Whether you’re looking to buy your dream abode, refinance your home loan, or purchase an investment property, searching for the perfect mortgage lender can often feel overwhelming.
If you have trouble narrowing down your options, don’t worry. Below, we’ll guide you on how to choose a mortgage lender and offer a few helpful questions you should ask of lenders before committing.
How to find a mortgage lender
A mortgage lender is a financial institution — such as a bank, credit union, or online mortgage company — that offers and underwrites loans for home purchases (or refinancing). Because each lender has specific borrowing guidelines and offers different interest rates, incentives, and loan terms, it’s crucial to thoroughly research your options before making a decision.
Here’s a step-by-step guide on how to comparison-shop and find the right mortgage lender for you.
1. Check your credit score: Before hunting down the best mortgage lender, you must know where you stand in terms of your credit health. Here’s why: Your credit profile can significantly impact the kind of loan and interest rate lenders are willing to offer you. If your credit score’s high, lenders are usually more willing to offer lower rates since they see you as a low-risk borrower.
So if you haven’t already, head to AnnualCreditReport.com to request a free copy of your credit report from each of the three major credit bureaus. If you have a sub-par credit score, consider taking the time to rebuild your credit before applying for a mortgage. Doing so could save you thousands of dollars in interest over the life of your loan.
2. Determine how much house you can afford: A good way to do this is to look at your monthly income and existing debt that may impact your ability to pay your mortgage on time. To ensure you’re not overextending yourself, financial advisors generally suggest that the total amount you spend on housing per month should not exceed 25% of your gross income.
Once you know the maximum amount you can spend on a mortgage, use a house affordability calculator. Enter your estimated down payment, loan term, interest rate, and other variables to calculate how much house you can afford.
And if you’re looking to refinance your mortgage, a mortgage refinance calculator to find out whether refinancing your home loan will save you money in the long run.
3. Learn about different types of mortgage lenders and which will serve your needs best: Choosing the right type of mortgage lender can make all the difference when it comes to finding a loan that best meets your needs. Whether you’re looking for a fixed rate, adjustable rate, or jumbo loan, there are many options available at traditional banks, credit unions, and online mortgage lenders.
Knowing the pros and cons of each type of lender can help you decide which is the best fit for your budget and unique circumstances. We’ll touch on this in the next section.
4. Compare rates and terms from lenders: Depending on your credit score and other financial information, the offers you receive can vary drastically between lenders. So, to reduce your monthly mortgage payment and snag the best deal, compare rates and terms from various lenders before hastily committing to one.
5. Get pre-approved: Gaining mortgage pre-approval is relatively straightforward — generally, it involves a short loan application and a soft credit check. Lenders will also review your finances, such as your sources of income, assets, and debts, to determine loan eligibility. If approved, lenders will offer you an estimate of how much they’re willing to lend you.
Though getting pre-approved doesn’t guarantee a home loan, it gives you an idea of what you can afford and allows you to focus your search on properties within your budget. Plus, having a pre-approval letter gives you more latitude when making an offer since it shows sellers you’re a serious and legitimate buyer.
Types of mortgage lenders
Just as there are plenty of different mortgages, there are multiple types of mortgage lenders. Let’s look at their pros and cons to help you figure out which kind best suits your needs.
Direct lenders
Direct lenders are financial institutions that provide mortgages to customers directly without intermediaries like brokers or private equity firms. As such, they use their own funds to finance loans. They typically conduct the loan processing, underwriting, and closing in-house.
Some examples of direct lenders include credit unions, banks, and online mortgage companies.
| Pros | Cons |
|---|---|
| – No broker fees – Some direct lenders offer ‘direct-only’ deals – Possibility of better rates, lower closing costs | – Need to apply individually with each direct lender – Could hurt your credit score due to multiple credit inquiries if you apply to multiple lenders |
Mortgage brokers
A mortgage broker is a person or a company who serves as an intermediary between borrowers and lenders in the home loan market. With access to a wide range of lenders and products, mortgage brokers help you compare different offers and get the most competitive rates on your home loan. However, you might have to pay broker fees in exchange for this service.
| Pros | Cons |
|---|---|
| – Access to multiple lenders at one time – Single point of contact – More flexibility and easier comparison shopping | – Possibility of higher closing costs, interest rates – Charge broker fees – Limited to the lenders the broker partners with |
Retail lenders
Retail lenders are financial institutions that offer mortgages directly to consumers — not institutions. And besides mortgages, they typically provide various other products, such as checking and savings accounts, credit cards, auto loans, and personal loans.
Some examples of retail lenders include credit unions like Navy Federal and banks like JPMorgan Chase.
| Pros | Cons |
|---|---|
| -Will likely continue servicing your mortgage after closing -Existing bank customers may get special discounts or programs -Might offer lower interest rates | -Less mortgage-lending expertise -Cross-selling of other banking products -Less variety of mortgage loan options |
Wholesale lenders
Wholesale lenders are financial institutions that fund mortgages and offer them through third parties like mortgage brokers or other banks and credit unions. In wholesale lending, customers don’t typically have direct access to the lender. Instead, you interact with the third party who facilitates the loan origination and application process.
Since you can’t contact the wholesale lender directly, communication could be slower depending on the intermediary.
| Pros | Cons |
|---|---|
| – Looser lending requirements – Relatively easy to find since they work with many mortgage brokers | – No direct access to the wholesale lender – Broker may charge additional fees |
Warehouse lenders
Warehouse lenders are financial institutions that offer short-term funding to mortgage lenders who originate home loans. Instead of funding the home loans themselves, mortgage lenders draw money off the line of credit given by the warehouse lender. These lines of credit are usually repaid as soon as the mortgage lender sells the loans on the secondary market.
Warehouse lenders don’t interact with consumers, and the mortgage lender is responsible for handling the loan application and approval process.
| Pros | Cons |
|---|---|
| – Allows banks to finance a loan without using their own capital | – No direct access to warehouse lenders |
Correspondent lenders
A correspondent lender is a type of lender that originates, underwrites, and funds mortgage loans using their name.
After closing, correspondent lenders either sell the loan to a larger bank or investors in the secondary mortgage market. However, since correspondent lenders often service your loans and collect your mortgage payments, your relationship with them won’t usually end even if the loan is sold.
| Pros | Cons |
|---|---|
| – Wide variety of mortgage options – Comprehensive service from underwriting to funding the loan | – Strict underwriting guidelines since these lenders sell your loan to the secondary market – Some correspondent lenders charge extra fees |
Portfolio lenders
A portfolio lender funds a borrower’s home loan with its own money and keeps the debt in a portfolio of loans instead of selling it on the secondary market. Portfolio lenders take on more risks by holding onto these loans, so they might charge higher interest rates and closing costs to offset this risk.
However, because these lenders don’t have to meet the underwriting guidelines set by secondary market buyers like Fannie Mae, borrowers might have an easier time qualifying for loans from portfolio lenders since they have less stringent requirements.
| Pros | Cons |
|---|---|
| – More lenient qualifications – Keep the same loan servicer over the life of your loan – Might get more flexible terms | – May have higher interest rates and closing costs due to increased risks – Fewer loan options than direct lenders |
Questions to ask when you find a mortgage lender
Here are a few questions you should ask when comparison-shopping to help you weed out the bad apples and find the most suitable mortgage lender:
- What are the loan programs you offer?
- How will my interest rate change over the life of the loan?
- What are the steps in the underwriting process?
- What is your pre-approval process?
- What escrow requirements do you have?
- Do I need to pay private mortgage insurance (PMI)?
- Are there pre-payment penalties on this loan?
- Do I qualify for any down payment assistance program?
- What costs will I pay at closing?
- How long will it take for my loan to close?
While it can be intimidating to shop for a mortgage, there are options to fit nearly every need. Just be sure to do your due diligence and soon you’ll be closing on your new home.