So you’re ready to buy a home but aren’t quite sure where to begin. You might be debating whether you should work with a bank or partner with a reputable mortgage broker. If you’re a first-time homebuyer, you might be asking, what is a mortgage broker? That’s why our team created this simple guide that outlines what you need to know about using a mortgage broker.
What Is a Mortgage Broker Anyway?
A mortgage broker serves as the go-between for you and a mortgage lender. This third-party entity works on your behalf to make sure you can secure the best rate possible when you’re purchasing a home. Instead of shopping around on your own, the mortgage broker can gather multiple quotes for you.
When you close on your mortgage, the broker will receive a commission payment from the lender who funded your loan.
Contrary to popular belief, partnering with a mortgage broker does not drive up the cost of buying a home. A great one can save you thousands of dollars — but more on that below.
Will I Need to Make a Down Payment?
More than likely, you’ll need to make a down payment to close on your loan. A down payment is an initial contribution toward making a large purchase, such as buying a home. It’s usually expressed as a percentage of the final purchase price.
Let’s say you want to buy a home for $250,000. A 10% down payment would be $25,000. However, the exact down payment amount required for your mortgage will depend on a variety of factors, including the type of loan you qualify for and your credit score. Some loans do not require a down payment at all.
Even if you don’t qualify for a home loan with no down payment, you may be eligible for down payment assistance. An experienced mortgage broker will be able to connect you with state programs designed to make buying a home more accessible. These programs may cover part or all of the required down payment amount.
Is a Mortgage Broker Different than a Mortgage Lender?
Many first-time homebuyers tend to use the phrases “mortgage broker” and “mortgage lender” interchangeably. A broker and lender are actually two different parties that are involved in the home-buying process.
The mortgage broker is responsible for obtaining multiple loan offers from various lenders. They “broker” the deal between you (the homebuyer) and the mortgage lender and present you with the best offer at the lowest interest rate to maximize your savings. Choosing between working with a broker and a lender depends largely on how mortgage rates work.
The mortgage lender refers to the financial institution loaning you the money to buy your home. A lender might be a credit union or bank. Once your loan is closed, you will begin making payments to the lender until your debt is repaid.
The lender can also resell the rights to your loan to another financial institution. This is a common practice in the mortgage industry. Even if your loan is resold, the terms and rates will remain the same. The only difference is that you will send your monthly payments to a different entity.
What Types of Home Loans Are Available in Arizona?
When you partner with a mortgage broker, they will discuss your unique needs and financial situation to identify the best loan option for you.
Before you partner with a mortgage broker, make sure they have experience working with multiple loan types.
The most popular loan options in Arizona are:
FHA Home Loans
FHA home loans are insured by the Federal Housing Administration. This flexible homebuying solution is the preferred route for many homebuyers due to the low down payment requirements. It also has highly reasonable credit and income requirements, which can make buying a home more accessible.
When financing your purchase through an FHA loan, you’ll be responsible for a down payment of 3.5% of the home’s final purchase price. You must also meet specific credit and income requirements. However, these requirements are less stringent than they are with many other loan types.
VA Home Loans
VA home loans are available to qualified veterans, military families and active service members. These loans have very favorable terms with a 0% down payment option. The income requirements are also incredibly flexible. The loan even has a built-in streamlined refinance option.
The federal government insures VA loans through the Veterans Benefits Administration.
In addition to VA guidelines, borrowers must meet the mortgage lender’s requirements. These rules usually include proof of income and an acceptable debt-to-income ratio. Most lenders require eligible veterans to have a median credit score of at least 620.
USDA Home Loans
USDA home loans present an exciting opportunity for buyers who are not eligible for VA benefits. Like FHA and VA loans, the USDA homebuying program is federally backed and is available in Arizona.
USDA loans are designed to assist low- to moderate-income individuals who want to purchase a home in rural regions. Many homes in the outskirts of Arizona’s largest cities are eligible for the USDA program.
Some of the highlights of USDA loans include:
- 0% down payment
- Great interest rates
- No first-time buyer limitations
- Flexible qualifying guidelines
- Seller concessions are allowed
Since USDA loans are designed for low- and mid-income buyers, the program does include income limits. These limits vary by region. A mortgage broker will be able to help you to determine whether you qualify for a USDA loan.
Conventional Home Loans
The federal government does not back conventional home loans. These loans range from 8- to 30-year fixed-rate mortgages and do not include any prepayment penalties. The most common of loan types are the 30 and 15 Year mortgage. First-time buyers may be eligible for a down payment of as little as 3%, but other buyers usually have to put down at least 10%.
Conventional loans are an excellent option for buyers that have a little more cash on hand or higher credit scores. Buyers with strong credit should also consider a conventional loan because they may reduce or remove PMI (private mortgage insurance) that is typically required until the loan is paid down to 80%.
PMI is mandatory for most loan types if more than 80% of the home’s appraised value is financed.
For example, let’s say a home is appraised at $300,000, and you purchase it for $280,000 with a $10,000 down payment. Since you have financed more than 80% of the home’s estimated value, you would be required to carry PMI. If you financed less than $240,000, then you would not be required to pay PMI at all.
Non-qualifying mortgage loans offer superior flexibility on stringent factors like credit score and income requirements. Non-QM loans are an ideal option for borrowers who are self-employed or need temporary financing.
Since the exact terms of non-QM loans vary greatly, we recommend discussing this option with a mortgage broker.
Can I Work Directly with a Lender?
Yes, you can purchase a home in Arizona by working directly with a lender. You can apply for a loan and close on your new home without partnering with a mortgage broker. However, there are some drawbacks to striking out on your own without any professional guidance.
Disadvantages of Going It Alone
While plenty of homebuyers have closed on their mortgage by dealing directly with a lender, most of them encountered plenty of setbacks along the way. Doing things alone has some serious disadvantages.
For starters, you will have to complete a separate loan application for every lender. This is no big deal if you get a great rate on your first attempt. However, even half a percentage difference in your mortgage interest rate will cost you thousands of dollars over the life of your loan. That is why you should shop around for the best rate, which means that you might be filling out lots of mortgage loan applications.
The longer it takes you to get pre-approved by a lender, the more likely you’ll miss out on your dream home, especially if the Arizona homebuying market is hot. A mortgage broker works with an entire network of lenders to get you approved fast so you can avoid this scenario.
Benefits of Using a Mortgage Broker
If you are serious about buying a home in Arizona, then working with a mortgage broker is the clear choice that offers some tremendous benefits, including:
Better Access to Lenders
Mortgage brokers and the loan officers they work with already have established relationships. They can zero in on which lenders are most likely to approve your application and may even be able to acquire financing from a lender that would otherwise deny your request.
By finding a reputable mortgage broker, you can streamline the entire homebuying experience, saving yourself the time and frustration of filling out individual loan applications and fielding phone calls. The broker will work tirelessly to find you a great loan so that you can focus on shopping for your home.
When you take out a home loan, it might be packed with fees and add-on costs. While several thousand dollars in fees may not seem like much when spread out over a 30-year loan, why would you want to fork over extra cash if you don’t have to?
A mortgage broker can often talk lenders into reducing various fees. Remember, they are there to get you a great deal. They don’t get paid unless your loan closes, which makes them highly motivated when it comes to negotiating terms and overcoming obstacles that pop up along the way.
Personalized Homebuying Solutions from Agave Home Loans
Would you like to learn more about how an experienced mortgage broker can help you buy a home in Arizona? If so, contact Agave Home Loans today. One of our talented brokers will be happy to answer any questions and guide you through the lending process.
Marshall spent seven years in hospitality and the restaurant industry prior to beginning a career in real estate and lending. After obtaining a finance degree with an emphasis in investments from Northern Arizona University, he began working at Quicken Loans. He spent seven years there as a banker and then Senior Director prior to co-founding Agave Home Loans. (NMLS ID: #1107208)