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Important Things to Know Before Choosing a Home Loan Company

Kalicia Bateman
Kalicia Bateman | Contributor

A home is the biggest purchase most consumers will make in a lifetime. This step can feel both exciting and stressful. You may feel overwhelmed by the pressure to choose a home loan that fits your individual profile as a home buyer as well as choosing a mortgage lender you can trust.

How can you prepare? Where can you find the best mortgage rate? Which company provides the best service? And ultimately, which mortgage company is right for you? Well, we may not know you personally, but we know where to start. As you prepare to make a decision, here are some things to consider:

Financial preparation

Mortgage lenders take into account your assets and liabilities, including student loans, car loans, other debts, and income, when determining your eligibility for a mortgage. Your credit score is one of the biggest factors into the loan you’ll qualify for, so work to improve your credit as much as you can prior to applying for a mortgage. This may involve paying off debts, especially consumer debt accrued on credit cards.

Another important factor in a lender's approval decision is your debt-to-income (DTI) ratio. Your DTI ratio is a comparison, displayed as a percentage, of how much you owe on your debts each month in relation to your income or how much you earn. When buying a house it is important to try and keep this ratio low — generally, your DTI ratio should not exceed 43 percent. If your ratio exceeds 50 percent you will most likely not be approved for a mortgage loan.

Aim to save as much as you can towards a down payment for your home with additional savings for repairs, a home inspection, an appraisal, and closing costs the seller may negotiate to transfer to you. Many lenders require as little as three percent down for a conventional loan down payment, but any down payment less than 20 percent requires you to pay for monthly private mortgage insurance (PMI) until you reach 20 percent equity paid over time.

Pre-approval

Many homebuyers seek a pre-approval letter prior to house shopping and entering into a loan agreement. A pre-approval letter shows you are a serious buyer and the sale is likely to go through.

To obtain a pre-approval letter, you’ll need to submit the following relevant documents:

  • ID (driver’s license or passport and social security number)
  • Employment verification (employer’s contact info)
  • Income verification (pay stubs, W-2 forms, tax returns)
  • Assets (bank statements for checking and saving, documentation of investments, retirement accounts)
  • Liabilities (outstanding debts like mortgage, car, student loans)
  • Residential history (current real estate holdings, rental history)
  • Other documents (Gift letter if you have a family member contributing to down payment)

Since a pre-approval letter is not a legally binding document or an official loan agreement, you do not need to finance your home through the lender that provides your letter. If you think you can get a better loan elsewhere, it’s recommended you keep lender shopping.

Interest rates

When picking a home loan company, it is important to consider the loan rates offered. Some companies list sample interest rates estimates online, making them easily accessible, but other companies require potential customers to inquire over the phone or in person to receive sample rates. All lenders need personal identifying information from prospective lenders to determine the most accurate interest rate quote.

Rates can change from daily and even hourly, so keep in mind that even a company's most accurate estimate is not guaranteed until your rate is locked in.

Loan types

There are a number of different loans that you may qualify for, including the following:

  • Conventional loans — fixed-rate mortgages
  • Adjustable rate mortgages (ARMs)
  • FHA loans
  • USDA loans
  • VA loans
  • Jumbo loans
  • Interest-only loan

Your loan officer can help you identify which loan type works best for you and your unique situation. Additionally, it is important to understand which home loan companies offer the specific loan option that you are looking for so that you can move forward without any hiccups.

Customer service

Many lenders work exclusively online. If having a brick and mortar branch location is important to you, identify local lenders and go from there.

Because home loans are often difficult and complex, effective communication between the company and the customer is essential. When choosing a home loan company, you want to make sure that communication is going to work to your advantage so you won't be confused about the details of your home loan.

Customer reviews will give you important insights. Looking through company profiles, reading reviews, and contacting customer service will help you, as a potential customer, determine if the company's customer service meets your needs.

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Mortgage Rates Frequently Asked Questions

Who is the top-ranked mortgage lender?

AmeriSave Mortgage is currently the top-ranked mortgage lender based on over 250 verified user reviews. AmeriSave excels in customer satisfaction, service, and attention. Out of the 250 verified customer reviews on Best Company, about 85 percent of them are four-star and five-star reviews.

AmeriSave customers praise the following: 

  • Low interest rates
  • Quick and efficient loan process
  • Easy application process
  • Low closing costs
  • Personable and helpful loan officers

What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage generally has lower interest rates. However, these interest rates can change periodically, causing monthly payments to fluctuate. The loan begins with a fixed interest rate but after a set period ends, interest rates become unpredictable and may go up or down based on the market.

What is an FHA loan?

FHA loans are from the Federal Housing Administration and are government-backed. FHA loans often have lower interest rates and down payment requirements than other loan types.

However, they require a mortgage insurance premium upfront as well as a monthly insurance payment. This type of loan gives homeowners additional safety when it comes to homeowners backing out on their mortgage loans.

If a homeowner defaults on the loan, the FHA will provide a paid claim to the lender of the loan, giving homeowners extra protection.

What is a VA loan?

VA loans are provided by approved lenders and originate from the U.S. Department of Veterans Affairs. VA loans are also government-backed and they are for active military and their families as well as retired veterans. The major benefit of VA loans is that if you qualify, you do not need to provide a down payment or an outstanding credit score.

What is a USDA loan?

USDA loans are backed by the United States Department of Agriculture and are available to qualifying rural property owners. USDA loans are meant for low- to moderate-income home buyers, providing lower interest rates with a 0 percent down payment. However, not all properties will qualify for this type of loan — you must ensure that the home you're buying is in a designated area.

What is a jumbo loan?

Jumbo mortgage loans are home loans that exceed the limits created by Fannie Mae and Freddie Mac, sibling organizations that have a significant place within the mortgage industry.

Often referred to as non-conforming mortgages, Jumbo loans are a bit riskier because they aren’t guaranteed by the Fannie Mae and Freddie Mac organizations, meaning the lender is the one who is responsible for any defaults that may occur.

Jumbo loans can be in the form of fixed-rate or adjustable-rate mortgages. A downside to consider with Jumbo loans is they require higher down payments than those of their conforming loan counterparts.

What is a fixed-rate mortgage?

A fixed-rate mortgage, also called a conventional mortgage, is one of the most common types of home loans. As the title of the loan suggests, the interest rate of this loan does not change throughout the entirety of the loan; the interest rate is decided when the loan is set up, and it will not differ in the loan’s lifespan. Because this type of loan has a fixed interest rate, it is easy to look for comparable rates.

The fixed interest rate can prove to be an advantage or a disadvantage, depending on how the market plays out. It can be beneficial to you, for example, if you have a rate of 3.8 percent and later the rates go up to 4.5 percent. You would have a substantially lower interest rate.

However, it can prove to go the opposite way. You could have a fixed rate of 4.5 percent, but later on the rates go down to 3.8 percent.

What is a home equity loan?

Home equity loans are loans in which you, the borrower, use the equity of your home as collateral; loan amounts are determined by the value of your property.

While this can be a helpful option for some homeowners, often providing lower interest rates, it also presents a risk if you are unable to make payments, since the lender can then foreclose on your property.

Do I have to make a 20% down payment?

It is a common thought and suggestion that you should pay 20 percent down on a house. While this can be beneficial for lowering your monthly mortgage payments, it may not be a realistic option for all homebuyers.

In many cases, first-time homebuyers pay approximately 7 percent down, and there are loan program options, such as FHA loans or VA loans, that require as little as 3 percent down, or even 0 percent down (VA loans and USDA loans).

A good rule of thumb is to make the highest down payment you reasonably can because it can make payments more manageable in the future. However, if you aren't able to pay 20 percent down, there are other options available to you.

Can I refinance my mortgage loan?

Many lenders offer mortgage refinancing services, allowing you to secure a lower interest rate, which could save you hundreds of dollars each month in mortgage payments.

What is mortgage pre-approval?

The pre-approval process allows you to compare rates from several lenders, and is similar to the pre-qualification process with personal loan products.

Once you choose and are approved by a lender, that lender will write you a pre-approval letter, proving that you have financing for a home purchase.

This letter can be integral in putting an offer down on a house because it proves to the home seller that you are prepared to make the purchase.

What is the difference between private mortgage insurance (PMI) and homeowners insurance?

Private mortgage insurance is insurance for your lender in case you are unable to make your monthly payment for any reason. In most cases you are required to pay PMI if you make a down payment of less than 20 percent.

Homeowners insurance is insurance for you as the homebuyer, protecting your home and belongings in the case of a destructive event or theft. When you purchase, a home you will likely be required to get homeowners insurance.

What is the difference between a loan officer and a mortgage broker?

A loan officer provides mortgage options only from the company that they work for, while a mortgage broker works with multiple mortgage lenders to secure the best options for you.

In the simplest terms, a loan officer is akin to a salesperson for their company, while a broker works on your behalf to secure the best mortgage loan for your needs.

There are many pros and cons to both, but if you are researching online mortgage lender options, you will primarily be working with loan officers.

How do I choose the best lender for me?

Every buyer's situation is different, and many lenders offer similar rates and terms. Thus, it is important to read customer reviews to give you the best idea of whether or not a company is transparent and trustworthy. From reading mortgage lender reviews you'll get a feel for which companies offer the most competitive mortgage rates and provide the best overall service.

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