how to choose a mortgage

How to Choose a Mortgage: 6 Tips to Get the Best Loan (For Your Clients)

Contributed by Roger Odoardi of Blue Water Mortgage.

As a real estate agent, your clients look to you for industry expertise, including guidance on how to get a mortgage and choose the right loan type from the right lender. Here are some tips on educating your clients about mortgages and helping them get a loan. After all, making the home-buying process as easy as possible for your clients helps ensure repeat business.

Understand Your Client’s Mortgage Requirements

Spend some time getting to know your clients. Ask about their priorities regarding homeownership – and their plans for their future. These conversations can provide valuable context for what loan type might best suit their situation.

Here are some questions to help guide the conversation.

Question #1: When you imagine your ideal home, where is it located?

Where your client wants to live could affect their eligibility for certain types of loans. For example, if your client envisions their perfect home in a quiet, rural area, they might qualify for a USDA loan. Sponsored by the United States Department of Agriculture, the USDA loan program offers home buyers a low-interest, zero-down payment mortgage to incentivize buyers to purchase property in rural areas with low population density. The property’s location could also affect how much they’re able to borrow and what type of property they can purchase.

Question #2: How long do you see yourself staying in this home?

The amount of time your client intends to stay in a home can affect the type of loan they choose. For example, if they plan on purchasing a home, renovating it, and reselling it ten or so years later, a 15-year mortgage might make more sense than a 30-year mortgage. Additionally, an adjustable-rate mortgage might be more practical than a fixed-rate mortgage because it would enable them to take advantage of lower interest rates within the first few years of owning a home. The difference between these loans can be confusing, so we recommend checking out our blog on adjustable-rate mortgages for clarification.

Question #3: Do you plan on starting or growing your family in this home?

If the answer to this question is “Yes,” your client might want to consider making repairs or improvements or building an addition in order to make the space more comfortable for their growing family, which may affect their loan type.

It’s also important to note that adding more members to the family means more expenses, which could make it challenging for your client to keep up with their monthly mortgage payments. It’s important to point these things out to clients, not to discourage them from pursuing their goals but to help them understand how their decisions can affect their finances.

These are just a few questions to ask to get started. Once you have a good sense of your customer’s goals, you’ll be better positioned to help your clients meet them.

Educating Your Clients About Mortgages

As a real estate agent, the best way to ensure that your client finds the home loan right for their needs is to work with a licensed mortgage broker. A broker is an invaluable asset who can walk your client through every stage of the mortgage application process, from prequalification to closing. However, your client may feel more comfortable sitting down with a mortgage broker if they have a better understanding of mortgages and the process of getting one.

Here are some talking points to guide your conversation with your client.

1. Make sure your client understands mortgages at the most basic level.

What Is a Mortgage? A mortgage is a loan specifically used for purchasing real estate, such as a home or land. It’s typically a large loan, with the property itself serving as collateral. The borrower agrees to repay the loan amount plus interest over a set period, usually 15 to 30 years, through regular monthly payments. If the borrower fails to make the payments, the lender may take possession of the property through a legal process known as foreclosure.

2. Make sure your client understands the different types of mortgages.

There are seven types of mortgages:

  • Fixed-rate mortgage loan
  • Adjustable-rate mortgage loan
  • Conventional real estate loan
  • Federal Housing Administration (FHA) loan
  • Veteran Affairs (VA) loan
  • U.S. Department of Agriculture (USDA) loan
  • Jumbo loan

Consider sharing this blog with your clients to help them understand the different types of mortgages: Understanding 7 Common Types of Real Estate Loans. A mortgage broker can go into more detail on the types of home loans that are available, but it might be helpful for your clients to have a basic understanding of their options before meeting with a loan officer.

3. Discuss how a down payment affects mortgages.

Ensure your client has a clear idea of how much money they can put down on their new home. A client’s down payment can affect everything from the interest rate on their loan to whether they need to pay private mortgage insurance (PMI).

Also, ensure your client understands that there are legal stipulations and regulations regarding using cash gifts for their down payment. Make sure your client clearly outlines any monetary gifts they intend to receive so their mortgage broker can advise them on how to proceed.

4. Ensure your client understands how their debt-to-income ratio can affect how much they are able to borrow.

Your client must understand that their debt can affect if and how much money they can borrow from lenders.

A mortgage broker can help your client calculate their debt-to-income (DTI) ratio, but to do so, all cards need to be on the table. The ideal DTI ratio depends on what type of loan your client chooses to apply for — for example, government-based loans require a lower DTI ratio (31%–43%) than non-government-backed loans (35%–45%).

5. Advise clients on how they can strengthen their credit score.

When it comes to applying for a mortgage, if your client has a credit score of 740 or higher, the world is their oyster. Lenders are likelier to look favorably upon borrowers with “top tier” credit scores. However, there are loan programs that are more lenient for borrowers with a low credit score, a non-traditional credit history, or no credit history at all. (Here’s more information on why good credit matters.)

Advise your clients to do a “soft pull” of their credit score — as opposed to a “hard pull,” which can appear on their credit report as an inquiry and negatively affect their credit score — prior to meeting with a mortgage broker.

If your client struggles with credit, they’ll want to prioritize paying off existing debt to improve their score. If they’re still struggling after this, they might want to consider taking on a co-signer for their loan.

Advise Your Client on How to Apply for a Mortgage

It’s important that you advise your client to share absolutely everything with you and their broker. Omitting information in the hope that it won’t be discovered will only lead to further issues down the road. If your client has concerns about their current debt or income situation, encourage them to be forthcoming because the only way to solve such problems is to get everything out in the open.

Inform your client about the type of information they need to gather for a mortgage application.

Your client must gather the following documents before meeting with a loan broker.

  • Their most recent pay stub
  • W-2s from the past two years
  • Tax returns from the past two years
  • Mortgage statements for any other properties they own
  • Awards letters, pension income, Social Security income, retirement distributions, etc. (if applicable)

Recommend a mortgage broker

Now that your client is adequately prepared, it’s time for them to sit down with a mortgage broker. Most brokerages gain business through referrals from real estate agents, family and friends, or past clients. Referring your client to a broker with a proven track record can help set your client up for success.

Advise your client to shop around for the best mortgage. Different lenders may offer varying interest rates and loan terms. In addition, each lender has different fees and closing costs. The quality of customer service and support provided by lenders can also vary.

Stay informed of your client’s mortgage application status

When the time comes, the broker of choice should first make a discovery call or hold a discovery meeting, during which they’ll walk your client through the factors that go into loan qualification and conduct a deep dive into your client’s income, asset, and credit profiles. This call will give the broker a clear idea of whether they can assist your client. If they’re a good fit, the broker will proceed by helping your client prepare paperwork for mortgage prequalification, thus kickstarting the application process.

From there, it’s out of your hands. Although you’ll continue to be your client’s point person for all things real estate-related — touring homes, scheduling a home inspection, negotiating with the seller, and so on — your client’s mortgage broker will take the lead on all things lender-related. That said, the broker should work closely with you throughout the mortgage application process to ensure that you’re on the same page and that your client has all the latest information about their status.

Educating your clients about the different loan types available to them and leading them to the right mortgage broker helps ensure a positive experience and increases the likelihood of return business. The key to a long and successful career as a real estate agent is to establish strong, long-lasting client relationships founded on trust and respect. Keeping your client’s best interests at heart is the first step.

Learn more about how to best serve your real estate clients from a premier education provider – Colibri Real Estate. Colibri offers convenient, at-your-own-pace real estate continuing education courses that keep you licensed and teach you the best strategies. Stay on top of your state’s real estate license renewal requirements with Colibri.