5 Things to Consider When Choosing a Mortgage Lender

August 14, 2020 · 8 minute read

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5 Things to Consider When Choosing a Mortgage Lender

Buying a home is likely one of the biggest moves you’ll make in your personal and financial life, and your home may represent one of your largest assets.

If you take out a mortgage loan to help you buy it, you will end up making mortgage payments—and if your lender ends up servicing your loan after closing—you will make payments to that lender, possibly for decades. This is one possible reason you may choose to shop around before committing to a mortgage lender and loan program that’s right for you.

Today, borrowers have more choices on ways to apply. With the rise of online and marketplace lenders, there’s increased competition, which fuels improvements in process, service, and cost—and can mean a much better experience for you.

That said, there may be different factors each individual wants to consider when on the lookout for a lender. If you want to avoid getting stuck with a not-so-great lender, take the time to shop around. Asking questions could help you evaluate your options. Here are some of the questions you may be looking for answers to:

1. Does the lender offer competitive interest rates?

First things first, it’s generally recommended to get the lay of the land by looking at various lenders and the rates and fees they advertise. Taking this step may help you understand what the market looks like overall and who may be offering competitive rates.

Remember that the rates and programs you are ultimately eligible for will likely depend on the lender you choose along with your needs and financial situation, yet this initial comparison can give you a baseline to start working from.

Try taking a look at the common loan types offered. Interest rates for fixed-rate loans do not change over the life of the loan. Interest rates for adjustable-rate mortgages can change over the life of the loan and are influenced by the Federal Reserve boosting or lowering their benchmark rate which in turn causes movements in the indexes tied to ARM rates, such as the LIBOR .

Hybrid Adjustable-rate mortgages are mortgages that offer an initial fixed rate for a certain period of time. These hybrid ARMs are commonly offered and typically come with a low introductory rate for either 1, 3, 5, 7 or 10 years. These introductory rates may be one element that entices borrowers to use them.

Another element may be that some hybrid ARMs offer an interest-only payment option for a specified period of time such as 10 years.

When the initial fixed-rate period is over, the interest rate is normally reviewed on an annual basis for adjustment. Although the index tied to the ARM rate may have moved much higher, these loans offer yearly and annual interest rate caps to control rate and payment fluctuations.

When talking to a lender about their mortgage offerings don’t just ask about interest rate, also ask about APR, or annual percentage rate . This figure takes into account certain fees like broker fees, points, and other applicable credit charges, giving you an easier way to compare loan offers.

2. Does the lender offer loan products with terms that suit your needs?

Your needs and financial situation can play a large part in which mortgage programs you choose and are eligible for. For example, some lenders require a 20% down payment to qualify for a mortgage.

If you can’t pay 20%, lenders may require that you have private mortgage insurance, which covers them in case you default on your mortgage payments. Mortgage insurance premiums vary depending upon many factors.

Ask your chosen lender how much insurance payments will add to your monthly payment and keep in mind that in certain circumstances private mortgage insurance does not apply, such as with some Jumbo loan programs and in other cases, can be eligible for removal from your home loan later if certain criteria is met.

If you can’t afford a 20% down payment, you can look for lenders who offer more flexible down payment requirements. Also, consider what term—the length of time you’ll be paying off your loans—works best for you. See what kinds of terms lenders offer and the interest rates that accompany those terms.

A shorter-term will likely come with higher monthly payments, but lower interest rates that result in lower interest charges over time. Not everyone can afford those higher monthly payments, however, in which case a longer term may be preferable. Note that longer terms usually mean that you end up paying more in interest over the life of the loan.

Once you’ve found a loan with rates and terms that work for you, you can obtain a rate lock from your lender, generally for the time it takes to close on the transaction, such as 30 or 45 days.

You may have to pay a fee if you want to lock in the rate for a longer extended period of time, but once you do it will guarantee that you have access to the mortgage at a specific rate during the lock-in period even if interest rate rises while your loan is being processed.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

3. What type of origination, lender, and other fees might you be responsible for?

We’ve already alluded to the fact that you’ll likely be on the hook for other costs in addition to your down payment. One good idea is to request a Loan Estimate (LE) for any mortgage you’re considering to see a solid estimate of what costs you may be on the hook for.

Keep your eye out for things like:

•   Commissions: Mortgage brokers are paid on commission, which is either paid by you, your lender, or a combination of both.
•   Origination fees: These fees may cover the cost of processing your loan application.
•   Appraisal fees: Appraisal fees cover the cost of having a professional come in and put a value on the home you want to buy. You must have a property valuation of some type in order to borrow money to buy a home and in most cases a full appraisal is required.
•   Credit Report Fee: Covers the cost of the bank obtaining your credit report from the credit reporting bureaus.
•   Discount Points: Optional fee the borrower can pay to reduce or buy down their interest rate.

The added fees will typically impact the overall cost of buying the home if the borrower does not receive a seller or lender credit towards closing costs, so doing your research and reading the fine print up front might pay off.

Depending on the loan terms and fees charged, some will be paid upfront at the beginning of the application process such as credit report and appraisal, while other fees might be paid at loan closing such as lender fees, title insurance and more.

In some cases, under certain loan programs, you can borrow the money to cover these fees, which will increase your overall mortgage payment(s). Therefore, having a clear understanding of what fees you’ll owe is critical to understanding how much you’ll end up paying.

Request from your lender a quote on all the costs and fees associated with the loan. A Loan Estimate (LE) is a typical form used to disclose loan fees to a borrower. Ask questions about what each fee covers. Have your lender explain any fees you don’t understand, and then find out which ones may be negotiable or can be waived entirely.

4. How much of the process is online vs. on paper or in person?

How much facetime you have to put in to apply for a mortgage can vary by lender. Some online banks will have you complete the process entirely online, while brick and mortar banks may require an in-person visit.

In the past, applying for a mortgage required a lot of physical paperwork. But much of this has now been replaced by online interactions. For example, you are now likely able to send your financial information like bank statements and W-2s electronically.

Lenders who complete much, or all, of the mortgage application process online may be able to offer lower rates or fees, since they don’t have the cost of brick and mortar bank locations and their employees to maintain.

That said, if you’re someone who likes face-to-face help, you may consider a lender that allows you to apply in person or a lender who utilizes facetime.

5. How quickly can the lender close once you’re in contract?

Once you’ve found the home you want to buy and you’re under a purchase contract with the seller, the amount of time it takes to close on a loan can vary. Depending on the situation you may have to wait for inspections, appraisals, and all sorts of paperwork to go through before you can close.

However, your lender may offer you ways to speed up the process. For example, you may be able to get preapproved for a loan, which takes care of a lot of potentially time-consuming paperwork upfront before you’ve even started shopping for a home.

Ask your lender how much time their closing process usually takes and what you can do to expedite it. Especially if you’re crunched for time, their answer can have a big impact on which lender you choose. After all, the faster you’re financed, the sooner you’ll be able to move in.

SoFi offers loan options with as little as 3% down for qualifying first-time homebuyers and 5% down for all other borrowers.

On the path to homeownership?

We’re right there with you. Download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.

Ready to buy a home? Check out mortgages with SoFi Home Loans.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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