One of the first steps in purchasing a home is setting a budget. Setting a number, although a great start, is not enough. Real estate purchases are complicated and consist of a few different components. The key throughout the entire home buying process is research and more research. No one ever complained they had too much information while making a large investment decision. We have, however, heard plenty of people say something like…I wish I knew that.
1) Compare Lenders. Time to dive into a little research. Finding a lender while buying a home isn’t as cut and dry as you’d consider it to be. There are several different types and it’s important you choose the right one for you. Choosing a good lender makes the process a million times easier and way less stressful in the long run. So…what are the different types of lenders?
A Mortgage Lender can be a bank or other form of a financial institution like a credit union. They set all the terms of your loan including the interest rate and payment schedule.
A Mortgage Broker acts as a mediator between you and the lender. They have no control over the loan itself including terms, timeline, and final details. However, they can help you with the negotiations. If dealing with a lender directly is intimidating for you, working with a broker can help make the process a little more seamless. Since they’re the ones handling the negotiations, they have the ability to shop around for you to find the best option. Even though a broker does the heavy lifting, it’s still important to make sure you do some research on the lenders they suggest. Once they make the connection, everything is in your hands so it’s best to be prepared.
Mortgage Bankers make up the majority of mortgage lenders in the US. These include big banks, online mortgage lenders, and credit unions. Mortgage bankers borrow money from other lenders to fund the mortgages they service and oftentimes sell it on the secondary market.
Direct Lenders are distinguished by specializing in mortgages. Direct lenders only offer their own products (like mortgages) as opposed to borrowing from other investors and lenders like a mortgage banker. Their specialization allows more flexibility with their qualifications but can be more strict with rules determining what will and won’t be provided.
Portfolio Lenders use their own money for loans and mortgages and do not sell them to a secondary market. Portfolio Lenders are generally smaller, community banks with more flexibility than a big bank. They’re also more dedicated to the community and personal relationships with clients which may be important to some home buyers.
Hard Money Lenders are a last-case-scenario type of situation. These are private loans meant to be paid back quickly. Hard Money Loans are often used for property flips since a profit is turned fairly soon. They’re meant for a short-term situation and when you need money fast which inevitably means a higher interest rate. They can be helpful when you need to buy a home now and don’t have the ability to find a long-term financing option immediately.
There are also Correspondent Lenders, Warehouse Lenders, and Wholesale Lenders. They all fall roughly under the “Direct Lender” category but with different means of financing, regulations, and sourcing funds. While researching different lenders within your area, the qualifications that fit your lifestyle, income, and needs will all determine which type of lender you end up moving forward with. Investopedia does a fantastic job breaking down each type of lender in depth.
2) Talk to a lender. This is as simple as it seems. Once you’ve narrowed down which route you’d like to take with lenders, start doing more research. Find a few different lenders or brokers within your area and set up consultations. Find out what the process looks like with each of them and get to know them to see if you feel comfortable. Working with a lender is no different than working with any other service provider. You should have a good relationship with them. They should be great at communicating with you. You should feel confident in the service they are providing. If they don’t check those three boxes, consider another option.
Choosing which lender (or broker) is right for you will ultimately depend on a few things. Your credit score, the interest rate, and annual percentage rate (APR), turnaround time, extra fees, and more. The Motley Fool shared great tips in picking the right lender.
3) Research the Interest Rate. While talking to lenders, make sure to ask them about current mortgage interest rates. Ask whether their quotes are the lowest for that day or week (source: Federal Trade Commission). Other information you need to find out includes:
- Is the interest rate fixed or adjustable?
- If the rate is adjustable, how will your personal rate and loan payment vary?
- What is the loan APR?
Your ultimate budget will be affected by the interest rate as well as the APR. Knowing what they are in advance will help your agent find options within your realistic budget.
4) Estimate a Budget. Once you’ve talked to different lenders, researched interest rates, and have a pretty good idea of the direction you’ll be moving in, it’s time to set an estimated budget. The budget should include your mortgage, taxes, and insurance rates. Calculate how much you can pay monthly. Determine what you’ll be able to borrow. Find out if you receive any tax breaks. List out additional costs like any repairs that you’ll need to make, how much utilities will cost, as well as if you’ll be furnishing. If your top budget is $500k but you need to buy all new furniture, it might be a better idea to look for a home less than your max budget. All these expenses need to factor into your final budget estimate.
Have questions about setting a budget? Get in touch with us!