When you are ready to purchase a home, you’ll be faced with many different decisions, like whether to buy an existing home or new construction. Like most things in life, the answer of what best fits your wants and needs depends on just that, you’re particular set of circumstances.
Applying for a mortgage can be confusing because of various loan products, with debt instruments offering many choices, from 15-year and 30-year fixed interest rates, to zero down payment VA loans, to adjustable rate mortgages with the lowest of rates. Another choice in getting a home loan is which source: a lender or a mortgage broker?
Do These Things before You Apply for a Home Loan
Regardless of which you ultimately choose, be ready and apply only after your finances are in order. You should request copies of your credit reports from all three bureaus, which can be done free, once a year, at AnnualCreditReport.com. Go over each file carefully, as there are approximately 40 million reports containing errors and 20 million of those errors are large enough to cause your mortgage application to be denied.
“A lender is a financial institution that makes loans directly to you. A broker does not lend money. A broker finds a lender. A broker may work with many lenders. Whether you use a broker or a lender, you should always shop around for the best loan terms and the lowest interest rates and fees.” —United States Consumer Financial Protection Bureau
Some other things you should definitely be doing, is saving-up for your down payment, earnest money deposit, and, for closing costs. In addition, if possible, start paying down debts, to decrease your DTI or debt-to-income ratio. After you apply, do not switch jobs, make large purchases, with cash or credit, and don’t open any new lines of credit.
Key Differences between a Lender and a Mortgage Broker
As stated above in the quote, the largest difference between lenders and mortgage brokers is banks, credit unions, and mortgage companies are the lenders, while brokers are licensed professionals which act on your behalf, to find the right bank, credit union, or mortgage loan company. This, however, is not the only difference. Here are some more differences between a lender and a mortgage broker:
- Variety of home loan products. Lenders, such as banks, credit unions, and mortgage companies, offer specific types of loan products, but nothing beyond these. Mortgage brokers have access a wider variety because these professionals work with many different lenders.
- Length of time between applying and approval. In general, the process of getting a home loan through a mortgage broker, will take longer because the broker will spend time exploring different loans which best fit you.
- Special circumstances. Brokers are generally better equipped at matching home buyers with special circumstances with loans which accommodate said circumstances.
- Lock-in rates. While mortgage brokers have a wider variety of loan products, they cannot lock-in rates, but credit unions, mortgage companies, and banks can lock-in rates.
For home buyers that do not have special circumstances and want to apply for a fixed-rate, 30 year loan, a bank, mortgage loan company, or credit union is usually the best route. Do some research and learn about the different types of home loan products before you apply to learn which best fit.