You’ll find no shortage of banks, online lenders, mortgage brokers and other players eager to take your loan application. Here’s everything you should know about choosing the mortgage lender that’s right for you. Sign up for a Bankrate account to read insights, analysis and lender reviews from our team of mortgage experts.
Types of mortgage lenders
- Direct lenders
- Mortgage brokers
- Correspondent lenders
- Wholesale lenders
- Portfolio lenders
- Hard money 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.
- Pro: In-house process from application to closing; borrowers typically work with one loan officer
- Con: Rates and terms vary widely between lenders
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.
- Pro: Work with multiple lenders on borrower’s behalf
- Con: Potential conflicts of interest
- Pro: Access to an array of loan products
- Cons: Borrowers won’t know which entity manages their mortgage until after sale; servicer could be hard to keep track of
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.
- Pro: Discounted or otherwise favorable loan terms
- Con: Have to go through a third party (such as a broker) to obtain a wholesale deal
Portfolio lenders originate and fund loans from their clients’ bank deposits so they can hold on to the loans, not resell them after closing. Typically, portfolio lenders include community banks, credit unions and savings and loans institutions.
- Pros: Can help borrowers with unique circumstances qualify for a loan; opportunity to work with a local institution
- Con: Potentially limited loan amounts or less favorable terms
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.
- Pros: Can be easier to qualify borrowers who don’t fit criteria for conventional loans; fast approvals and funds disbursement
- Cons: Higher fees and rates; shorter-term loan means higher monthly payments
How to find the best mortgage lender
To find the best mortgage lender, you need to shop around. Consider different options like your bank, local credit union, online lenders and more. Ask about rates, loan terms, down payment requirements, mortgage insurance, closing cost and fees of all kinds, and compare these details on every offer.
Before you start shopping, there are a few steps you can take to get the best rate:
- Strengthen your credit
- Determine your budget
- Know your mortgage options
- Compare rates and terms from multiple lenders
- Get preapproved for a mortgage
- Read the fine print
Step 1: Strengthen your credit
Long before you start looking for a mortgage lender and applying for a loan, give your finances a checkup, and improve your standing if needed. This means pulling 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, delinquent accounts in collections and high 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, says Jason Bates, vice president of the Purchase division for American Financing, a national mortgage lender based in Aurora, Colorado.
In addition to solid credit, lenders want to see that you can handle your existing debt along with 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. A lender could qualify you for a loan that would max out your budget and leave no room for unexpected expenses, but taking out such a mortgage might be a bad financial move.
Lenders preapprove you based on your gross income, outstanding loans and revolving debt, Bates says. However, they don’t look at other monthly bills, such as utilities, gas, day care, insurance or groceries, in their calculations.
To get a more accurate idea of what you can afford, factor in these kinds of expenses and other financial goals. Look at your monthly net income to calculate how much you should spend on a mortgage payment.
“Make a line-item budget for all your monthly expenses, and be conservative about the monthly mortgage payment,” says Bates, who adds that this is especially crucial for first-time homebuyers who might not get their ideal home right away.
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. 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.”
Many lenders offer conventional loans with as little as 3 percent down, and some government-insured loans require no down payment or just 3.5 percent down. Consider FHA loans and USDA loans, and if you’re a veteran, look into VA loans.
Keep in mind that if you put down less than 20 percent, many lenders will charge you a higher interest rate and require mortgage insurance.
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 on rates, fees and terms. 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 out of the Consumer Financial Protection Bureau and Freddie Mac, found that comparison-shopping saves borrowers thousands over the course of a 30-year mortgage.
Start exploring lenders:
- Interfirst Mortgage Company
- AmeriSave Mortgage Corporation
- Cardinal Financial Company
- Fairway Independent Mortgage Corporation
Step 5: Get preapproved for a mortgage
Obtaining a mortgage preapproval with three or four different lenders is really the only way to get accurate loan pricing, because with a preapproval, lenders do a thorough review of your credit and finances.
Lenders can have different documentation requirements for preapproval. Generally, you’ll need to provide:
- Driver’s license or other government photo ID
- Social Security numbers for all borrowers (to pull credit)
- Residential address history, as well as names and contact information for landlords in the past two years
- Pay stubs from the past 30 days.
- Two years of federal tax returns, 1099s and W-2s
- Printouts of bank statements for all accounts for the past 60 days
- List of all financial accounts (checking, savings, brokerage accounts, 401(k) and other retirement savings plans)
- 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
- Information on any recent liens or legal judgments against you or other borrowers, such as IRS actions, bankruptcy, collections accounts or lawsuits
Be mindful: A mortgage preapproval doesn’t mean you’re in the clear. Lenders can re-check your credit, employment and income histories and your assets at any time during the process. If you take out a new car loan, for example, that changes your financial picture and can derail your mortgage.
Ishbia says borrowers should “hold tight” after preapproval and avoid opening new lines of credit, moving around money in your bank accounts and changing jobs before — and during — the mortgage process.
Step 6: Read the fine print
We get it: Mortgage 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 and loan processing fees, closing costs and the down payment amount. These items shouldn’t change dramatically from preapproval to closing if your credit and financial profile stay the same.
Lenders sometimes offer credits to help lower the amount of cash due at closing. Be aware, though: These credits can push up the interest rate on your loan, which means you’ll ultimately pay more.
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). Getting ahead of any issues early can save you a lot of headaches later.
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 they work and how they differ from one another. This will help you find the mortgage lender and loan that offers what’s best for your situation.