions answered so you can better understand the process, the loans available and the fees involved.

The following questions are a starting point for gathering information from your loan officer:

• What types of home loans do you offer? Which do you think would best fit my needs?
• What are the loan rates, terms and eligibility requirements?
• What is the required minimum down payment amount for the different loan options?
• Will my loan require mortgage insurance?
• Is there a prepayment penalty if I want to pay off my loan early?
• Do you offer a letter, certification, pre-approval or something similar I can provide sellers to validate my qualifications?
• What will my closing costs be?
• Can I lock in my interest rate?
• Who will be my primary contact? Will it be you or someone else once the loan moves to underwriting?
• Can I buy discount mortgage points? How long will it take to recoup them?
These are fees paid at closing that can help you lower your monthly mortgage payment.
• How long is the mortgage process? When can I expect to close?
• Will the loan closing take place in person or online?

Take your time to ask all the questions you need. A mortgage is a significant financial commitment, and you want to be confident that you’re making the most informed decision. If your loan officer is impatient or reluctant to answer your questions, that may be a sign that they’re not the right lender for you. A loan officer should be a borrower’s advocate and take the time to educate them throughout the process.

Interest Rate Lock

Mortgage rates constantly fluctuate, so asking for an interest rate lock is a smart idea if you find a good rate. An interest rate lock, also known as a locked-in rate, is a guarantee from a lender to give you a set interest rate when you apply for a mortgage. It protects borrowers against potential interest rate increases during the mortgage underwriting process.

Rates can generally be locked for an option of 30, 45, 60 or even 90 days. They are usually locked after the loan application has been reviewed and before underwriting. Lenders have different policies regarding rate locks, including fees, so inquire about policies when comparing lenders.

How Long Is the Process?

The mortgage loan timeline, consisting of a BuyerReady Certification, applying for the loan and underwriting, varies from 30 to 60 days or longer. Some factors that hinder the mortgage process include:

• When borrowers do not have all their documents in order or provide inaccurate or incomplete information
• When borrowers have more complex situations, such as credit issues
• When lenders experience delays obtaining verifications, such as your credit history from the credit bureaus, rental records from a landlord or employment information
• Stricter regulations that require lenders to accommodate more compliance checks

While some delays may be beyond your control, here are a few tips that could help expedite the loan process:

• Gather as many financial documents as possible before applying for the loan
• Do not omit any required information
• Respond promptly to your lender’s questions or documentation requests
• Stay in frequent communication with your lender and address any issues quickly
• Try to avoid making any major financial changes during this time, such as changing jobs or taking on significant new debt

Get a List of All Paperwork Needed

Submitting documents is a requisite part of the home loan application and approval process. All lenders require certain documents to verify your financial and personal information to assess your creditworthiness and ability to repay your loan. The documentation will give your lender insight into your financial situation, income, assets and liabilities. While you should check with your lender to see what specific documentation they will need, at a minimum, lenders will typically ask for:

• Employment verification, including pay stubs
• Social Security, pension or retirement income, if retired
• Evidence of any other forms of income, such as child support
• Tax returns for the past two years
• Bank statements for your checking and savings accounts
• Statements for other assets like your investment and retirement accounts
• Student loan details
• Information on any debt you have, such as auto or student loans
• Gift letter, if family members are contributing funds toward the down payment
• Rental payment history, if applicable

There’s a lot that goes into choosing the right lender. But finding one that offers a loan that aligns with your financial goals and provides a positive borrowing experience is essential. With some due diligence, you’ll find a reputable lender to guide and support you through the mortgage process as you make the move toward your next home.

As a top national mortgage lender, Pennymac has loan experts who specialize in purchase loans to help homebuyers through the mortgage process and ensure a seamless home-buying experience. Plus, they can help you get BuyerReady Certified so you’ll know how exactly much money you can borrow and be more confident when looking for a home. Interested to learn more about what Pennymac can do for you? Get a custom instant rate quote today.

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