Borrowing money often feels intimidating, especially if you’re buying something major like a house. As long as you’re familiar with the basics of picking a reputable lender, the process is painless. With that in mind, we provide a guide on getting started with loan offers.
Establish Good Credit
It can seem hard to build credit, especially if you don’t already have any. To make matters worse, the lack of credit makes it difficult to get loans, credit cards, and housing. So how can you build a responsible history without credit?
Apply for a Secured Credit Card:
If you have zero credit, you’ll need a secured credit card. To get one, you must make a cash deposit to serve as your credit limit.
Otherwise, the card works like any other. You buy things on it and have a monthly date to make payments. If you don’t pay your balance in full, you gain interest.
The deposit serves as collateral if you don’t make your payments. Once you close the account, you get that cash back.
Apply for a Credit-Builder Loan:
Like it says on the tin, a credit-builder loan exists to build your credit.
The lender holds the money “borrowed,” and you don’t receive it until you repay the loan in full. You can also think of it as a type of savings program, except credit bureaus become aware of your payments.
You’re more likely to find this type of loan with a credit union or smaller institution, like Gladiator Lending.
Building Existing Credit:
Even once you have credit, it takes time to build a good reputation–think around six months.
Practicing these well-documented good credit habits will prove to future lenders that you’re worth the risk:
- Make 100 percent of all payments on time. This means more than credit cards; pay your utilities on time in full. Any unpaid bills may end up at a collection agency, which hurts your credit.
- Keep credit utilization low. This refers to the ratio of balance versus your total limit. If you must maintain a balance, keep it below 30 percent. For example, with a $1,000 limit, you should never have a balance above $300.
- Don’t open too many accounts at once. A below-average account age can hurt your credit.
- Likewise, don’t close your accounts if you don’t need to. Keep all your free credit cards open, because the age of accounts also matters.
- Verify your credit report at least once per year.
Narrow Your Budget
Practicing good credit should have already instilled this lesson, but you shouldn’t buy more house than you can afford. The right lender appreciates the boundaries of your budget and doesn’t try to coerce you. Even if you qualify for a better loan, you want to aim for the monthly payment you know you can afford.
Many lenders preapprove you based on:
- Gross income
- Outstanding loans
- Revolving debt
Although lenders don’t look at your utilities, you should. Factor all monthly expenses and long-term financial goals, like college or retirement. Look at how much you make each month, after paying those expenses. The amount you’re left with tells you how much you can afford.
Understand Your Loan Options
If you’ve never bought a house, the different loans can look like spilled alphabet soup. Between FHA, ARM, HARP and VA loans, it’s hard to remember the difference between them all.
Breaking down the most common types will help you find the right fit. And knowing what you’re doing will make you a smarter, more confident shopper.
- Conventional Loans: This is any loan not guaranteed or insured by the government. They usually have lower rates than government-backed loans.
- FHA Loans: Insured by the Federal Housing Administration, FHA down payments are as low as 3.5 percent. They’re suitable for buyers with lower credit scores and less cash. Not all lenders maintain the same standards, though.
- VA Loans: Any loan guaranteed by the U.S. Department of Veterans Affairs is a VA loan. If you are an active or former member of the military, you might qualify.
Finding Reputable Lenders
Four main types of mortgage companies exist. As always, the one that works best for you depends on your specific circumstances:
- Banks and mortgage bankers: If you prefer your bills stay under one roof, this will work best. It might take longer to choose your loan through this route, though. Additionally, not all banks have government-backed loans. Private companies like Gladiator Lending may have different criteria for loan eligibility.
- Credit unions: They’re like banks, but not quite. Usually, only members can receive loans. They often come with reduced interest rates and costs, but they may take as long as banks to close. Similarly, they might not have government-backed loans.
- Mortgage lenders: These lenders exist only for real estate loans, unlike banks or credit unions. Because of this, many mortgage lenders complete their process “in-house,” reducing the time frame involved.
- Mortgage brokers: These lenders don’t directly loan money; they bring lenders and borrowers together. This gives you more options, but you have even less control over the speed of approval.
Naturally, each type of lender has its own pros and cons. For example, the larger banks are more likely to have a variety of loans to choose from, but smaller banks and mortgage lenders can offer more one-on-one communication. In the end, it will matter most which works best for your circumstances, and which lender you feel is most trustworthy after comparing all of their loan offers.
Choosing a Reputable Lender
Even with poor credit, settling on the first lender is rarely a good idea. In fact, you want to shop around as widely as possible — across all four kinds of lenders. Be sure to gather as much information as possible to aid your decision. You are more likely to find someone who communicates the way you like and who will work with you. This is especially true with modern lenders like Gladiator Lending.
Why else should you shop around? According to Freddie Mac, doing so lets you keep money on the table. Borrowers could save at least $1,000 over the life of the loan by getting even one more rate quote.
Look for Good Reviews:
When you’re shopping for a loan, the convenience of the branch shouldn’t be your first priority. Loyalty to the bank is irrelevant too because you’re likely one of the millions of accounts. It’s not the mortgage interest either, nor the cost to get the loan. Major lenders are competitive and offer the same bag of tricks, for all intents and purposes.
Customer service should thus be the major factor when looking for a lender. Find a lender that has great reviews from satisfied customers. You’re more likely to find this outside of too-big-to-fail banks. Credit unions, smaller banks, and newer companies, such as Gladiator Lending, have fewer accounts and thus won’t see each face as little more than a series of numbers.
Try Asking Your Agent:
If you’re buying a house, your real estate agent likely knows great choices of the mortgage lender. Agents often have firsthand knowledge of which lenders fall flat or offer great service. After all, performance matters in real estate transactions.
The best lenders share responsibility for your loan. In other words, they are quick to respond to your questions and inform you of changes along the way. They won’t delay delivering your documents, and they are proactive against potential problems.
After receiving many loan offers, you need to compare them and pick the lender you want. Unfortunately, it’s not quite as easy as pairing them side by side; it’s closer to apples and oranges. For instance, one lender might have lower interest rates, but they also have much higher fees.
This is where diligent work comes in. You need to examine the fees, the loan points, and the rates to make an educated decision on the best for you.
Other factors will matter too, like if you mesh well with one lender over another. In the end, remember that the rapport you are establishing is a relationship, so you should trust the one you’re with.