The role of the mortgage lender

by Adam Krause, Contributor

If you are looking to purchase a home and don’t have the financial capital to pay cash up-front, one of the most important steps in the homebuying process will be finding the right mortgage lender.

A mortgage lender is a bank or other financial institution (such as a life insurance company, trust company, or credit union) that will issue you a home loan in exchange for periodic interest payments on the loan balance. Mortgage lenders can vary, from those who operate in a small geographic area to those that issue loans on a national scale. Since the relationship between the homebuyer and the mortgage lender is an important one, you should look for a mortgage lender who is familiar with your local housing market and can quote you a reasonable mortgage rate.

The federal government and your local state government may also act as mortgage lenders (as opposed to private financial institutions) offering government-backed loans. For instance, the U.S. Department of Housing and Urban Development (HUD) operates a home loan program through the FHA (Federal Housing Administration).  The Section 203(k) Mortgage Program allows low-income homebuyers, first-time homebuyers, and nonprofit organizations to purchase homes with low down payments (as little as 3.5%) in urban areas.

Most private mortgage lenders will require significantly higher down payments, such as 15% or 20% down. Given the post-housing crisis era, many mortgage lenders have tightened their lending requirements. However, it is still possible to obtain a mortgage loan with a low down payment if you do the proper research and have a strong credit history. But if you’re looking at homes that cost over three times your salary, you may need to lower your expectations.

A mortgage lender that’s willing to offer you a first mortgage to purchase a home may also qualify you for a second mortgage for the purpose of making home improvements or tapping into your home equity. If you are looking to take out a second home loan with the same mortgage lender, you will need to show a history of steady employment and timely payments on your first mortgage. Additionally, you should let some time go by before applying for the second mortgage because you will need to build a significant amount of home equity. Due to the increased financial risk to the mortgage lender, a second mortgage will likely come with higher interest rates than the first mortgage loan.