How to find a lender for first time home buyers smartly

For someone buying their first home, the prospect of finding a mortgage lender can be overwhelming. Not only is there a multitude of lenders to consider, but you’ll also need to navigate through loan fees and down payment prerequisites. And, ensure that the chosen loan type aligns with your needs. Here’s how to find a lender for first time home buyers in a smart way. 

The idea is to help simplify the mortgage process for you. And, to get you the best interest rates available for your eligibility.

So, who is a mortgage lender?

A mortgage lender, typically a bank or financial institution, offers home loans to individuals seeking to buy a home without the ability to make an outright purchase. These lenders have varying borrowing guidelines that assess your credit score, loan terms, and mortgage interest rates. 

Applying for a mortgage loan is commonly done either in-person or online, depending on where you live, your preference, and the lender’s procedures. In the mortgage market, there are diverse lender types, ranging from traditional ones such as banks to individuals operating within the mortgage industry.

Who are the different types of loan lenders?

There are various types of loan lenders, each catering to different financial needs and preferences. Here are some common types of lenders:

• Traditional banks and credit unions: These are conventional financial institutions that offer a wide range of loans, including mortgages, home loans, personal loans, and auto loans.
• Online lenders: Digital platforms and online lenders provide a convenient way to apply for and manage loans. They often specialize in personal loans, student loans, and even mortgages.
• Mortgage brokers: Brokers act as intermediaries, connecting borrowers with mortgage lenders. They can offer access to a variety of loan options.
• Peer-to-peer lending platforms: Peer-to-peer lending connects individual lenders with borrowers, cutting out traditional financial institutions. These platforms often focus on personal loans.
• Specialized lenders: Some lenders specialize in specific types of loans, such as auto lenders that exclusively deal with car loans or medical loan providers.
• Credit card companies: Credit card issuers not only provide credit cards but may also offer personal loans or cash advances.
• Payday lenders: These lenders provide short-term, high-interest loans, often targeted at individuals facing immediate financial needs.
• Government lenders: Government-backed lenders, such as the Federal Housing Administration (FHA) or the U.S. Department of Education, offer FHA loans with specific terms and conditions.
• Nonprofit lenders: Some organizations operate as nonprofit lenders, providing loans with a focus on community development or assisting underserved populations.

Read more: How to pay home loan with credit card

What to consider before looking for a lender?

The ideal mortgage lender should offer you support when required and give you rates that are fair and don’t strain your finances. Lenders present both the APR (annual percentage rate) and the interest rate in their offers, but it’s crucial to focus on the APR as it represents the true cost of the mortgage. As a rule of thumb, a lower APR indicates a more affordable loan.

As you look for a lender, consider the following points: 

Understand your financial commitment

• Determine your budget by assessing your income, assets, and credit score.
• Your mortgage lender should provide details on monthly payments, interest rates, closing costs, property taxes, and required down payments.

Explore your mortgage options

• Understand the types of mortgage loans.
• Discuss various loan types with your lender, such as conventional fixed-rate mortgages, adjustable-rate mortgages, FHA Loans, and VA Loans.
• Differentiate between conventional and government-backed loans.
• Verify if the lender offers both types and understand the unique requirements for each.
• Understand the implications of different terms and interest structures on your monthly payments and overall costs.
• Learn about mortgage points and their role in reducing interest rates.

Consider your credit score and income

• Inquire about the credit score requirements set by the lender.
• Explore potential benefits or lower rates for good credit.
• Understand how your credit score impacts your loan terms.
• Recognize the role of income in determining home affordability.
• Inquire about the lender’s considerations for various income sources and required documentation.

Know about your down payment requirements

• Clarify the down payment needed for closing.
• Explore government-backed loan options and potential eligibility for low or zero down payment.
• The required down payment amount depends on the type of home loan you choose. Conventional loans may allow as low as a 3% down payment, while some opt for a 20% down payment to avoid private mortgage insurance (PMI). FHA loans may have down payments as low as 3.5%, contingent on your credit score. Notably, VA and USDA loans do not mandate any down payments.

Read more: Average down payment on for first time buyer

Understand interest rates and APR

• Clarify your interest rate components and the factors influencing them.
• Learn about the Annual Percentage Rate (APR) to grasp the full cost of borrowing.
• Understand adjustment frequencies for adjustable rate mortgages.
• Inquire about mortgage rate locks for rate stability until closing.
• Understand the validity period of rate locks and their impact on loan costs.

Be sure of the closing costs and prepayment penalties

• Inquire about average closing costs in your state.
• Understand mandatory and optional fees, as well as services you can choose.
• Discuss the possibility of paying off your mortgage early.
• Ask about prepayment penalties and understand their impact on potential savings.

Understand the concept of escrow accounts

• Inquire about the necessity of an escrow account, especially for government-backed loans.
• Understand options for addressing shortages or obtaining refunds.

By breaking down these key points, you can navigate the mortgage process with clarity and choose a mortgage lender who is right for you.

Read more: How does escrow work?

How to find a lender for first time home buyers

Here are some of the best ways to find the most affordable and suitable home loan lender.

• Explore your bank’s offers: Check with your bank for potential discounts or special rates for existing customers. Larger banks often provide educational resources for first-time homebuyers.
• Do a credit-based search: Utilize resources tailored for first-time homebuyers to find lenders accepting your credit score. Note that alternative loan options, like VA or FHA, may offer flexibility beyond the typical 620 credit score requirement.
• Review ads and mailers: Examine credit card and loan mailers for potential lenders. Research each lender, scrutinize fine print, and read customer reviews to assess services and reliability.
• Seek recommendations and do your research: Ask family, friends, financial advisors, and even real estate agents for lender recommendations. Conduct independent research to ensure recommendations align with your needs and preferences.

What is the best way to compare mortgage lenders?

Once you’ve identified the type of loan you require, consider the kind of service and lending experience that suits your preferences. Whether you favor face-to-face interactions with a banker at a physical bank or prefer a contact-minimized approach through a mobile app, your choice may lead you towards traditional banks, nonbank lenders, credit unions, or even relying on a mortgage broker.

To gauge your options, apply for mortgage preapproval with multiple lenders. This process not only helps determine your borrowing eligibility and potential interest rates but also provides insights into the working dynamics with each lender. While actual interest rates and fees become apparent only through the mortgage application, obtaining multiple preapprovals assists in narrowing down your choices before incurring application fees. Once you apply for a mortgage, expect to receive a loan estimate within three business days – a standardized form facilitating a side-by-side comparison of lenders to identify the most favorable mix of rates and fees.

What does the loan estimate tell you?

The loan estimate is a concise three-page document mandated by the government. It outlines key loan details, including

• Clear answers regarding potential expense increases after closing, prepayment penalties, and balloon payments.
• Projected monthly mortgage payments encompassing taxes, insurance, and assessments.
• Estimated closing costs and required cash at settlement.
• Details on services that can and cannot be shopped for, such as pest inspections and home appraisals.

Moreover, it facilitates easy comparison of loan offers from various lenders, providing information on the total costs of third-party services, the annual percentage rate (interest rate plus fees), and the interest amount over the loan term, expressed as a percentage of the total loan amount.

Which are the best mortgage lenders for first-time homebuyers?

Based on relevant factors, experts at Bankrate have narrowed down the best mortgage loans for this year. 

FAQs 

Who is a first-time homebuyer?

A first-time homebuyer is someone who is purchasing a home for the first time, whether transitioning from renting or moving from their family home. To be eligible for a first-time homebuyer loan, it’s not necessarily required to be your initial property purchase. In the context of these mortgages, you qualify as a first-time homebuyer if you haven’t acquired a home in the last three years.

Are there first-time homebuyer programs?

Yes, there are programs for first time home buyers – programs that often feature a reduced interest rate, a lower down payment requirement, and additional savings opportunities, such as decreased mortgage insurance premiums. Various types of first-time buyer programs exist, ranging from 3% down conventional loans to 3.5% down FHA loans, and even no-down payment options for qualifying military members or those buying in rural areas.

What documents are required when applying for a mortgage?

Documents include proof of income, employment verification, tax returns, and information about your debts. It’s best to prepare these documents in advance to expedite the loan application process.

Can a first-time home buyer seek help in making a down payment?

If you’re buying a home for the first time, you could be eligible for assistance with your down payment and other benefits designed for first-time home buyers. Typically administered by state housing authorities, these programs might also have city- or county-specific options depending on your location. 

Read more: Can I sue mortgage lender for negligence?

How do I find a suitable mortgage lender?

When applying for a mortgage loan, always obtain quotes from a minimum of three lenders. Assess the annual percentage rate along with fees and other terms, for comparison. Look beyond interest rates. Consider fees, loan terms, customer reviews, and the lender’s responsiveness. 

How much down payment do I need as a first-time homebuyer?

The range is quite broad. For instance, with a credit score of 620 or higher, you could potentially qualify for a conventional loan requiring a minimum down payment of 3% on the home’s purchase price. If your credit score is less favorable, you might consider a slightly higher down payment of 3.5% for an FHA loan. Military personnel or those purchasing homes in rural areas may get a zero down payment option. Additionally, some lenders have introduced 1% down mortgages, accompanied by free grants. 

How important is my credit score when finding a lender?

Your credit score is crucial. It affects the interest rates you’re offered and your loan eligibility. Check your credit score beforehand and explore lenders that cater to your credit range.

Written by Ramona Sinha. December 30, 2023

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.