Many homebuyers need a loan to purchase property. And as savvy consumers, we know that shopping around is the key to getting the best deal on most items. Plenty of us, however, somehow miss that message when it comes to mortgages.
This mistake can cost borrowers thousands of dollars over the course of their home loans. Wake up, people! These days, borrowers can get a mortgage loan in lots of different ways. So you may be wondering where you should get yours.
Back in the day, banks were the only option for getting a mortgage, but then credit unions and brokers came on the scene. These days, borrowers can get a home loan online, much as you’d order up dinner from Seamless. But should you?
Getting a mortgage
Each of these mortgage lenders has pros and cons for borrowers, so it pays to know what they are before you commit.
Bank
Most local and national banks have mortgage lending programs, some of them aggressive and highly developed.
Pros: If you already have a relationship with a bank (through a checking account, for example), you may be able to obtain a discounted interest rate if you also use them as a mortgage lender.
“If you’re a customer with good credit, you can get a competitive interest rate from your bank,” says Ginger Wilcox, chief industry officer for mortgage startup Sindeo.
Cons: Banks typically have a limited variety of mortgage products and more rigid credit standards than other types of lenders. They expect you to have a good credit score, a down payment, and an acceptable debt-to-income balance. The biggest banks may have a certain amount of bureaucracy for you to wade through, which can slow down the process.
Credit union
Credit unions are nonprofit organizations that offer financial services directly (and often exclusively) to their members. You may already belong to a credit union if you have a checking account or credit card account through them.
Pros: Credit unions typically have lower overhead than banks, so they may be able to offer a mortgage with lower interest rates or fees. For example, in December 2023 the interest rates for a 30-year fixed-rate mortgage averaged 6.96% at credit unions as of the end of December 2023, compared with 7.10% for banks, according to the National Credit Union Administration,
Cons: Like banks, credit unions have a limited variety of loan products. You have to pay a membership fee (typically $5 to $25) and meet certain membership criteria in order to join, usually based on things such as your geographic area or employer. Use this tool to research a credit union and see whether you qualify for membership. Credit unions also look at your ratio of debt-to-income and your credit score, although they may be more willing to work with you if necessary.
Mortgage broker
A mortgage broker has relationships with multiple lenders and works on your behalf to find you the right loan with the best mortgage rate and lowest closing costs for your situation. The key factors would include the amount of down payment you have, your credit score, and other factors. Your real estate agent may recommend a local mortgage broker.
Pros: If you have a unique situation, for example if you are self-employed or have poor credit, a broker will know all of the options that are open to you—and which lender might offer the most appropriate product.
Cons: Brokers receive fees, paid either by the borrower, the lender, or a combination of the two. These are generally 1% to 2% of the value of the loan. There is no guarantee that you’ll get a better interest rate than you would have if you’d shopped around on your own, says Keith Gumbinger, vice president of the mortgage site HSH.com.
Online lender
Like nearly everything else these days, it’s now possible to apply for and receive approval for a mortgage entirely online.
Pros: Streamlined document uploading and the ability to apply on your schedule can make the process less stressful. Plus, online lenders may be able to close your loan more quickly. Sindeo, for example, claims it can close loans in as quickly as 15 days, while the average lender takes about a month and a half.
Cons: There’s little human interaction, which could be tough for first-time homebuyers or others looking for an adviser to guide them through the process. Online lenders also don’t have the long-term relationships with local real estate professionals.
“If you’re in a strong seller’s market, where there are multiple offers on properties, having a lender with credibility in the local real estate community can help your offer rise to the top of the pile,” says Richard Redmond, author of “Mortgages: The Insider’s Guide.”
Research to do no matter who you choose
Keep in mind that whichever route you go, you should always shop around to make sure you’re getting the best deal, not only on your mortgage rate, but with the lowest loan origination fees and other closing costs.
You should also make sure you are ready to buy or refinance a home before you make a mortgage application. Check your credit report on the credit bureaus, and see if your credit history needs work.
If your credit score shows that you have bad credit, you may need to work on it for several months or even a year before you qualify for the loan amount you want, with a good mortgage rate.
Understand the requirements for a down payment, and save up an additional down payment if you need one. You may qualify for first-time home buyer or other down payment assistance in your state.
Pay down your credit card debt and other consumer debt as much as possible, to improve your debt-to-income ratio. The more you prepare before you apply for a loan, the easier it will be, and the better terms you can expect to receive.
It’s also common to get a pre-qualification or better yet, a pre-approval letter from a mortgage lender before you make an offer on a home. Getting pre-qualified shows the potential seller that a lender thinks you can afford the monthly payment, and the lender expects to be able to give you a loan.
“Even if you’re getting a conforming loan and the rates don’t vary much, loan fees can vary lender by lender, and you can end up paying more than is necessary,” says Benjamin Beaver, a sales associate with Coldwell Banker Patterson Properties in San Angelo, TX.
