How to Choose a Mortgage Lender
Finding the best mortgage lender can make the difference between a high or low rate, a loan approval or denial or a smooth loan process versus a nightmare of never-ending documentation requests. Learning how to choose a mortgage lender can save you time, money and stress during your home purchase or refinance.
How to choose the best mortgage lender in 5 steps
A mortgage lender will thoroughly assess your financial situation when deciding whether to give you a mortgage preapproval or refinance loan. Although mortgage companies typically follow the same basic lending rules, their products and processes may vary. Here are some steps to help you find the best mortgage lender for your situation.
1. Learn what mortgage lenders look for
Lenders primarily focus on four things when you apply for a loan: your credit score, your monthly debt, your monthly income and how much money you’ve saved.
- The higher the credit score, the better. Shoot for a credit score of 740 or higher if you want the lowest interest rates and an easier path to loan approval. However, bad credit mortgages are available if you have scores as low as 500.
- Less debt means less mortgage approval hassle. Your potential lender divides your monthly debt (including your new mortgage payment) by your before-tax paycheck to determine your debt-to-income (DTI) ratio. The benchmark for mortgage lending is 43% — but you may be approved with a higher ratio if you have high credit scores and extra savings.
- Steady income for two years is the gold standard. Salaried and full-time hourly income for at least 24 months will make your approval easier. If you’re self-employed or receive variable commission income, keep your tax returns and accountant’s number nearby — you’re likely to need both to get a green light on your mortgage application.
- Higher down payments and extra savings help strengthen your application. Although you don’t need 20% saved up, a higher down payment equals a lower monthly payment and, in some cases, a better interest rate. If you’ve got a rocky credit past, extra savings called “mortgage cash reserves” may turn an iffy application into a thumbs-up approval.
How much house can you afford?
It’s important to understand the mortgage you can afford before choosing a lender. As discussed, mortgage lenders primarily look at your credit score, income and debts to determine your eligibility. They don’t typically consider your day-to-day expenses, such as child care or health insurance. It’s up to you to review your budget and make sure buying a house won’t make you “house poor.”
Are you unsure how much mortgage you can afford? Find out using our home affordability calculator.
2. Choose the type of mortgage you need
Choosing a mortgage lender is about more than just getting the lowest rate — it’s also about getting the right type of mortgage. Not all lenders offer the same mortgage loan options, and others specialize in specific mortgage loan types, making it even more important for you to know which type of mortgage you need.
→ Conventional loans. Rules for conventional conforming loans are set by Fannie Mae and Freddie Mac, with down payments as low as 3%. You can skip the cost of private mortgage insurance (PMI) if you have a 20% down payment (PMI covers lenders’ costs if you default).
→ FHA loans. If you’re willing to pay expensive FHA mortgage insurance, lenders approved by the Federal Housing Administration (FHA) may approve you with scores as low as 500 (compared to a minimum of 620 for conventional loans).
→ VA loans. Eligible military borrowers may qualify for no-down payment mortgages guaranteed by the U.S. Department of Veterans Affairs (VA). An added perk: The VA cash-out refinance is the only standard mortgage program that allows you to borrow 90% of your home’s value to pocket extra funds from your home’s equity (most programs cap you at 80%).
→ USDA loans. If a country home is your dream, but your earnings and savings are low, a loan backed by the U.S. Department of Agriculture (USDA) may be a good fit. No down payment is required, but there are strict income and location limits.
→ Jumbo loans. Designed to meet the needs of borrowers who need a loan amount above conforming loan limits, jumbo loans may be your only mortgage option if you’re buying or refinancing in a very expensive housing market.
Your interest rate and monthly payment change for different loan terms
The most popular loan term is 30 years because it offers the lowest stable payment and rate. The rates on shorter-term loans, such as the 15-year fixed-rate mortgage, are lower than 30-year fixed-rate loans, but the payment is higher due to the faster payoff period. You can also choose an adjustable-rate mortgage (ARM) if you need temporary savings and have a plan to refinance or sell your home before the initial low rate period is over.
3. Gather the required documents
Although there are online lenders that may be able to electronically verify your income, credit and assets, you’ll typically need at least a month’s worth of paystubs, two years’ worth of W-2s and two months’ worth of bank statements.
You may also need to write a letter of explanation to give the lender extra assurance that you can afford your mortgage payment. This could be necessary if you have a foreclosure or bankruptcy on your credit or gaps in your job history. It may also be required if you receive large, unexplained cash deposits during the underwriting process.
If you’re refinancing, you’ll also need information found on your current mortgage statement.
4. Shop around to find a lender
A recent LendingTree study found that shopping around for a mortgage could save borrowers across the United States an average of $76,410 over the term of their loan. Finding the best mortgage company for your needs requires you to know the right steps to follow when you start your mortgage lender search.
→ Do all your loan shopping on the same day. Mortgage rates change daily, which means you should gather all your loan estimates on the same day. If you don’t, you may end up shelling out thousands in extra interest charges because you didn’t get the lowest rate.
→ Make sure you’re comparing the same loan product. The lowest rate may not be the best choice, especially if it’s low only temporarily (such as with a 5/1 ARM) or requires you to make a higher payment for a shorter-term loan (such as a 15-year fixed loan).
→ Ask if the quote includes mortgage points. A low rate may not seem like such a great deal if you have to pay thousands of dollars worth of “mortgage points” to get it. Check the APR on each rate quote — short for “annual percentage rate,” this number gives you a rough idea of how much you’ll pay in costs over the life of your loan. Typically, the higher the APR, the higher the costs you’ll pay.
Questions to ask potential mortgage lenders
When comparing mortgage lenders, here are some questions to ask to see which one is right for you:
- What type of mortgage loans do you offer?
- What are your eligibility requirements?
- What paperwork do you require?
- Will I be able to complete the application online?
- What does the mortgage underwriting process entail?
- How long does the typical mortgage closing take?
5. Choose the best lender for you
The best way to find a mortgage lender is to gather quotes from a number of different types of lenders, including mortgage banks, mortgage brokers and your local bank. Be sure to ask them about special deals like lender credits for first-time homebuyers or repeat customer discounts if you’re refinancing. Here are some of the most common types of mortgage lenders:
Direct lenders
A direct lender is a financial institution that manages every step of the mortgage process — from application to funding. Direct lenders can be traditional big banks, local banks and credit unions and online lenders. Many direct lenders are approved to offer down payment assistance or specialized nonqualified mortgage (non-QM) programs for borrowers who don’t fit into standard loan program requirements.
Your local bank or credit union may offer you special mortgage rates if you have large sums of money invested or on deposit in a savings account. In addition, your bank may offer special closing cost discounts if you pay your mortgage with your bank checking account.
Mortgage brokers
A mortgage broker works with a number of different banks to find the best match for your finances. They don’t actually lend you the money, and the loan process is usually handled by the company the broker sends your application to.
Because they do business with so many different mortgage lenders, brokers may be a good choice if you have some challenges with your income or credit reports and need several lenders to choose from to get a preapproval.
Hard money lenders
Hard money lenders are private companies that offer short-term loans. Like a traditional mortgage, your property is used as collateral on a hard money loan — but that’s where the similarities end.
Hard money loans typically have higher interest rates and shorter repayment periods than traditional mortgage loans. In addition, hard money lenders may require a larger down payment.
Hard money lenders may make sense for real estate investors who are looking to buy a fixer-upper in order to make improvements and resell it within a short time period. Still, as with any lender, it’s important to compare rates and fees from multiple hard money lenders before making a decision.
Where to get a mortgage
Use the comparison table below to get a better idea of how to choose the right mortgage lender for you.
| A direct lender makes sense if: | A local bank or credit union makes sense if: | A mortgage broker makes sense if: | A hard money lender makes sense if: |
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