From direct lenders and mortgage brokers to conventional banks and credit unions, consumers today have a wide range of options for how to choose a mortgage lender. Although the mortgage process itself doesn’t vary much across the board, each lender offers its own loan options, terms, fees and service.
Read on to learn about the different types of lending institutions and the best practices for choosing your ideal mortgage lender.
Steps for choosing a mortgage lender
1. Understand the different types of mortgage lenders
The type of lender you choose will determine the loan offers available to you, what you’ll pay for your loan and the kind of customer service you can expect to receive. It’s a good idea to comparison shop, so after you learn about the different types of lenders, you can use our list of the best mortgage lenders to find the best mortgage rates, fees and closing times before settling on a lender.
Direct lenders work directly with homeowners to originate and underwrite loan products with their own funds. Many retail lenders fall under this category, as they don't involve third parties or middlemen in the mortgage loan origination process.
The advantages of choosing a direct lender include more centralized communication, quicker application and approval turnaround time, and that these types of lenders either actually own the funds you are borrowing or borrow them elsewhere.
Examples: Bank of America, Chase Bank, Wells Fargo
Mortgage brokers are licensed professionals that work with clients to improve their chances of approval, seek out the best deals for them, and function as intermediaries between lenders and borrowers. These don't lend money directly and are usually paid after a loan is closed.
Because mortgage brokers have access to multiple lenders, they are a good choice for nontraditional borrowers — self-employed individuals, low-credit borrowers, non-W-2 borrowers — who may need more mortgage term options to find the best loan.
Nonbank mortgage lenders
Nonbank lenders don't take deposits or offer other banking services such as checking and service accounts. They, therefore, use lines of credit to fund mortgage loans and then sell those loans to investors.
This type of lender has grown substantially since the Great Recession as they have been exempt from some of the new regulations levied on the traditional mortgage lending industry. Advantages of nonbank mortgage lenders include faster loan approvals, more flexible rates, and greater convenience.
Examples: Quicken Mortgage, Caliber Home Loans, loanDepot, Reali Loans
Mortgage marketplaces are similar to mortgage brokers. They don't lend money directly to borrowers, working instead to find the best deals and ensure their users’ information is well documented. Mortgage marketplaces feature dozens or even hundreds of potential lenders who advertise their home loan products online.
Users can use these marketplaces to aggregate mortgage products, compare rates, find estimates and contact lenders — making it useful for those still shopping for a good deal.
Examples: LendingTree, Credible, eMortgage
2. Decide what type of mortgage you need
Another critical step in the home buying process is determining which type of loan is best for you. There are many different types of mortgage loans to choose from, and each loan has its requirements, advantages, and disadvantages.
To help you find the best choice for you, here are the most common mortgage loans:
Conventional mortgages (fixed & adjustable rate)
Conventional mortgages are the most common type of home loan. They're originated and serviced by private lenders, such as banks and credit unions, and have fewer restrictions but stricter credit score and debt-to-income ratio requirements than government-issued loans. To qualify, borrowers generally need a minimum credit score of 620 and must provide at least a 3% down payment.
Conventional loans come in fixed and adjustable varieties. With a fixed-rate mortgage, your APR will not change for the life of the loan — typically a 10-to-30-year term length — so your payments will remain the same unless you refinance. An adjustable-rate mortgage adjusts its APR according to market rates once a year, which means your payments may be unpredictable.
Government-backed mortgages refer to the mortgage programs insured by three federal agencies: FHA, VA, and USDA loans. These loans offer borrowers unique benefits compared to conventional home loans, such as lower interest rates and liberal requirements. However, you must meet specific criteria to qualify.
FHA loans are insured by the Federal Housing Administration, and borrowers with credit scores as low as 500 can apply. FHA loans feature minimum down payments of 3.5% but have a maximum loan limit that varies by region.
VA loans are insured by the Department of Veterans Affairs, are only available to certain borrowers, and ask for a one-time charge known as a funding fee. VA loans also require a down payment or private mortgage insurance.
USDA loans are insured by the United States Department of Agriculture, don’t require a down payment, and feature some of the lowest interest rates. USDA loans are only available to low-income borrowers looking for homes outside urban areas.
Jumbo loans are known as non-conforming loans, meaning they exceed the underwriting limits of Fannie Mae and Freddie Mac, the two government agencies in charge of supporting the U.S home finance system. With this type of loan, borrowers can get loans above the conforming loan limits for one-unit properties of $647,200 in most parts of the country and $970,800 in high-cost areas. Special provisions apply to Alaska, Guam, Hawaii and the U.S. Virgin Islands, where the baseline loan limit is $970,800.
Jumbo loans are more challenging to qualify for than conforming loans: you’ll need a high credit score, large down payment, and low DTI to be considered.
If you’re a homeowner and at least 62 years old, you may qualify for a reverse mortgage. This type of home equity loan taps into your home value by borrowing against it, and grants you funds as either a lump sum, fixed monthly payment, or line of credit. The loan becomes due only when a borrower passes away, moves away permanently, or sells the home, at which point they, their spouse, or estate must repay it.
3. Compare mortgage lender rates
Shopping around to compare offers from multiple lenders could save you thousands of dollars in the long term. Request quotes from at least three lenders so that you have a range of options to choose from, and use our mortgage calculator to get an idea of how much you can expect to pay for a mortgage.
While you shop for lenders, pay attention to:
- Fees (origination fees are usually 0.5% of the amount you’re borrowing)
- Interest rates (check the current mortgage rates here)
- Monthly payments
- Private mortgage insurance monthly payment and taxes
- Down payment requirements and other upfront costs (if applicable)
- Closing costs
- Loan office experience
Consider contacting your current bank or credit union when requesting a quote. Many financial institutions offer special deals for existing customers, or potential borrowers referred to them by friends and family. If you can’t find a good offer on your own, think about contacting a mortgage broker or loan officer who can help you find other offers.
4. Ask questions
A home will quite likely be the biggest purchase of your life. Before filling out the loan application, borrowers should ask plenty of questions to ensure they're making the right decision. For example, you could ask your lender:
- Which type of mortgage is best for me?
- How much are the closing costs?
- Are down payment assistance programs available?
- What fees will be included in my loan? What fees will be due at closing?
- How do you communicate with homebuyers?
5. Check your credit score
Your credit score is one of the most important factors lenders will consider when you take out a mortgage. The higher your score, the greater your chances of securing a loan. Lenders will also offer lower interest rates to borrowers with good credit — you’ll have the power to negotiate for a better deal if your credit score is high.
Consider your credit score limitations when choosing a mortgage lender. If your score is less than stellar, you may not be able to do business with every single lender and may not qualify for certain types of mortgage. It might help to contact some credit repair companies for help if your credit score severely impacts your homebuying capabilities.
6. Get preapproved
Getting preapproved before applying for a mortgage is essential because it shows that you're a serious buyer and not just window shopping. Many sellers won’t even consider a buyer unless they have proof of mortgage pre-approval.
To get preapproved, you’ll need to contact a mortgage lending institution and ask for a document known as a letter of pre-approval. Based on this information, the lender will evaluate your financial history, estimate how much you can afford, and pre-approve you for a certain amount if you qualify for a mortgage. This entire process can take from as little as one day to over a week, and the letter of pre-approval will be valid for 30, 60, or 90 days, depending on the lender.
You should have the following documentation on-hand before requesting pre-approval:
- Personal identification (driver’s license, passport, U.S. alien registration card)
- Social Security number and card
- Recent pay stubs, bank statements, and W-2 forms
- Investment account statements (e.g., 401(k), IRAs, stocks, mutual funds)
- List of monthly debts, including student loans, auto loans and credit cards (to find out your DTI ratio, use our debt-to-income calculator)
- Rental information
Where can you get a mortgage?
Consumers can get a mortgage from several different types of lenders. Two of the most commonly sought out lenders are banks and credit unions, also known as retail lenders. These provide mortgages directly to consumers and feature other financial products, such as banking accounts and other loan types.
Banks generally offer the largest variety of loan programs and have entire teams dedicated to processing mortgages. First-time homebuyers with long-standing relationships with their bank may enjoy certain benefits, like better interest rates or more affordable closing costs.
It’s important to consider the scale of the institution when getting a mortgage with a bank. Big banks can provide greater convenience for their customers and feature a broader range of financial products and services. However, smaller banks offer a more personalized customer experience while generally having more competitive rates and fees.
Like banks, credit unions can process various types of mortgages and offer other financial products. However, unlike banks, you have to become a member to do business with them. Credit unions are the closest to an old-fashioned small bank, with lower closing costs and interest rates, quicker turnaround times, and better customer treatment overall.
How to Choose a Mortgage Lender FAQ
What credit score do mortgage lenders use?
The two most common credit scores that mortgage lenders use to evaluate borrowers are the FICO® Score and the VantageScore®. The former is calculated by the Fair Isaac Corporation, whereas the latter was jointly developed by the three major credit report bureaus.
There are different versions of the credit scores for both models, and some lenders may use both to get a fuller picture of your lending ability.
What is a mortgage lender?
What do mortgage lenders look for?
How to shop for a mortgage lender?
The best way to shop for a mortgage lender is to prepare beforehand by checking your credit score and gathering the necessary documentation. After getting preapproved, you should read about the types of mortgages and mortgage lenders available to you and, finally, ask potential lenders any questions you may have.
Follow our recommended steps above to increase your chances of finding the right lender for you.