Shopping for a Mortgage? How to Choose a Mortgage Lender to Suit Your Needs

Buying a home is a long-term commitment. Since you’ll be working with your mortgage lender for years to come, putting in the work to find the best mortgage lender at the beginning of your search can pay off.

Though most of the mortgage process is the same with any lender, shopping around can help you spot the differences that could save you money, like chargeable fees and customer service expectations. Use this guide to help you find the best mortgage lender to meet your needs and budget.

Where can you get a mortgage?

There are multiple places you can get a mortgage these days. Although traditional banks are an option, they aren’t the only option available.

Knowing what’s important to you and how you want to work through the process can help you narrow down the best place to get a mortgage. For instance, some people prefer to work with someone in-person, while others prefer an online process. Some like to be more hands-on, but others would rather someone else do all the work.

Understanding your needs can help you determine which type of mortgage lender is right for you.

The 6 types of mortgage lenders

The six different types of mortgage lenders are:

• Correspondent lenders
• Direct lenders
• Hard money lenders
• Mortgage brokers
• Portfolio lenders
• Wholesale lenders

These main mortgage lenders have different features that make them stand apart from one another. Which one is best for you will depend on how much work you want to do and what types of loan restrictions you may have.

Correspondent lenders

Correspondent lenders work with you to originate and fund your loan through the initial process, but once your loan closes, they sell your mortgage on the secondary market to large lending institutions.

Working with a correspondent lender gives you a wide range of loan products to choose from and may get you lower interest rates and fees compared to other lender types. However, you probably won’t know who your loan servicer will be and it can be difficult to ensure a smooth transition, which can cause potential missed mortgage payments.

Direct lenders

Homebuyers looking for a mortgage are most familiar with direct lenders, which are lenders who supply mortgages directly to you, the borrower. This can include traditional banks, credit unions and exclusively online lenders. Direct lenders originate and fund the mortgage and may service them or outsource the servicing.

When using a direct lender, you usually work with the same loan officer and entity throughout the entire process. Rates, terms and fees can be competitive, but also vary widely across lenders. If you choose this route, expect to do the legwork and comparison shopping to find the best direct lender.

Hard money lenders

A hard money lender may sound scary, but it just means that you get a loan through a private investor. The investor can include an individual, investor group or licensed mortgage broker using their own money to fund the loan. They focus mainly on the property’s value and appreciation potential, which helps protect their investment, and less on your ability to pay the loan.

If you have credit issues, like a foreclosure, low credit score, bankruptcy or credit report red flag, you might find other lenders won’t approve your application, but a hard money lender will. This option is also ideal for builders, flippers and real estate investors.

While you can enjoy a fast approval and disbursement, expect shorter loan terms of six months to a year, up to a maximum of five years. You might also have high fees, interest rates and closing costs compared to conventional lenders. Consider working with an experienced real estate attorney to review the lending paperwork before you sign, and make sure you vet the lender.

Mortgage brokers

If you want someone to do all the shopping for you, consider working with a mortgage broker. They don’t actually fund the loans, make decisions or set your interest rate or loan terms. Much like an independent insurance broker, a mortgage broker is a licensed professional who matches borrowers with lenders.

The broker makes a commission when you choose a lender, which is added to the cost of your loan. It’s important to note that although you can compare multiple loan terms, rates and fees, the broker may prioritize lenders offering the best commissions for them, even if there are better options for the borrower.

Portfolio lenders

Rather than sell your loan on the secondary market, a portfolio lender uses portfolio assets to fund the loan and holds onto it as the servicer. Since they are liable for the borrower’s default, they get to name their terms, which could include higher origination fees and interest rates for you. Credit unions, local banks and savings and loans banks are examples of portfolio lenders.

Working with a portfolio lender may provide greater flexibility, like lower down payments and higher loan amounts. You might even avoid paying mortgage insurance with a conforming or non-conforming loan. If you have bad credit or are a real estate investor or self-employed, it may be worth considering a portfolio lender.

Wholesale lenders

Another option is wholesale lenders, who work directly with mortgage brokers and other loan providers, rather than directly with the borrower. However, although you might get a discounted rate with a wholesale lender, it may not be the best deal with a third-party involved, as they may tack on a fee for their services.

However, there could be less restrictive lending terms with wholesale lenders, which could help with approval if you don’t meet traditional lending criteria. Once the loan closes, wholesale lenders, like correspondent lenders, usually sell the loan on the secondary mortgage market, which frees up their ability to fund more loans.

How to choose the best mortgage lender for you?

Now that you know the different types of mortgage lenders, it’s time to choose the best mortgage lender for you. If you’re searching online for mortgage rates, you’ve likely come across ads from lenders hoping to entice you to reach out to them to get a quote. It’s also easy to search for lists of top mortgage lenders and brokers online.

But first, consider your existing bank or credit union if you have a good relationship with them. There could be special financing offers available for existing customers you can’t find anywhere else.

Asking your friends and family for references can also help you with your search. If you have a real estate agent, they usually have a preferred lender list they can recommend.

Key questions for mortgage lenders and brokers

It’s helpful to know what kinds of questions to ask before you complete a mortgage application.

Here are some questions to ask mortgage lenders:

• How long should the entire process take?
• What paperwork do I need to provide?
• Are you my primary contact through the entire process, or will I be working with someone else once the application goes to underwriting?
• What’s the best way to keep in contact, and how promptly should I expect you to follow up?
• What steps can I complete online, and which require in person contact?
• How long should I lock in my interest rate for? Can I get an extension if closing gets delayed through no fault of my own?

For a mortgage broker, consider asking:

• How many quotes did you consider, and why did you select this lender and rate as the best option?
• What fees and commissions do you charge and who pays them?

Steps to take when choosing a mortgage lender

Consider these tips for finding the best mortgage lender:

Determine your budget

Knowing how much you can afford to pay each month is one of the first things you should do to find the right mortgage. Just because you’re preapproved for a certain amount doesn’t mean you can actually afford it.

Lenders base pre-approvals on outstanding debt and gross income. They don’t consider other monthly expenses, like groceries, utilities, childcare expenses, gas and vehicle maintenance.

To determine your mortgage budget, subtract your monthly bills from your net income, or what you take home every month. Use what you have left to create a realistic budget for your mortgage.

Improve your credit score

The better your credit score, the more lending options you have, with better rates and loan terms. Before you start your search for a mortgage lender, you need to know your credit score and review your credit history.

There are three main credit bureaus: Experian, Equifax and TransUnion. You can pull a free credit report once per year from all three at Annualcreditreport.com. You can do all three at once or do one per quarter, which may show how your score improves over time.

Take a close look at your score and check for delinquencies, errors, late payments, collections and large balances. If there are errors, you can dispute them through the credit bureau, which may provide an instant score boost.

Paying down debt can help improve your debt-to-income ratio, which lenders use to determine eligibility and how much you can borrow. Most lenders want the DTI below 43%, but some will go as high as 50 percent.

Using an app like Quicken can help you get spending under control and create a personalized budget you can stick to. It can also help you negotiate existing bills for better rates and get rid of unnecessary subscriptions.

Understand your mortgage options

Just like there are multiple mortgage lender types, there are also multiple mortgage options available. The five main mortgage loan types are:

• Adjustable-rate mortgages
• Conventional loans
• FHA and other government-backed loans
• Fixed-rate mortgages
• Jumbo loans

Conventional and government-insured loans may only require a 3% down payment, while other loans require 20% down. If you’re buying rural, you may qualify for a USDA loan, while veterans should consider VA loans.

Knowing the different mortgage options can help you understand which options are best for your lending needs.

Compare rates and terms

Just like with home and auto insurance, it can pay off to compare rates and terms with different mortgage lenders. Since you could be paying a mortgage for up to 30 years, you could stand to save thousands by doing some comparison shopping.

Consider getting rates and terms from different mortgage lenders, including credit unions, traditional banks, online lenders and mortgage brokers. Compare the terms, rates and fees, but don’t forget about customer service and availability when choosing a mortgage lender.

Read the loan estimate fine print

Mortgage documents can be long, tedious and boring to read. But you don’t want to end up with buyer’s remorse because you didn’t read the loan estimate carefully. A loan estimate lists out the loan terms, which can vary widely. Comparing loan estimates from at least three lenders can help you find the best terms you’re eligible for.

Make sure you understand the loan terms, including the:

• Down payment requirement
• Interest rate
• Lender fees
• Closing costs
• Monthly payments

Verify if the monthly payment includes the insurance and property taxes, which are usually paid by the lender through your escrow account. These terms shouldn’t change much for closing, as long as your credit and financials don’t change in the process.

Ask questions about any fees or anything else you don’t understand. There could be administrative costs, title search fees, appraisal fees, recording costs and tax transfer fees listed out on the loan estimate.

Make sure they spell your name correctly and bank account numbers are accurate. Let your lender know about any errors right away to make sure everything is accurate when you move to the next step of the mortgage process.

Get a mortgage pre-approval

Once you’ve narrowed down your mortgage lender and type, the next step is getting a mortgage pre-approval. The lender will run your credit and review your finances to determine which interest rate and other terms you qualify for.

The pre-approval shows the real estate agent that you’re serious about buying and what you can afford. When you’re ready to make an offer, you can show the seller your pre-approval so they know you won’t have problems with financing, which may make them more willing to accept your offer.

Although the documents you need for pre-approval can vary, most lenders require:

• A copy of your driver’s license
• Your social security number
• Last 30 days of paystubs
• Last two years of federal tax returns
• Bank statement printouts from the last 60 days
• List of all financial accounts with balances
• List of all debt payments, including child support, credit cards and loans
• Employment and income history
• Source of down payment information

Once you have a pre-approval, avoid making any large purchases, opening new credit lines, moving money between accounts or taking a new job. These changes could affect your pre-approval terms and jeopardize your mortgage options.

Frequently asked questions (FAQs)

How do I know if my mortgage lender is reputable?

There are several steps you can take to know if your mortgage lender is reputable. Do an online search for the lender to see how customers review the company and if there are any negative stories in the news about them. You can also search the lender by name on the Better Business Bureau (BBB) and Consumer Finance Protection Bureau (CFPB) websites. Contacting the Attorney General for your state is also an option to consider, as the AG has information about each company’s worthiness if they operate in your state.

What do you consider red flags on mortgage loan applications?

When reviewing mortgage loan applications, lenders review the information you include and supporting documentation you supply thoroughly before deciding to finance your loan. Lenders consider low credit scores, high debt-to-income ratios, last-minute large purchases and large deposits for which you can’t provide documentation red flags. The lender also usually wants to see the last two years of bonus and overtime income. If there are large fluctuations, it could put your pre-approval amount in jeopardy.

How accurate are mortgage pre-approvals?

Mortgage pre approvals are more accurate than prequalifications. A pre-approval requires more documentation, like pay stubs and bank statements, and a hard credit check. But even with a mortgage pre-approval, there’s no guarantee you’ll be approved when you find a home you want to put an offer on. The home needs to be approved, which means the lender has to verify the home’s condition, title history and appraisal value. If anything changes in your income or debt ratio during the time from pre-approval to finalizing the loan, your pre-approval conditions could change.