When it comes time to take out a loan to purchase a home, today’s consumers have plenty of options to choose from. Direct lenders, mortgage brokers, banks, and credit unions all provide options for taking out a mortgage loan, and each type of mortgage lender has its own loan options, terms, fees, and service. How can you decide on which option is right for you and your family? We’ll break down each of the different mortgage lender options and what you should consider in order to make the most educated decision.
If you come across an unfamiliar term when reading this piece, check out our glossary of mortgage terms.
Three Types of NJ Mortgage Lenders
Different mortgage loan institutions will offer a variety of mortgage loan options and it’s always a good idea to shop around and look at all the offers when purchasing a home. Before settling on a lender, you’ll want to pay attention to which options have the best mortgage rates, fees, and closing times.
There are three different types of mortgage lenders: Banks, Brokers, and Mortgage Brokers.
Since most banks have their own in-house origination staff and originate their own mortgages (under the guidelines of Fannie Mae and Freddie Mac), you can sometimes find better rates or quicker turnaround times. However, sometimes mortgage banking is not their top priority since it is just one of many services they offer.
Since brokers usually carry quite a bit less overhead than the larger banks, they have access to very competitive rates. Be careful though, as these lower rates can sometimes result in a slower turnaround time for approval on the loan, increased documentation, and a reduced service level.
Mortgage bankers are a bit of a hybrid between banks and brokers. Like a bank, they generally have their own underwriters on staff and will originate, process, underwrite, and close the mortgage application in-house. Only after the closing will they sell off the securitized note and service of the loan to earn their revenue. Unlike a bank and like a broker, however, they can choose from various banks and secondary market options to make sure that they are getting access to the best rates for their clients. In fact, in some cases, mortgage banking companies will sell directly to the agencies cutting out the banks altogether.
Learn more about the advantages and disadvantages of each of the three lender types here.
Understanding Different Types of Mortgages
Once you understand the different types of mortgage lenders, it’s important to understand the type of mortgage loans you can choose from. There are many types of mortgage loans and each one has its own requirements for qualifying and certain advantages and disadvantages. When choosing a mortgage lender, it’s a good idea to have a basic knowledge of the different types of mortgage loans available.
Conventional Mortgages (Fixed & Adjustable Rate)
Conventional mortgages are the most common type of home loan. They’re originated and serviced by private lenders, such as banks and credit unions, and have fewer restrictions but stricter credit score and debt-to-income ratio requirements than government-issued loans. To qualify, borrowers generally need a minimum credit score of 620 and must provide at least a 3% down payment.
Conventional loans come in fixed and adjustable varieties. With a fixed-rate mortgage, your APR will not change for the life of the loan — typically a 10-to-30-year term length — so your payments will remain the same unless you refinance. An adjustable-rate mortgage adjusts its APR according to market rates and can adjust once a year after an initial fixed period, which means after the initial period of fixed-rate your payments may be unpredictable.
Government-backed mortgages refer to the mortgage programs insured by three federal agencies: FHA, VA, and USDA loans. These loans offer borrowers unique benefits compared to conventional home loans, such as lower interest rates and liberal requirements. However, you must meet specific criteria to qualify.
- FHA loans are insured by the Federal Housing Administration, and borrowers with credit scores as low as 500 can apply. FHA loans feature minimum down payments of 3.5% but have a maximum loan limit that varies by region.
- VA loans are insured by the Department of Veterans Affairs, are only available to certain borrowers, and ask for a one-time charge known as a funding fee. VA loans also require a down payment or private mortgage insurance.
- USDA loans are insured by the United States Department of Agriculture, don’t require a down payment, and feature some of the lowest interest rates. USDA loans are only available to low-income borrowers looking for homes in rural areas.
Jumbo loans are known as non-conforming loans, meaning they exceed the loan amount limits of Fannie Mae and Freddie Mac, the two government agencies in charge of supporting the U.S home finance system. With this type of loan, borrowers can get loans above the conforming loan limits. In 2022 these loan limits were raised to $647,200 for one-unit properties in most parts of New Jersey and $970,800 in high-cost areas.
Jumbo loans are more challenging to qualify for than conforming loans: you’ll need a high credit score, large down payment, and low DTI to be considered.
If you’re a homeowner and at least 62 years old, you may qualify for a reverse mortgage. This type of home equity loan taps into your home value by borrowing against it, and grants you funds as either a lump sum, fixed monthly payment, or line of credit. The loan becomes due only when a borrower passes away, moves away permanently, or sells the home, at which point they, their spouse, or estate must repay it.
Important Questions To Ask Before Deciding on a Mortgage Lender
Buying a home is likely to be the largest purchase you ever make in your life. You want to make sure you are doing everything that is in your own best interest and asking lots of questions. Some things you should ask mortgage lenders when you are shopping around include:
- Which type of mortgage is best for me?
- How much are the closing costs?
- Are down payment assistance programs available?
- What fees will be included in my loan? What fees will be due at closing?
- How do you communicate with homebuyers?
Once You Apply With A New Jersey Mortgage Lender, Are You Obligated To Close With Them?
Just because you have applied with a mortgage lender does not mean you are under any obligation to close with them. In fact, you are able to walk away from a transaction at any time right up to the closing table (and even three days after due to right of rescission laws in the case of a New Jersey refinance of a primary home). Lenders, however, may charge up-front application or appraisal fees. You will want to confirm with your lender at what point those fees are refundable, if at all, after application.
Being an educated future homeowner is the first step to choosing the right mortgage lender for you. Browse our resources to learn more about lenders in New Jersey.