Best Mortgage Lenders For First-Time Buyers

    Newbie Home Buyer’s Guide To Mortgage Lenders

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    Every first-time homebuyer has a unique set of challenges. Some need to work with smaller budgets, while others must manage a limited credit history – both of which make finding the best mortgage difficult. 

    Despite this, 33% of new homes sold in 2019 went to new home buyers! But how did they pull this off? The answer is they chose the best lenders to suit their specific needs. 

    To aid your own home buying journey, this guide will help you understand mortgage basics, the different types of loan options, creditor options, and how to determine the best lender for you.

    Mortgages Explained

    Mortgages are secured loans taken out against the value of an asset – that is, the house you are looking to purchase as a first-time homebuyer. To pay off this loan, homeowners must make regular monthly payments according to an amortization schedule determined by their lenders. 

    Failing to pay off a mortgage loan can result in a lender repossessing the property to offset any financial losses. On the other hand, once the mortgage loan is fully paid off, you become your house's official owner. This means that your lender can no longer repossess your home.

    Different Mortgage Types

    There’s a wide variety of mortgage products and loan options for all kinds of first-time homebuyers. Some home loans may require 20% of your home’s cost upfront, while other creditors have low down payment options for clients with a stellar credit history. 

    Even if a first-time homebuyer doesn’t meet the minimum credit score for conventional loans, there are also government-backed mortgage products designed to make owning a home more attainable. 

    But which loans should you consider? This section describes the most common types of loan products and who can apply for them.

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    Conventional Loan

    Conventional loans are mortgages that aren’t backed by the federal government. Instead, the first-time homebuyer with a good credit score can secure a mortgage with private creditors or government-sponsored organizations like Fannie Mae or Freddie Mac. 

    Because the government doesn’t guarantee these loans, mortgage lenders may be quite strict with their requirements. That means some creditors may require borrowers to pay for private mortgage insurance (PMI) on mortgages with a down payment of less than 20% of the total loan. Additionally, first-time homebuyers should generally have clean credit histories and a stable income source before applying for conventional loans. 

    Government-Backed Home Loan

    When a borrower doesn’t meet the minimum credit score requirement for a conventional loan, they may find it challenging to secure a mortgage – that’s where government loans come in. 

    The FHA, VA, and USDA loans are all government-secured mortgage products, meaning that they provide insurance for your lender if the agreement falls through. As a result, mortgage lenders are more likely to enter agreements with first-time homebuyers with a less-than-perfect credit score. 

    Federal Housing Administration (FHA) Loan

    FHA loans are designed to help first-time homebuyers that can’t qualify for a conventional loan, whether it’s because of their credit score or debt-to-income ratio (DTI). Lenders are relatively lenient with rates and fees on FHA loans, sometimes allowing borrowers to pay as little as 3.5% for their down payment without having to worry about PMI! Additionally, mortgage rates on FHA loans are generally lower than their conventional counterparts.

    However, there is one drawback when getting an FHA loan: the mortgage insurance premium or MIP. Borrowers are required to pay their mortgage insurance premium upfront and every year following the date of activation on your FHA loan. 

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    Department Of Veterans Affairs (VA) Loan

    If you’ve served in the U.S. military and are looking to finance a home, you’re in luck. Qualified service people and their spouses can apply for a VA loan, which allows them to obtain the entire loan amount with zero down payment. VA loans also have lower mortgage rates than conventional and FHA loans!

    However, it’s important to note that not all veterans may qualify for VA loans. Here are the requirements for this low-interest rate option:

    • Veterans receiving VA-sponsored benefits due to a service-related disability
    • Surviving spouses of veterans who died while in service
    • Veterans entitled to compensation for a service-related disability or injury

    Borrowers who apply for VA loans are usually required to pay a funding fee, which helps offset the cost to taxpayers. Note that the funding rates and fees vary based on the type of military service you completed and the total mortgage amount. 

    Department of Agriculture (USDA) Loan

    Like FHA, VA, and other government loan types, USDA loans are designed to help low-income first-time homebuyers. However, unlike other government-insured options, USDA loans are specifically targeted at buyers in rural areas. Creditors are usually quite forgiving with their requirements for USDA loans, requiring extraordinarily low down payments while also giving out fair interest rates.

    Conforming Home Loan

    A conforming home loan is any conventional mortgage that doesn’t exceed a county-specific dollar cap – therefore meeting the requirements to be purchased by Fannie Mae or Freddie Mac. The maximum amount is determined by the Federal Housing Finance Agency (FHFA), which changes yearly. 

    As of 2021, the conforming loan limit (CLL) is at $548,250 for one-unit properties, but high-cost areas like New York and San Francisco may have higher limits. These loan types are essential because the CLL protects both lenders and borrowers from taking on more risk/debt than they can manage. 

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    Non-conforming Mortgage Loan

    As the name suggests, non-conforming loans exceed the county-specific dollar cap, making them unlikely to be purchased by government organizations for insurance. Jumbo loans are the most common type of non-conforming loans.

    A typical mortgage lender considers these loan products to be quite risky, which means they require larger down payments and may be quite strict with their eligibility criteria. Only first-time homebuyers with excellent credit or substantial savings will be considered for these loan products.

    Types Of Mortgage Lenders And Creditors

    First-time buyers are faced with many difficult decisions when trying to purchase a home. However, one of the most important considerations they have to make is their mortgage lender. Lenders determine everything from your mortgage rate to your payment scheme, so you’d want to find one that suits your needs perfectly. 

    Here are some of the most common types of mortgage lenders you should consider. 

    Direct Lenders

    When someone says “mortgage lender”, they’re usually referring to direct lenders. These are online entities, credit unions, banks, and other similar organizations that deliver mortgages straight to their buyers. That means first-time buyers don’t need to deal with mortgage brokers while trying to secure the best interest rates for their desired home. 

    Given that a direct lender processes applications internally, the information you’ll need to know as a buyer is easily accessible – from closing costs, interest rates, to the origination fee you have to pay for their services! However, loan products may be expensive or difficult to understand when dealing with direct lenders, so you may want to shop around before committing to anything. 

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    Mortgage Brokers

    A mortgage broker is an independent professional who shops around for mortgages on behalf of buyers, making it an attractive option for first-timers. Mortgage brokers usually charge about 1-2% of the total loan amount, payable by the buyer or lender. Note that brokers are third-party agents and don’t have any deciding power over your closing costs, interest rate, or origination fee. 

    Correspondent Lenders

    Unlike brokers, correspondent mortgage lenders originate, underwrite, and fund their loans. However, once the loan closes, they sell them off to larger institutions through the secondary mortgage market. Once your mortgage is sold, the larger lending institution becomes the loan servicer. 

    Wholesale Lenders

    In contrast to most types of lenders, a wholesale mortgage lender works directly with brokers instead of potential buyers. They usually offer their products at reduced mortgage rates and depend on independent agents to connect them with consumers. 

    Portfolio Creditors 

    Community banks, credit unions, savings, and loan institutions are all considered portfolio creditors. Similar to correspondent lenders, this type of mortgage lender also originates and funds their own loans. 

    But there is one significant difference: the mortgages purchased from these creditors are funded with customers’ deposits. That means portfolio lenders can afford to keep the mortgages within their agency, so they also service the loan throughout its lifetime. 

    Hard-money Creditors

    Hard-money creditors are usually private investors involved in providing short-term loans that are backed up by real estate. Additionally, these investors are generally less concerned about mortgage rates and care more about the collateral’s value when protecting their investment. 

    On top of this, a hard-money lender tends to give its borrowers less time to repay their loan, usually from 1-5 years. They also charge more in interest rates and closing costs.

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    How To Find The Best Mortgage Lender For You

    Choosing the best lender isn’t about getting lucky – it’s about being prepared. Here are five actionable tips for new buyers looking for a lender. 

    Work On Your Credit Score

    Your credit score is one of the most significant determining factors when it comes to your mortgage rate. But what can you actually do about poor credit? 

    To start, we recommend doing a credit check with any of the three main reporting bureaus Experian, TransUnion, or Equifax. That way, you’ll have an idea of how much (or how little) work needs to be put in before taking out a home loan. 

    If your credit score isn’t as high as you expected, we suggest reviewing your credit report for delinquent accounts, or payment errors. Once you’ve identified the problem areas, you can start making regular payments so your credit rating improves over time. Once you’ve remedied a poor credit rating, you’ll find that many creditors are likely to give you a more favorable mortgage rate. 

    Figure Out Your Budget

    One essential part of finding the best mortgage lenders for first-time homebuyers is determining a workable budget. Doing this is relatively simple. 

    First, we recommend taking note of your gross income, recurring expenses, and outstanding loans. Then, factor in your financial goals (savings, spending money) and monthly utilities. Once you’ve come up with an itemized list of your regular expenses, you’ll have a clearer estimate of how much can afford to set aside for a mortgage. 

    Note that while creditors usually run strict financial checks to ensure you’re capable of paying off your mortgage, some financial firms may allow buyers to max out their spending capacity – leaving zero wiggle room. While this can help you secure a larger first home, there’s a greater risk of losing your property if you encounter financial troubles down the road. 

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    Research Home Loans

    Here’s the truth about landing the best mortgage lenders for first-time buyers: you need to speak a lender’s language to get the optimum mortgage rate. That means doing research, reading up on the housing market, understanding state and local legislation regarding homeownership, and building a working knowledge of mortgage-related jargon. 

    But beyond just knowing the difference between a fixed-rate and adjustable-rate mortgage, knowing what you can and cannot do will greatly expand your mortgage options. For example, many folks buying their first home tend to go for the “traditional” route and apply for a mortgage with a large lender for convenience, like a bank. However, these creditors usually require hefty down payments that may not be affordable for everyone.

    On the other hand, buyers that did their research will know that local creditors may have more affordable terms and a more attractive mortgage rate. Taking the time to smarten up really pays off when determining the best mortgage lenders for you!

    Compare Rates From Different Lenders

    Once you’re sure you match the criteria for minimum credit score and understand the ins and outs of different loan types, it’s time to shop around for the best fit. At this stage, we recommend sending out an online application or two to different types of lenders – that means credit unions, banks, and online mortgage lenders.

    Shopping around for the best possible loan terms means that you’re in charge of how much money is spent overall. After all, every lender has its own rules and protocols that inform the rates they give you, and sometimes it just isn’t a good fit

    If you have a bigger budget but less time, consider contacting a mortgage broker to save yourself some trouble – just make sure you know what you want and communicate it with your broker.

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    Get Pre-Approved For Your Mortgage

    Let’s say you’ve settled on a lender of two after your cursory examination of available mortgages. The next logical step would be to get pre-approved by creditors you’re interested in. 

    The pre-approval process opens the line of communication between you and your chosen lender. During this, they take a look at your credit score, spending history, and overall loan eligibility. Unlike shopping around, you can get specific quotations for a fair and accurate comparison between creditors. 

    The Best Mortgage Lenders For First-Time Homebuyers

    So you’ve done your research on different loan types and spent a few months preparing for your application – but you don’t know which creditors are worth your time. Fret not, because we’ve done some of the heavy lifting for you. This section lists some of our top picks for the best mortgage lenders for first-time buyers! 

    Best For VA Loans: Veterans United

    Veterans United is best for first-time buyers that have spent some time in the military. This creditor has a wide array of loan products available, but there is one major drawback: it only works with veterans and military spouses. 

    Minimum credit score: 640

    Pros

    • 24/7 customer service
    • Can handle online applications
    • Free credit-counseling service
    • Has fixed-rate and adjustable mortgage options

    Cons

    • Doesn’t offer HELOCs or home equity loans
    • Website can be difficult to navigate
    • May be more expensive than other VA creditors

    Best For First-Time Homebuyers That Prefer Banks: Bank Of America

    Bank of America makes it into our top picks because it’s one of the friendliest “big bank” options for new buyers. This creditor boasts relatively low rates alongside a user-friendly online interface, making the online application process a breeze for first-timers. Bank of America also gives consumers the choice to visit any of their brick-and-mortar locations for a face-to-face customer experience.

    Min credit score: 620

    Pros

    • No-PMI, low down payment mortgages
    • Alternative credit data can be considered
    • One of the best online mortgage experience

    Cons

    • Long approval process
    • Origination fee necessary
    • No USDA loans
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    Best Credit Union For Veterans: Navy Federal Credit Union

    The Navy Federal Credit Union is a members-only institution aimed at supporting military service people, veterans, and their families. With its excellent online integration and top-tier customer service, It’s one of the best choices for military families looking to buy a new home.

    Pros

    • Excellent customer service
    • Well-designed apps for most platforms
    • Zero down payments
    • Flexible approval process

    Cons

    • Only available to military folks
    • No home equity loans

    Best For Getting An Online Mortgage: Quicken Loans By Rocket Mortgage

    Quicken Loans by Rocket Mortgage is the best of the best when it comes to online transactions and customer service. Unlike traditional creditors, Quicken Loans has a relatively low credit score requirement, making home buying a fast and painless experience for many low-income consumers.

    Min credit score: 580

    Pros

    • Unparalleled online service
    • Customizable loan term
    • Rate lock

    Cons

    • No physical branches
    • No home equity loans

    Best For A Self-Employed Homebuyer: New American Funding

    Most lenders evaluate potential borrowers based on their credit ratings and income statements, making it difficult for self-employed buyers to secure a mortgage. Luckily, New American Funding boasts a manual approval process that allows consumers to submit other sources of financial data. 

    Min credit score: 620

    Pros

    • Uses manual underwriting, which works for inconsistent income streams
    • One of the best online application processes

    Cons

    • Higher rates than other creditors
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    Final Thoughts

    A lender can make or break your house buying experience, especially when you’re purchasing your first home. For example, direct creditors determine your rates and payment schedules, while mortgage brokers put in the hours to lock down the best possible fit for your circumstances. 

    No matter the choice you make, it all boils down to the financial institution that closes your mortgage – that’s why it’s so important to pick the best one! But the “best” is relative for each applicant, and navigating every creditor’s specific terms can be exhausting. 

    That’s why we recommend connecting with financial experts to cut through all the confusion. Contact Wesley Mortgage, LLC to find out how we can help you!

    Written By Ed Wallace
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