How to find the best mortgage lender as a first-time homebuyer

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While you may have been dreaming about buying your first home for years, the reality of preparing to make the purchase is a wake-up call. Though combing through your financial history and creating a budget in order to figure out what you can actually afford can be a daunting task, working with a lender familiar with first-time homebuyers can make the process much less intimidating. They can decode the paperwork, point you in the direction of first-time homebuyer grants and programs and generally offer reassurance when the process seems overwhelming.

The challenge? How to choose a mortgage lender in the first place. Like choosing a Realtor, not every lender will be a great fit for your situation. Here’s what you need to know to find the best first-time homebuyer lenders out there.

1. Take stock of your full financial picture

You wouldn’t buy a car or plan a wedding without knowing how much you can comfortably spend, or apply for a job without a resume. Yet, many prospective buyers don’t bother to understand the basics of their finances — and the moves they make may fill the list of first-time homebuyer mistakes.

First, get your credit report. Your credit score and history affect your mortgage interest rate in a big way. (The lower your credit score, the bigger the chance of higher monthly payments, fees and potential rejections.) Pay attention to your debt-to-income ratio. Even if you’re comfortably making payments, a high amount of debt can be a red flag. Then, go through your bank statements, tax returns and all other financial accounts to get a crystal-clear understanding of where your money goes.

By over-preparing now, you’re not just making the eventual application process easier. You’ll be able to have an idea of whether you’ll qualify for the lowest interest rates, tell which lenders might be a better fit for you and know if you’ll meet income requirements for first-time buyer programs.

2. Research state and local first-time homebuyer programs

It’s a good thing to be in the market for your first home; you might qualify for programs that help potential homebuyers through grants, discounts, special interest rates, help with closing fees and other benefits. Search “first-time homebuyer programs” and your state (or even your county) to see what you could potentially qualify for.

First-time homebuyer programs also help solve the mystery of how to select a mortgage lender. That’s because these programs usually have a short list of approved lenders that work with the agencies administering the benefits.

3. Check your ‘connections’

First-time homebuyer programs aren’t limited to state and local agencies. Your employer, alumni association or current bank may offer education programs or discounts through certain lenders. (Don’t overlook your membership to that big-box store either, because many offer mortgage services.)

You’ll frequently find programs and discounts available through credit unions, which make them some of the best “banks” for first-time homebuyers. These nonprofit financial institutions have their own requirements for joining (like working in a certain industry, living in a specific area, your religious affiliation, a membership in an organization or club, etc.), though you’re likely to find one that you’ll qualify for.

A mortgage broker can also be a useful ally. Brokers work directly with borrowers to shop around for the best loans from a mix of lenders, and can be especially helpful as a guide in the home-buying process.

4. See if you qualify for government-backed home loans

The best-known is the FHA loan, a mortgage insured by the Federal Housing Administration. FHA loans appeal to borrowers with low to moderate incomes to make a down payment that’s far less than the conventional 20 percent down, depending on credit score. (If it’s 500 to 579, you’ll pay 10 percent down; 580 or higher allows for a 3.5 percent down payment.) These loans are available through approved lenders. To find the best FHA lender, compare closing costs and features, instead of considering just the down payment.

Other government-backed home loans available include VA loans (guaranteed by the United States Department of Veterans Affairs) and USDA loans (guaranteed by the United States Department of Agriculture). The former is zero money-down mortgage available for qualified veterans, while the latter is a zero money-down loan for homes in rural or suburban areas. Like FHA loans, these are available through approved lenders, so closing costs, fees and other features can vary between lenders.

5. Compare conventional loans

If you don’t qualify for first-time homebuyer programs or government-backed loans, your research still hasn’t been wasted. You’ve already found a few potential mortgage lenders just by seeing who works with first-time homebuyers through those aforementioned programs and products. You’ll likely be considering a conventional loan, which typically involves a 20 percent down payment (though this can vary based on the lender and your overall financial health).

How to pick a mortgage lender from your shortlist is a matter of comparison. Look at the APRs offered, but also add up the fees, from the application fee to the loan appraisal fee. These all will affect the closing costs you’ll pay, so less is definitely more here.

Don’t underestimate the power of a “gut check,” too. When you speak to potential lenders, who do you feel at ease with? When you’re making such a major decision, being comfortable with asking questions (and getting clear answers) can ultimately help save you time, money and hassle.

Featured image by MoMo Productions of Getty Images.

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