If you are purchasing a mortgage, comparing multiple mortgage lenders can save you money. But beyond the cost, what should you look for from a lender? And how do you narrow down your search to the lender you compare to?
Here’s what you need to know about choosing a mortgage lender:
How to Find the Best Mortgage Lender
Below are five strategic steps to finding the ideal mortgage lender.
Step 1: Analyze your finances
Understanding your financial situation will help you understand the type of mortgage you want and lenders who are specialized for this type of mortgage. It’s important to know:
- your Credit score: Most lenders want it to be 620 or higher. If your score is over 740, you won’t have any trouble finding a lender, but if it’s on the bottom, you’ll have fewer options. Some lenders specialize in borrowers with credit challenges.
- your Debt Income (DTI) Ratio: This is a measure of the amount of monthly income spent on debt payments, including new mortgages. Lenders prefer that potential housing costs not exceed 28% of their monthly total income, and while total debt payments do not exceed 36% of their monthly income, some lenders and loan types are more flexible.
- Your Savings Balance: You will need cash on hand for down payments and closing costs without running out of emergency funds. Ideally, you’ll have money reserved for repairs and home maintenance after moving in. If you need a lender to provide down payment assistance, it can be helpful to know that early on.
- Your Home Buying Budget: Having a general sense of how much you want to spend at home can help you choose a kind of mortgage. For example, if you plan to spend more than the limit on your conforming loan, you will need a jumbo loan.
Step 2: Know your mortgage options
Now you can use that information about your finances to select the type of loan. Common options are:
- Traditional loans: These are mortgages issued by private lenders with rather strict financial requirements. You can qualify for just 3% down, but you will need to pay private mortgage insurance (PMI) until you reach 20% of your shares at home. Almost every lender offers these loans.
- Jumbo Loan: These loans are essential when purchasing a home in expensive areas, but are more difficult to qualify than standard traditional or government-supported loans.
- Government-supported loansLike FHA, VA, USDA loans: Government-supported loans usually have more looser requirements than traditional loans, and some people do not require a down payment.
Beyond your credit score and debt there may be other factors that affect the mortgage you can earn. For example, self-employed people need a loan that does not require a W-2 form to verify their income. Alternatively, if you are applying for down payment assistance, you may need a lender to join the state housing finance agency.
Lenders may not offer all or so many types of mortgages. So narrowing down the type of loan you need can help narrow down your lender’s search as well.
Step 3: Find a few lenders to compare
Once you have chosen the type of loan, you can start looking for a lender to 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 for lender reviews online.
Beyond the type of loan, you want to consider:
- Lender type. There are many types of mortgage lenders, including large national banks and local credit unions. Some lenders work completely online. If you prefer face-to-face service or not! – This will guide you through your search.
- Customer Service Options. Make sure that the lenders on your suggested list have the customer service options to use. For example, if the availability of a lender’s phone conflicts with work schedules, that may not be appropriate.
- Sample rate. Lenders offer sample rates on their website, though not all. These allow you to feel whether the lender’s offering is competitive before applying for pre-approval.
- Benefits. Lenders may offer discounts to eligible applicants. For example, we may offer discounts to people who use real estate agents from their lenders’ networks or refinance within a certain period of time after they obtain a mortgage. Others offer special services to veterans, first-time home buyers, or other groups. If your lender has a program or savings opportunity that applies to you, consider adding it to your list.
Step 4: You’ll be approved in advance for your mortgage
Getting pre-approval for a mortgage is the only way to get a solid sense of the size of the loan you qualify for and what to pay for it. This process may also reveal which lenders are best for you in terms of technology, customer service or other factors. You can start after choosing a few lenders you want to compare.
During pre-approval, the lender will provide a thorough review of your credit and finances. The documents required for pre-approval may vary, but you will usually need to provide:
- Photo ID and Social Security Numbers for all borrowers
- Paying stubs from the last 30 days
- Two-year federal tax return, 1099, W-2
- Print or download statements for all financial accounts (checks, savings, brokerages, employers, individual retirement savings plans) for the past 60 days
- A list of all revolving and fixed obligation payments, including credit cards, personal and auto loans, student loans, alimony and child support.
- Employment and income history, as well as contact information for your current employer
- If you are receiving help from a relative or friend, down payment information including amount, source of funds and gift letter
Multiple mortgage inquiries count as one inquiry about your credit report within the 45-day period, so shopping for the best loan will not significantly reduce your credit score.
Step 5: Read our loan estimate
Within three days of applying for a mortgage, the lender must provide a loan estimate. This document explains the exact terms of your loan, including interest rates, repayment periods, and fees. This helps avoid surprises that can disrupt your budget or damage your credit.
Comparing loan estimates will give you a significant view of many third-party expenses, including lender title insurance, title search fees, valuation fees, record fees, transfer taxes, and other administrative fees. Although you can negotiate some of these costs, you know that lenders don’t decide on most fees for these services. On the other hand, that may mean you can buy these services.
We will focus on APRs that reflect the true cost of the loan, including interest, mortgage points and other fees, as well as the interest rates offered. These differences in costs affect the overall cost of the loan. Sometimes it’s a few percentage points.
Always ask if you are not sure about a specific fee or spot error in your document, such as a wrong name or an incorrect bank account number. Going ahead of the problem will save you a lot of headaches later.
After reviewing all your loan estimates, you can weigh the information against other experiences with previous lenders to determine which is best.
Types of mortgage lenders
There are six main types of mortgage lenders. The type that best suits you will depend on the level of practical interaction you like, the legwork you are willing to do, and the type of loan you consider.
- Direct lender: These lenders work directly with the borrower through the application process. They also create mortgages and fund them and provide services – which means they manage and manage repayments – or outsource the services to a third party. They are perfect for home buyers who want competitive rates and personalized services.
- Wholesale Lenders: Unlike direct lenders, wholesale lenders never interact with borrowers. They usually offer products at discounted rates through mortgage brokers or other lenders. These loans may be great for applicants with non-perfect credits.
- Mortgage broker: A mortgage broker is an independent, licensed professional who works for a small fee as a matchmaker between a lender and a borrower. Usually, it is 1-2% of the loan amount. They are best for borrowers who want to help with comparison shopping, but you will pay more, and you may only get offers from lenders in that broker’s network.
- Correspondent lender: Correspondent lenders send out and fund their own loans, but will quickly sell to large lending agencies in the secondary mortgage market after the loans are closed. If you have good credit, you will probably get a big rate from one of these lenders, but you will need to deal with a new loan servicer.
- Portfolio lender: Portfolio lenders send and fund loans from clients’ bank deposits. They usually hold mortgages instead of reselling after closing. Portfolio lenders typically include community banks, credit unions, savings and loan institutions. If you have an unusual financial situation, such as being a small business owner, consider a portfolio lender. However, be aware that you can pay more for the loan.
- Hard Money Render: A hard money lender is a private investor (individual or group) who offers short-term loans protected by real estate. While traditional lenders often look at their financial ability to pay off their mortgages, hard money lenders are more interested in the value of real estate to protect their investments. If you need money quickly and can afford to pay off the loan within 1-5 years, and at a relatively high rate, a hard money lender may work for you.
Questions to ask a mortgage lender
When you shop, there are a few questions that ask your mortgage lender about the process and its options. Here are some:
- What kind of documents do I need?
- How long does the rate lock last?
- How long does a mortgage usually take to close, and how often does it take to close a loan in time?
- What are the steps in the underwriting process? Also, how do you submit the documents? Online, by mail or in person?
Additional Reports by Mia Taylor
