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Banks, online lenders, mortgage brokers, credit unions: There’s no problem finding a player eager to take your mortgage loan application. The challenge is finding the best mortgage lender — for your needs, that is. Here’s everything you should know about choosing a mortgage lender that’s right for you.
How to find the best mortgage lender
To find the ideal mortgage lender, you need to shop around. Studies show that borrowers who compare the details of at least three lenders’ offers save a considerable amount over those who just go with the first institution they come across.
But before you start shopping, there are a few steps you should take first.
Step 1: Strengthen your credit score
Long before you start looking for a mortgage lender and applying for a loan, give your finances a checkup. This means checking your credit score and credit reports.
You’re entitled to a free credit report from each of the three main reporting bureaus (Experian, Equifax and TransUnion), which you can get through AnnualCreditReport.com.
If your score could use some work, first look through your credit reports for errors, late payments and delinquent accounts in collections. Straighten out anything that is incorrect.
Next, focus on high outstanding balances. Paying down each of your credit cards below 30 percent of the available credit and making on-time payments are the best ways to improve your score.
In addition to solid credit, lenders want to see that you can handle a new mortgage payment, so they’ll look at your debt-to-income (DTI) ratio. This formula adds up all your monthly debts and divides it by your gross monthly income to get a percentage. Many lenders require a DTI ratio below 43 percent, though some loan programs allow up to 50 percent. To keep your DTI ratio manageable, avoid taking on new loans or making large purchases on credit cards for at least three months before applying for a mortgage. You should stick to this rule until you’ve finalized your mortgage, as lenders can pull up your credit report any time throughout the application process until you close.
Step 2: Determine your budget
An important part of finding the right mortgage is having a good handle on how much house you can afford. Don’t assume it’s whatever amount the lender is willing to preapprove you for. Lenders determine a preapproval sum based on your gross income, outstanding loans and revolving debt. However, they don’t consider other monthly bills — utilities, gas, day care, health insurance — in their calculations.
Result: A lender could qualify you for a loan that would max out your budget, leaving no room for unexpected expenses or even expected ones (like food), leaving you house poor. This would be a bad financial move.
To get a more accurate idea of what you can afford, factor in these kinds of regular household expenses, as well as your savings and investment goals. Look at your monthly net income to calculate how much you should spend on a mortgage payment.
Step 3: Know your mortgage options
A key aspect of finding the best mortgage lender is being able to speak their language, including knowing the different types of mortgages.
There are five main types of mortgage loans:
- Conventional loans
- Jumbo loans (and other non-conventional loans)
- FHA and other government-backed loans
- Fixed-rate mortgages
- Adjustable-rate mortgages
Some upfront research can also help you separate mortgage facts from fiction.
“Traditionally, when it comes to getting a mortgage, a lot of people’s first thoughts are to go to a bank or that they need a 20 percent down payment to afford a home,” says Mat Ishbia, president and CEO of United Wholesale Mortgage. “That’s an outdated way of thinking.”
A variety of financial institutions — from traditional brick-and-mortar banks to online mortgage companies — offer home loans now. Many lenders offer conventional loans with as little as 3 percent down. Don’t neglect the public sector: Some state housing finance authorities and some government-insured loans require no down payment or just 3.5 percent down. Consider FHA loans, USDA loans, and if you’re a veteran, look into VA loans.
Step 4: Compare rates and terms from multiple lenders
Settling on the first lender you talk to isn’t the best idea. Rate-shop with different lenders — banks, credit unions, online lenders and local independents — to ensure you’re getting the best deal. But along with basic interest rates, ask about APRs, loan terms, down payment requirements, mortgage points, mortgage insurance, closing costs and fees of all kinds.
Try to find a lender that communicates the way you prefer, whether it’s online, via text or in person.
If you don’t shop around, you could be leaving money on the table. Multiple studies, including ones done by the Consumer Financial Protection Bureau and Freddie Mac, found that comparison-shopping saves borrowers thousands over the course of a 30-year mortgage.
Got it? Then start exploring. Bankrate rates lenders based on factors including affordability, availability and customer experience.
Step 5: Get preapproved for a mortgage
Getting a mortgage preapproval with three or four different lenders is really the only way to get a firm sense of what size loan you qualify for. With a preapproval, lenders do a thorough review of your credit and finances.
While the documentation requirements for preapproval can vary, generally, you’ll 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 of statements for all financial accounts (checking, savings, brokerage accounts, 401(k) and other 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
Be mindful: A mortgage preapproval doesn’t mean you’re guaranteed the money. That doesn’t happen until after you formally apply for a mortgage on a specific property, and lenders do a deeper dive into your finances. They can then re-check your credit, employment and income histories and your assets at any time during this underwriting process.
Ishbia says borrowers should “hold tight” after preapproval and avoid opening new lines of credit, taking on fresh debt, moving around money in their financial accounts (unless you need to liquidate assets for the purchase) and changing jobs before — and during — the mortgage process. If you take out a new car loan, for example, that changes your financial picture and can derail your mortgage.
Step 6: Read the fine print on your loan estimate
We get it: Financial documents make your eyes glaze over. But if you don’t read them closely and there are any errors or surprises, you could feel buyer’s remorse later. Check out this explainer on the loan estimate form lenders are required to give you within three days of receiving your mortgage application.
Pay close attention to:
- Your interest rate
- Monthly payments
- Lender fees
- Closing costs
- Down payment amount
These items shouldn’t change dramatically from preapproval to closing if your credit and financial profile stay the same.
As you compare loan estimates from different lenders, you’ll see a slew of third-party costs, such as lender’s title insurance, title search fee, appraisal fee, recording fee, transfer taxes and other administrative costs. You can negotiate some of these closing costs, but know that lenders don’t determine the fees for third-party services — just their own.
Always ask questions if you don’t understand certain fees or spot errors in the paperwork (such as a misspelled name or a wrong bank account number). Getting ahead of any issues early can save you a lot of headaches later.
Questions you should ask a mortgage lender
When shopping for a mortgage, there are several questions to ask your lender about the process and their loan options. Here are a few:
- What paperwork will you need to provide?
- How long does their rate lock last?
- How frequently do they fail to close a loan in time?
- What are the steps in their underwriting process and will you be able to complete everything online, by mail or in person?
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 like, the legwork you’re willing to do and any restrictions you have on loan types you’ll consider.
Direct lenders
Direct lenders are banks, credit unions, online entities and other organizations that provide mortgages directly to borrowers.
They create and fund mortgages and either service them (meaning manage the repayment) or outsource the servicing to a third party. They also establish loan rates and terms; these can differ significantly depending on which lender you work with.
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.
Mortgage brokers
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 for (but passes on to you as part of the cost of your mortgage). They don’t fund loans or 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 work exclusively through brokers (see “Wholesale lenders,” below). However, you might see higher rates to compensate for the commission the lender has to pay or only get offers from lenders that offer the broker a good commission.
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.
These lenders offer a wide range of loan products and may have low rates, but you might wind up having to deal with by a new, unexpected loan servicer. Correspondent lenders also tend to have stringent requirements for borrowers.
Wholesale lenders
Unlike direct lenders, wholesale lenders never interact with borrowers. They usually work with mortgage brokers and other third parties to offer their loan products at discounted rates, and rely on brokers 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 to get a loan from a wholesale lender; you can’t apply directly.
Portfolio lenders
Portfolio lenders originate and fund loans from their clients’ bank deposits. They generally hold onto the mortgages, instead of resell them after closing. Typically, portfolio lenders include community banks, credit unions and savings and loans 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
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 loan that will last for the long term.
Bottom line on finding the best mortgage lender
Doing your homework on the basics of mortgage lending early on can set you up for success, and help you get better acquainted with the different types of mortgage lenders out there. Mortgages are not one-size-fits-all products, so you need to know how different lenders work and how they (and their loans) differ from one another. Understanding what’s required of you, and the steps you have to take to be a good applicant, is also crucial to finding the right lender to finance your dream home.
