How To Choose A Mortgage Lender: 5 Tips

Finding the best mortgage lender is a crucial step in the homebuying process. But with so many institutions out there, how do you even begin to compare, let alone know which lender is right for you?

The good news is that just by considering multiple lenders, you’re likely to save money. Studies show that borrowers who compare the details of at least three lenders’ offers save a considerable amount over those who go with the first institution they come across. Here’s what to know before and after you get those offers.

How to find the best mortgage lender

Here are five strategic steps — some for before you even start shopping, others for how to shop smart — to finding the ideal mortgage lender.

Step 1: Get your finances in order

Before beginning your homebuying journey, check your credit score with the three main reporting bureaus: Experian, Equifax and TransUnion. You can request these for free through AnnualCreditReport.com. Make sure there are no mistakes in your reports that could negatively impact your score. And if your score could use some work, prioritize improving it before applying for a mortgage. Paying down debt and avoiding opening new accounts or closing old ones will help your score — and improve the mortgage terms you’re offered. Most lenders want your score to be at least 620.

It also helps to figure out how much home you can afford before you start looking at houses. You can use the 28/36 rule: Your potential housing costs should ideally not exceed 28 percent of your monthly gross income, including your mortgage payment, taxes, insurance and other housing-related expenses. Lenders also prefer your total debt payments — including monthly payments on your mortgage, credit card balances, auto and student loans — add up to no more than 36 percent of your monthly income. This rule leaves room in your budget for other expenses — like groceries and utilities — as well as savings. Keep in mind that you’ll need cash available for a down payment and closing costs.

Figuring out a budget and your credit score will help you decide what type of mortgage is best for your financial situation. We’ll get to that next.

Step 2: Know your mortgage options

There are many types of mortgages, but some of the most common are:

While most mortgages work in essentially the same way — you receive a loan and pay the money back over time — their requirements do differ. For example, you can get a conventional loan for as little as 3 percent down, but if you make a down payment of less than 20 percent, you’ll need to pay for private mortgage insurance (PMI) for awhile. FHA loans have looser credit score requirements than conventional loans, but you’ll pay mortgage insurance premiums for the entire loan term in most cases. Jumbo loans can be helpful if you’re buying a home in an expensive area, but they’re harder to qualify for than standard conventional or government-backed loans.

Within these types of loans, you may have other options, including the loan term and interest rate type. Common loan terms are 15 years or 30 years, with longer terms generally resulting in lower monthly payments but higher total interest costs. Interest rates can be fixed — meaning the rate and monthly payments stay the same throughout the term — or adjustable, meaning the rate may start lower but can increase or decrease over time based on financial markets.

Beyond your credit score and debts, there may be other factors that influence the mortgage you can get. If you’re self-employed, for example, you’ll need a loan that doesn’t require W-2 forms to verify income. Or if you’re applying for down payment assistance, you may need a lender who participates with your state’s housing finance agency.

Lenders may not offer all — or even very many — types of mortgages. So narrowing down the type of loan you want can help you narrow down your lender search, too.

Step 3: Compare rates and terms from multiple lenders

Once you’ve found at least three lenders that offer the loan type you want — whether they’re banks, credit unions and online lenders — it’s time to compare rates and terms. Be sure to check the following:

• Loan terms, including the loan amount, interest rate and annual percentage rate (APR)
• Down payment requirements
• Mortgage points
• Mortgage insurance
• Closing costs
• Other lending fees, if applicable

Focus not just on the interest rate you’re offered, but also on the APR, which reflects the true cost of your loan, including interest, mortgage points and other fees. Differences in these expenses impact the overall cost of the loan — sometimes by several percentage points.

Remember, shopping around for the best loan won’t significantly lower your credit score, as multiple mortgage inquiries within a 45-day period count as one inquiry on your credit report.

Step 4: Get preapproved for a mortgage

Many lenders let you compare at least some information just by visiting their websites. But getting a mortgage preapproval is the only way to get a firm sense of what size of loan you qualify for and what you’ll pay for it. The process may also reveal which lender is best for you in terms of technology, customer service or other factors.

During preapproval, lenders do a thorough review of your credit and finances. While the required paperwork for preapproval can vary, you’ll generally need to provide:

• Photo IDs and Social Security numbers for all borrowers
• Pay stubs from the past 30 days
• Two years of federal tax returns, 1099s and W-2s
• Printouts or downloads of statements for all financial accounts (checking, savings, brokerage, employer and individual retirement savings plans) for the past 60 days
• List of all revolving and fixed debt payments, including credit cards, personal and auto loans, student loans, alimony or child support
• Employment and income history, along with contact information for your current employer
• Down payment information, including the amount, source of the funds and gift letters, if you’re receiving help from a relative or friend

Step 5: Read your loan estimate

Within three days of applying for a mortgage, your lender must provide you with a loan estimate. This document explains the exact terms of the loan, including the interest rate, repayment term and fees. This will help you avoid surprises that could disrupt your budget or damage your credit.

As you compare loan estimates, you’ll see a slew of third-party costs, such as lender’s title insurance, a title search fee, an appraisal fee, a recording fee, transfer taxes and other administrative costs. You can negotiate some of these expenses, but know that lenders don’t determine the fees for most of these services. On the other hand, that may mean you can shop for these services, too.

Always ask questions if you don’t understand certain fees or spot errors in the paperwork, such as a misspelled name or an incorrect bank account number. Getting ahead of any issues can save you a lot of headaches later.

Types of mortgage lenders

There are six main types of mortgage lenders. Which type is best for you depends on the level of hands-on interaction you prefer, the legwork you’re willing to do and the loan types you’ll consider.

Direct lenders

Best for: Mortgage-hunters seeking competitive rates and fees and personalized service.

Direct lenders are banks, credit unions, online entities and other companies that do business with consumer borrowers, providing them with mortgages directly.

They create and fund mortgages and either service them — meaning they administer and manage the repayments — or outsource the servicing to a third party. They also establish loan rates and terms.

These lenders typically have competitive rates and fees, and you’ll work with the same loan officer through the whole process. However, you’ll have to do the comparison shopping on your own.

Wholesale lenders

Best for: Applicants whose credit may need work and are looking for a smoother approval process.

Unlike direct lenders, wholesale lenders never interact with borrowers. They usually work with mortgage brokers and other lending institutions — including small banks and credit unions — to offer their loan products at discounted rates. They rely on brokers or the institution to help borrowers apply for a mortgage and work through the approval process.

These lenders may offer easier approvals and favorable loan terms, but you need to work with a broker or another mortgage company to get a loan from a wholesale lender; you can’t apply directly.

Mortgage brokers

Best for: Homebuyers who want to compare a variety of mortgage options and don’t mind paying a broker’s service fee.

Mortgage brokers are independent, licensed professionals who serve as matchmakers between lenders and borrowers.

Brokers usually charge a small percentage of the loan amount — generally 1 to 2 percent — for their services, which the lender pays, but passes on to you as part of the cost of your mortgage. They don’t fund loans, set interest rates or fees, or make lending decisions.

Brokers make comparison-shopping easy because they do the legwork for you. They may find opportunities you couldn’t, since some lenders, like wholesale lenders, work exclusively through brokers. However, you might pay higher rates to compensate for the commission the lender has to pay or only get offers from lenders in that broker’s network.

Correspondent lenders

Best for: Applicants with the best credit who are seeking competitive borrowing rates.

Correspondent lenders originate and fund their own loans but quickly sell them to larger lending institutions on the secondary mortgage market after the loan closes.

These lenders offer a wide range of loan products and may have low rates, but you might wind up having to deal with a new, unexpected loan servicer. Correspondent lenders also tend to have stringent requirements.

Portfolio lenders

Best for: People looking for personalized customer service or who may have irregular income, such as the self-employed or small business owners.

Portfolio lenders originate and fund loans from their clients’ bank deposits. They generally hold onto the mortgages instead of reselling them after closing. Typically, portfolio lenders include community banks, credit unions and savings and loan institutions.

These local lenders may have better service and can approve borrowers with atypical financial situations. However, their loans typically have higher rates or fees, and they may not be able to loan large amounts.

Hard money lenders

Best for: Applicants who need money quickly and whose finances can accommodate a short repayment timeline.

Hard money lenders are private investors — an individual or group — that provide short-term loans secured by real estate. While traditional lenders look closely at your financial ability to repay a mortgage, hard money lenders are more concerned with the property’s value to protect their investment.

Hard money lenders typically require repayment in a short time frame, usually one to five years. They also generally charge steeper loan origination fees, closing costs and interest rates, as much as 10 percentage points higher than conventional lenders do.

Hard money loans are useful when speed is of the essence or you don’t fit typical borrowing criteria. However, they’re costly and mostly intended for short-term borrowing, making them a poor choice for people who want a long-term loan.

Questions you should ask a mortgage lender

When shopping around, there are several questions to ask a mortgage lender about its process and its options. Here are a few:

• What paperwork does it require?
• How long does its rate lock last?
• How long do its mortgages typically take to close, and how frequently does it fail to close a loan in time?
• What are the steps in its underwriting process, and how will you submit your documents? Online, by mail or in person?

Additional reporting by Mia Taylor