How to Choose a Mortgage Lender

Finding the best mortgage lender may make the difference between a high rate or low rate, a loan approval or denial or a smooth loan process versus a nightmare of never-ending documentation requests. Learning how to find the best mortgage lender could save you time, and money and make your homebuying or refinance experience less stressful.

How to get the best mortgage loan in 5 steps

Getting a mortgage preapproval or refinance loan requires a detailed look at how well you’ve made money decisions throughout your financial life. Although mortgage companies typically follow the same basic lending rules, they may offer different products and processes. This is important to know if you’re wondering how to find the best mortgage lender for your situation.

1. Learn what mortgage lenders look for

Lenders are focused on four things when you apply for a loan: your credit scores, your monthly debt, your monthly income and how much money you’ve saved.

The higher the credit score, the better.

Shoot for a score of 740 or higher if you want the lowest interest rates and easiest path to loan approval. However, bad credit mortgages are available if you have scores as low as 500.

Less debt means less mortgage approval hassle.

Your lender divides your monthly debt (including your new mortgage payment) by your before-tax paycheck to determine your debt-to-income (DTI) ratio. The benchmark for mortgage lending is 43% — but you may be approved with a higher ratio if you have high credit scores and extra savings.

Steady income for two years is the gold standard.

Salaried and full-time hourly income for at least 24 months will make your approval easier. If you’re self-employed or receive variable commission income, keep your tax returns and accountant’s number nearby — you’re likely to need both to get a green light on your mortgage application.

Higher down payments and extra savings help strengthen your application.

Although you don’t need 20% saved up, a higher down payment equals a lower monthly payment, and in some cases a better interest rate. If you’ve got a rocky credit past, extra savings called “mortgage cash reserves” may turn an iffy application into a thumbs-up approval.

2. Choose the type of mortgage you need

Choosing a mortgage lender is about more than just getting the lowest rate, it’s also about getting the right type of mortgage. Not all lenders offer the same mortgage programs, and others specialize in specific mortgage loan types, making it even more important for you to know which type of mortgage you need.

• Conventional loans. Fannie Mae and Freddie Mac set the rules for conventional conforming loans with down payments as low as 3%. You can skip the cost of private mortgage insurance (PMI) if you have a 20% down payment (PMI covers lenders’ costs if you default).
• FHA loans. If you’re willing to pay expensive FHA mortgage insurance, lenders approved by the Federal Housing Administration (FHA) may approve you with scores as low as 500 (compared to a minimum 620 for conventional loans).
• VA loans. Eligible military borrowers may qualify for no-down payment mortgages guaranteed by the U.S. Department of Veterans Affairs (VA). An added perk: The VA cash-out refinance is the only standard mortgage program that allows you to borrow 90% of your home’s value to pocket extra funds from your home’s equity (most programs cap you at 80%).
• USDA loans. If a country home is your dream, but your earnings and savings are low, a loan backed by the U.S. Department of Agriculture (USDA) may be a good fit. No down payment is required, but there are strict income and location limits.
• Jumbo loans. Designed to meet the needs of consumers that need a loan amount above conforming loan limits, jumbo loans may be your only option if you’re buying or refinancing in a very expensive housing market.

3. Gather the required documents

Although there are online lenders that may be able to electronically verify your income, credit and assets, you’ll typically need at least a month’s worth of paystubs, two years’ worth of W-2s and two months’ worth of bank statements.

If you have a major credit issue like a foreclosure or bankruptcy in your past, big cash deposits in your checking or savings account or gaps in your job history, you’ll need to write letters of explanation to give the lender extra assurance that you can afford your mortgage payment. If you’re refinancing, you’ll also need information found on your current mortgage statement.

4. Shop around to find a lender

A recent LendingTree study found that shopping around for a mortgage saved borrowers in the country’s largest metros an average of $63,151 over the term of their loans. Finding the best mortgage company for your needs requires you to know the right steps to follow when you start your mortgage lender search.

Do all your loan shopping on the same day.

Mortgage rates change daily, which means you should gather all your loan estimates on the same day. If you don’t, you may end up shelling out thousands in extra interest charges because you didn’t get the lowest rate.

Make sure you’re comparing the same loan product.

The lowest rate may not be the best choice, especially if it’s only low temporarily (such as a 5/1 ARM is an example) or requires you to make a higher payment for a shorter term loan (like a 15-year fixed loan).

Ask if the quote includes mortgage points.

A low rate may not seem like such a great deal if you have to pay thousands of dollars worth of “mortgage points” to get it. Check the APR on each rate quote — short for “annual percentage rate,” this number gives you a rough idea of how much you’ll pay in costs over the life of your loan. The higher the APR, typically the higher the costs you’ll pay.

5. Choose the best lender for you

The best way to find a mortgage lender is to gather quotes from a number of different types of lenders including mortgage banks, mortgage brokers and your local bank. Be sure to ask them about special deals like lender credits for first-time homebuyers or repeat customer discounts if you’re refinancing.

Mortgage banks

Also called a mortgage lender, a mortgage bank is a financial institution with direct access to funds for your mortgage. The entire mortgage process is usually handled by the lender’s employees, including processing, underwriting and funding of your loan.

Many mortgage banks are approved to offer down payment assistance, or specialized non-qualifying mortgage (non-QM) programs for borrowers that don’t fit into standard loan program requirements.

Mortgage brokers

A mortgage broker works with a number of different banks to find the best match for your finances. They don’t actually lend you the money, and the loan process is usually handled by the company the broker sends your application to.

Because they do business with so many different mortgage lenders, they may be a good choice if you have some challenges with your income or credit and need several lenders to choose from to get a preapproval.

Retail banks

National lenders, local lenders and credit unions may offer mortgages at their branches. You may be able to get your mortgage at the same place you have your checking or savings account. In addition, your bank may offer special closing cost discounts if you pay your mortgage with your bank checking account.

Your local bank may also offer you special mortgage rates if you have large sums of money invested or on deposit in a savings account. One caveat: Banks tend to set more stringent guidelines for approval, so if you don’t have cookie-cutter income or credit, you may want to opt for a mortgage bank or broker.

Where to get a mortgage

Use the comparison table below for a side-by-side glance that will give you a better idea of how to choose the best mortgage lender.