How To Choose A Mortgage Lender: 5 Tips

If you’re shopping for a mortgage, comparing multiple mortgage lenders is likely to save you money. But beyond costs, what should you look for in a lender? And how do you narrow your search to the lenders you’ll compare?

Here’s what to know when you’re choosing a mortgage lender.

How to find the best mortgage lender

Here are five strategic steps to finding the ideal mortgage lender.

Step 1: Analyze your finances

Understanding your financial position will help you figure out the type of mortgage you want — and the lenders that specialize in this type of mortgage. It’s important to know:

• Your credit score: Most lenders will want it to be 620 or above. If your score is 740+, you shouldn’t have a hard time finding a lender, but if it’s on the lower side, you’ll have fewer choices. Some lenders specialize in borrowers with credit challenges.
• Your debt-to-income (DTI) ratio: This is a measure of the amount of your monthly income that goes toward debt payments, including your new mortgage. Lenders prefer your potential housing costs not exceed 28 percent of your monthly gross income, and your total debt payments not exceed 36 percent of your monthly income — but some lenders and loan types are more flexible.
• Your savings balance: You’ll need cash on hand for a down payment and closing costs without draining your emergency fund. Ideally, you’ll also have some money set aside for repairs and home maintenance once you move in. If you need a lender who offers down payment assistance, it’s helpful to know that early on.
• Your homebuying budget: Having a general sense of how much you want to spend on a house can also help you choose a type of mortgage. For example, if you’re planning to spend more than the conforming loan limit, you’ll need a jumbo loan.

Step 2: Know your mortgage options

Now you can use that information about your finances to choose a loan type. Common options include:

• Conventional loans: These are mortgages issued by private lenders with fairly strict financial requirements. You can qualify with as little as 3 percent down, but you’ll need to pay for private mortgage insurance (PMI) until you reach 20 percent equity in the home. Almost all lenders offer these loans.
• Jumbo loans: These loans are essential if you’re buying a home in an expensive area, but they’re harder to qualify for than standard conventional or government-backed loans.
• Government-backed loans, like FHA, VA and USDA loans: Government-backed loans typically have looser requirements than conventional loans, and some don’t require a down payment.

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: Find a handful of lenders to compare

Once you’ve picked a loan type, you can start looking for lenders that offer it. Your current bank or credit union is always a good place to start, and you can ask friends and family for recommendations. You can also search online for lender reviews.

Beyond loan type, you’ll want to consider:

• Lender type. There are many varieties of mortgage lender, including large, national banks and local credit unions. There are also lenders that work entirely online. If you’d prefer in-person service — or not! — this can guide your search.
• Customer service options. Make sure the lenders in your shortlist have customer service options you’ll use. For example, if a lender’s phone availability conflicts with your work schedule, it may not be a good fit.
• Sample rates. Some — but not all — lenders offer sample rates on their websites. These can give you sense if a lender’s offerings are competitive before you apply for preapproval.
• Perks. Lenders may offer discounts to qualifying applicants, for example, those who use a real estate agent from the lender’s network or who refinance within a certain time period after getting a mortgage. Some also offer special services for veterans, first-time homebuyers or other groups. If a lender has a program or savings opportunity that applies to you, consider adding it to your list.

Step 4: Get preapproved for a mortgage

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. After you’ve picked the few lenders you want to compare, you can get started.

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

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 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.

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.

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.

After you’ve reviewed all your loan estimates, you can weigh the information against your other experiences with the lenders so far to decide which one is the best choice.

Types of mortgage lenders

There are six main types of mortgage lenders. The best type 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: These lenders work directly with borrowers through the application process. They also create and fund mortgages and either service them — meaning they administer and manage the repayments — or outsource the servicing to a third party. They’re best for homebuyers who want competitive rates and personalized service.
• Wholesale lenders: Unlike direct lenders, wholesale lenders never interact with borrowers. They usually offer their products through mortgage brokers or other lenders at discounted rates. These loans may be best for applicants with less-than-perfect credit.
• Mortgage brokers: Mortgage brokers are independent, licensed professionals who serve as matchmakers between lenders and borrowers for a small fee — usually 1 to 2 percent of the loan amount. They’re best for borrowers who want help comparison shopping, but you’ll pay more, and you may get offers only from lenders in that broker’s network.
• Correspondent lenders: 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. If you have excellent credit, you’ll likely get a great rate from one of these lenders, but you will have to deal with a new loan servicer.
• Portfolio lenders: 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. Consider a portfolio lender if you have an unusual financial situation, such as being a small business owner — but be aware that you may pay more for the loan.
• Hard money lenders: 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. A hard money lender might work for you if you need money quickly and can afford to pay back the loan within one to five years — and at a relatively high rate.

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