Buying a home is a long-term commitment. Since you’ll be working with your mortgage lender for years to come, putting in the work to find the best mortgage lender at the beginning of your search can pay off.
Though most of the mortgage process is the same with any lender, shopping around can help you spot the differences that could save you money, like chargeable fees and customer service expectations. Use this guide to help you find the best mortgage lender to meet your needs and budget.
Where can you get a mortgage?
There are multiple places you can get a mortgage these days. Although traditional banks are an option, they aren’t the only option available.
Correspondent lenders
Correspondent lenders work with you to originate and fund your loan through the initial process, but once your loan closes, they sell your mortgage on the secondary market to large lending institutions.
Direct lenders
Homebuyers looking for a mortgage are most familiar with direct lenders, which are lenders who supply mortgages directly to you, the borrower. This can include traditional banks, credit unions and exclusively online lenders. Direct lenders originate and fund the mortgage and may service them or outsource the servicing.
Hard money lenders
A hard money lender may sound scary, but it just means that you get a loan through a private investor. The investor can include an individual, investor group or licensed mortgage broker using their own money to fund the loan. They focus mainly on the property’s value and appreciation potential, which helps protect their investment, and less on your ability to pay the loan.
Mortgage brokers
If you want someone to do all the shopping for you, consider working with a mortgage broker. They don’t actually fund the loans, make decisions or set your interest rate or loan terms. Much like an independent insurance broker, a mortgage broker is a licensed professional who matches borrowers with lenders.
Portfolio lenders
Rather than sell your loan on the secondary market, a portfolio lender uses portfolio assets to fund the loan and holds onto it as the servicer. Since they are liable for the borrower’s default, they get to name their terms, which could include higher origination fees and interest rates for you. Credit unions, local banks and savings and loans banks are examples of portfolio lenders.
Wholesale lenders
Another option is wholesale lenders, who work directly with mortgage brokers and other loan providers, rather than directly with the borrower. However, although you might get a discounted rate with a wholesale lender, it may not be the best deal with a third-party involved, as they may tack on a fee for their services.
Improve your credit score
The better your credit score, the more lending options you have, with better rates and loan terms. Before you start your search for a mortgage lender, you need to know your credit score and review your credit history.
Understand your mortgage options
Just like there are multiple mortgage lender types, there are also multiple mortgage options available. The five main mortgage loan types are:
Compare rates and terms
Just like with home and auto insurance, it can pay off to compare rates and terms with different mortgage lenders. Since you could be paying a mortgage for up to 30 years, you could stand to save thousands by doing some comparison shopping.
Read the loan estimate fine print
Mortgage documents can be long, tedious and boring to read. But you don’t want to end up with buyer’s remorse because you didn’t read the loan estimate carefully. A loan estimate lists out the loan terms, which can vary widely. Comparing loan estimates from at least three lenders can help you find the best terms you’re eligible for.
Get a mortgage pre-approval
Once you’ve narrowed down your mortgage lender and type, the next step is getting a mortgage pre-approval. The lender will run your credit and review your finances to determine which interest rate and other terms you qualify for.
Frequently asked questions (FAQs)
How do I know if my mortgage lender is reputable?
There are several steps you can take to know if your mortgage lender is reputable. Do an online search for the lender to see how customers review the company and if there are any negative stories in the news about them. You can also search the lender by name on the Better Business Bureau (BBB) and Consumer Finance Protection Bureau (CFPB) websites. Contacting the Attorney General for your state is also an option to consider, as the AG has information about each company’s worthiness if they operate in your state.
What do you consider red flags on mortgage loan applications?
When reviewing mortgage loan applications, lenders review the information you include and supporting documentation you supply thoroughly before deciding to finance your loan. Lenders consider low credit scores, high debt-to-income ratios, last-minute large purchases and large deposits for which you can’t provide documentation red flags. The lender also usually wants to see the last two years of bonus and overtime income. If there are large fluctuations, it could put your pre-approval amount in jeopardy.
How accurate are mortgage pre-approvals?
Mortgage pre approvals are more accurate than prequalifications. A pre-approval requires more documentation, like pay stubs and bank statements, and a hard credit check. But even with a mortgage pre-approval, there’s no guarantee you’ll be approved when you find a home you want to put an offer on. The home needs to be approved, which means the lender has to verify the home’s condition, title history and appraisal value. If anything changes in your income or debt ratio during the time from pre-approval to finalizing the loan, your pre-approval conditions could change.