Choosing a mortgage lender is like entering any important relationship. Get a clear sense of what’s being offered, shop around and assess which lender is right for you before committing. Choosing the right mortgage lender could save you time, energy, and thousands of dollars. Everyone’s homebuying journey and financial situation is unique, so different lenders suit different buyers.
What is a mortgage lender?
A mortgage lender is a financial entity like a bank, mortgage investment company, or credit union, who loans you the money you need to purchase property. Most people can’t afford the full price of a new home and will pay a down payment on a home up front while a lender covers the rest. This loan is called a mortgage, and monthly mortgage payments are owed to the lender until the home is paid off. The payments you make for a loan typically consist of the remaining amount owed after your down payment is subtracted, and the interest payments charged by the mortgage lender you choose.
Types of Mortgage Lenders
Choosing a mortgage lender can make a massive financial difference and shorten the amount of time you’ll need to pay off your mortgage. There are two main types of lenders:
A Lenders include major banks and credit unions. These lenders require a high credit score and have strong requirements for financial and credit history. In Canada, A Lenders require buyers to do a mortgage stress test in addition to a normal application. A loan from an A Lender looks especially good to sellers and demonstrates good financial standing.
B Lenders are an alternative to more traditional loans and have a different set of criteria for applicants. These lenders aren’t federally regulated in the same way, and include entities like Mortgage Finance Companies (MFC’s). B Lenders usually have shorter mortgage terms (1-3 years instead of 5) and have more leeway for applicants with less than perfect credit scores or self-employed income.
Your financial health, home goals, and personal lifestyle will determine the kind of mortgage that’s best for you. Before you consider lenders, learn about different mortgage types to establish what might be a good fit for you.
- Do you want a fixed or variable interest rate?
- What’s your ideal mortgage term?
- Do you want an open or closed mortgage?
- Explore popular mortgage terms and get to know the language lenders use so you can be prepared.
- What kind of home are you looking to buy?
Questions to ask potential mortgage lenders
A good lender will welcome questions and can provide answers easily. Mortgage lenders should be able to describe the types of home loans offered, outline the options that may be available to you, and help guide you through the process. Here are some questions to ask potential lenders.
Do you charge an additional fee for your services?
Mortgage lenders typically provide their services for a low rate or free of charge because they’re already going to be making money from the interest you pay; however, there may
be additional legal fees or appraisal costs. B Lenders are more likely to have additional closing costs or fees.
Can I get pre-approved for a mortgage?
Get to know the lender’s pre-approval process, including the kind of credit check they’ll do, whether you’ll need to do a mortgage stress test (for A Lenders), the information they’ll need from you, and a timeframe for processing.
How much of a down payment will I need?
Make sure you ask about down payment assistance programs and investigate Canada’s incentives for first time homebuyers. These programs can help you save money on your downpayment.
What will my interest rate be?
Your lender will offer you interest rate options based on your financial situation.
- A fixed interest rate is typically higher but stays the same for the entire term.
- A variable interest rate can rise and fall during the term but is typically lower than a fixed rate.
- A combination or hybrid interest rate may be partly fixed, and partially variable; so part of the rate stays consistent while the rest may fluctuate.
Who will I be dealing with?
Get to know how your lender operates. Some lenders will assign an agent who you’ll be working with throughout the process, while others may perform the opening interview and then pass your file along to an assistant or administrator.
Can they offer you the best rate for the offered term? If not, why is their product better?
The great thing about shopping around is being able to compare rates and to leverage them. Lenders should have a sense of their competitors and what they’re offering. Just because a rate is higher doesn’t mean it’s a bad option, but a good lender will be able to explain why it’s a good fit for you. A good loan can be right for you for a variety of reasons beyond the price; perhaps their offer provides better features or flexibility even though the rate is higher.
What is the penalty for breaking my mortgage?
Even though you plan on making all of your payments, it’s important to know the cost of breaking your mortgage in case you choose to refinance or sell your home.
How long does your loan processing process typically take?
Different types of lenders have different processing times, but the process can take days or months. In general, 30 days is a standard processing time if you have all your information ready to go.
What kind of mortgage terms do you offer?
A mortgage term refers to the length of the mortgage contract you’d be agreeing to, including payments and relevant interest. If you still owe money at the end of your term, you’ll need to renew your mortgage. A mortgage term generally ranges from several months to five years. Most people need several mortgage terms to completely pay off their mortgage. The mortgage term is important because it affects the kind of interest rate you pay, and each time a term ends you have the opportunity to renegotiate your interest rates.
What term do you recommend for me?
A great mortgage broker should be able to weigh a variety of factors when suggesting a loan, including your financial background, your goals, the size of your likely down payment, and the flexibility that might be advantageous for you. Once you’ve shared information about your background, financials, goals, and lifestyle, a lender should suggest a short and long term game plan. If they suggest a shorter term, ask them what they see happening once that first term ends––how would they suggest you renegotiate at that mark, based on your potential needs at the time?
What’s the catch?
A great lender will level with you and provide transparency when you’re shopping for a loan. Maybe you’re being offered a great rate but the prepayment penalty is high, the deal is conditional on a bundle with other agreements like a line of credit with the same financial entity, or there are big consequences for discharging or selling early. Ask about pros and cons for each option.
Red flags for mortgage lenders
Consistency and reliability are important to potential lenders.The first rule of thumb is to be truthful; if you don’t disclose debts or issues when a lender asks, they’ll likely find out anyway. Being open about your financial situation makes it possible for lenders to give you options that are right for you. In the same way that there are great questions to ask when you’re considering a lender, there are also certain things that may make a lender wary of loaning you money. Lenders want to know you have consistent work, so this isn’t the time to announce you’re starting a new business or freelance career. Applying for new credit cards, making major purchases, or missing payments are all warning signs for mortgage lenders.
Get support for every step of the homebuying journey
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Find more information on how to buy a home, how to sell your home, and mortgage and finance tips, see our Home Journey How-To’s or sign up at houseful.ca.