Choosing the right mortgage lender is a critical part of the biggest financial decision of many people’s lives.
Small variations in rates and fees offered by different lenders can make a big difference. For a buyer of a $250,000 home, just one quarter of a percentage point off a 30-year mortgage rate comes out to $10,000 over the life of the loan.
“You have to learn to read between the lines and understand what options are available to you,” says Ilyce Glink, real estate author and CEO of the personal finance site Best Money Moves.
And no one can help you do that better than an experienced mortgage professional.
You want to find someone who will not just help you find what you think you need, but will also inform you about the options you didn’t even know existed. You want a professional who will point out and translate all the fine print, so you can make an informed decision and understand the tradeoffs. That’s why it’s so important to find a great mortgage lender.
Types of Mortgage Lenders
There are two main types of mortgage lenders: direct lenders and mortgage brokers. Direct lenders can help you with a mortgage from one specific lender, while mortgage brokers can pair buyers with multiple lenders.
Direct lender
Banks and credit unions are two common types of direct lenders. With a direct lender, the entire mortgage lending process will be handled by one entity from start to finish. Working with the bank or credit union where you have your checking or savings accounts can have its advantages, as existing customers may get better rates or lower fees.
But if you’re mortgage shopping with a bank, you’ll only be able to choose from the mortgage products and rates that specific bank offers. So if you want to work exclusively with direct lenders, you’ll need to do all of the legwork for comparison shopping yourself.
Mortgage broker
A mortgage broker doesn’t directly issue loans. Instead a broker works as an intermediary between lenders and the borrower. This gives the mortgage broker the ability to shop around for rates and mortgages from multiple different lenders.
If you’re having trouble qualifying for a loan with one bank, a broker can easily shop around with different lenders. Brokers can be particularly helpful for more niche programs, says Jennifer Beeston, a branch manager and SVP of mortgage lending for Guaranteed Rate, a Chicago-headquartered mortgage lender.
A broker is able to more easily find you a good deal, but brokers may favor one lender over another based on the commission they receive. Depending on the broker, the commission is paid in some combination by you and the lender the broker connects you with for a mortgage.
PRO TIPWhen you’re shopping for a lender, look at reviews for the individual loan originator and not just the broader company. A great company won’t mean much if the individual you work with on the loan lets you down.
4 Steps to Finding the Best Mortgage Lender
The mortgage lender is who you will work with to choose, apply for, and ultimately close on a loan to buy a home. Your personal circumstances play a huge role in picking the right lender. Your credit score, income, and savings can all impact what mortgages, and mortgage rates, you can qualify for.
Even the property you’re looking to buy – its price and location – can influence what lender is ideal for you. So before you do any lender comparison, you should determine your home-buying budget and where you’d like to live. From there, Glink recommends talking to multiple lenders and asking what you can qualify for based on your financial profile and buying preferences.
Here’s how to narrow down your choices to find the right lender.
1. Look at the lender’s rates and Fees
Low mortgage rates are all over the headlines these days. While this is a great opportunity for some people to shop for a home or refinance, that’s not the case for everyone. To qualify for the best mortgage rates, you’ll need a combination of a high credit score, low debt-to-income ratio, and a solid down payment.
While every lender will look at your credit score, debt, and assets, each will assess you (and your mortgage eligibility) slightly differently. This is why you may find better rates with a different lender. So it pays to shop around for the best rate.
But it’s more than just finding the best rate. You need to look at the fees as well. If you have to pay bigger upfront fees, it can easily wipe out the potential savings of a lower interest rate.
This is why rates and fees need to be shopped for at the same time. To accurately compare fees and rates you’ll need a loan estimate, which you’ll get within three days of submitting an application. Submitting an application also allows you to lock in the interest rate, Beeston says.
In addition to standard mortgage origination fees, also make sure to check for mortgage points, also known as discount points, says Beeston. “I have people who send me loan estimates all the time. I’m seeing lenders charging five points; I don’t even know how it’s legal,” she continued. Discount points cost 1% of the loan total and typically reduce the interest rate by one-eighth to one quarter of a percent.
2. Decide what type of mortgage you want
The style and structure of the loan itself has a big impact on the lifetime costs and interest ramifications of a mortgage. Understanding what type of mortgage you need will help you choose a lender because each lender offers different products and services.
Different terms
Mortgages come with a variety of terms, or payment schedules. Common mortgage terms are 15 years and 30 years. But you can also find 10-, 20-, or even 40-year mortgage terms.
The terms of your mortgage affect the monthly payments and the total amount of interest you’ll pay. Shorter terms lead to bigger monthly payments, but you’ll pay less interest to the lender over time and be free of a mortgage sooner. Longer terms come with smaller payments, but the amount of interest you pay over the life of the loan is higher because you’ll have the loan for more time.
Fixed rate
Fixed-rate mortgages are the go-to choice for the typical homebuyer. The interest rate locks in and will never increase over the life of the loan. This provides you with long-term certainty because the main variables to your monthly payment would be property taxes and homeowners insurance.
Adjustable rate
An adjustable-rate mortgage (ARM) has a “teaser” interest rate for a set period of time and a variable rate afterward. Ideally, the teaser rate is lower than what you’d find on a comparable fixed-rate loan, though this effect has been diminished lately with low rates across the board.
An ARM is more complicated than its fixed-rate counterpart, and the nuts and bolts of the fine print varies more than with a fixed-rate mortgage. For example, ARMs have different introductory rate timeframes. The frequency and amount of rate adjustments and how the rate changes also vary depending on the loan and lender.
Government-backed
Government-backed mortgages are secured by the government, but issued by approved lenders. These mortgages generally have lower credit score and down payment requirements than other types of home loans, and are meant to increase access to home ownership for certain types of buyers. But, government-backed loans can have additional eligibility standards, and the appraisal process is more strict.
There are three main types of government-backed home loans: Federal Housing Administration loans (FHA), Department of Veterans Affairs loans (VA), and U.S. Department of Agriculture loans (USDA).
To qualify for a FHA loan you must meet the minimum credit score requirements, which are set by the government at 500 with 10% down, or 580 with 3.5% down. Although individual lenders often have higher standards than the government minimums, FHA loans still typically have lower credit score requirements than conventional loans.
The other two types of loans have more restrictive guidelines. VA loans are only available if you, or your spouse, meet the military service requirements. USDA loans are only issued for qualifying properties in eligible rural areas.
Conventional
Conventional loans aren’t backed by the government and fall into two subcategories: Conforming and non-conforming.
A conforming loan meets the standards of the quasi-government organizations Freddie Mac and Fannie Mae. This is important because Freddie Mac and Fannie Mae were created by Congress to support homeownership and the country’s housing finance system.
They do that by buying mortgages from lenders, which are then held by the agencies or sold to investors in the form of mortgage-backed securities (MBS). So conforming loans are easier for lenders to sell to Freddie Mac and Fannie Mae, even though they aren’t insured by the government.
Non-conforming loans don’t fit these guidelines, usually because they’re too big. Non-conforming loans are also known as jumbo loans. In 2022, for most of the country, any mortgage over $647,200 is considered non-conforming.
3. Check if you’re eligible for any assistance programs
If you’re a first-time homebuyer, you should also make sure you’re using any available closing cost and down payment assistance programs. These programs can literally save you thousands of dollars on a home purchase.
What programs are available varies depending on where you’re purchasing a home and even what lender you choose. Many lenders participate in down payment programs, but no one lender offers all of them, says Sean Moss, senior vice president at Down Payment Resource, an online aggregator of homebuyer assistance programs. So you’ll have a better idea of what opportunities are available by talking to a couple of different lenders.
Certain lenders may even have specific mortgage products or promotions targeting first-time buyers. So be sure to take the potential for upfront cash assistance into consideration when choosing a lender.
4. Consider the individual, not just the lender
When you’re looking for a lender, don’t focus solely on the company itself. With loans, you’re only as good as the person you’re working with, Beeston says. So a large bank may have good reviews, but if the loan officer is inexperienced, you’ll have a much different experience than if you worked with someone who has been helping homebuyers for 15 years.
The individual mortgage professional you’re working with can have just as much of an impact on your experience, if not more, than the lending institution.
Trust and experience should factor highly into your decision about a mortgage professional. If you aren’t sure where to start looking for a loan officer, ask around for recommendations from friends, family, and other financial professionals. Your accountant, financial planner, or real estate agent might be able to recommend knowledgeable and trustworthy loan originators.
