So, you’re buying a home and you need a mortgage. Congrats! But how do you choose the right lender who will offer the best deal and great customer service on the largest purchase of your life?
You’ll find no shortage of banks, online lenders, mortgage brokers and other players eager to take your loan application. Here are six steps for choosing the best mortgage lender from a crowded playing field.
How to find the best mortgage lender:
- Step 1. Strengthen your credit
- Step 2. Narrow your budget
- Step 3. Know your options
- Step 4. Compare several lenders
- Step 5. Get preapproved
- Step 6. Read the fine print
Learn more about Bankrate’s picks for the best mortgage lenders.
Long before you start applying for mortgages, give your finances a checkup – and fix them, if needed. This means pulling your credit score and credit reports. (Bankrate offers both for free.)
Once every 12 months, you’re entitled to a free credit report from each of the three main reporting bureaus – Experian, Equifax and TransUnion – by visiting AnnualCreditReport.com. If you have a lower-than-expected credit score, look through your credit reports for errors, late payments, delinquent accounts in collections and high balances.
Paying down each of your credit card balances below 30 percent of the available credit line and making on-time payments are the best ways to improve your score, says Jason Bates, director of sales, purchase division, at American Financing, a national mortgage lender based in Aurora, Colorado.
In addition to solid credit, lenders want to see that you can handle your existing debt along with a new mortgage payment, so they’ll look at your debt-to-income ratio. This formula adds all your monthly debts and divides it by your gross monthly income to get a percentage.
Many lenders require a debt-to-income ratio below 43 percent, though some loan programs now allow a maximum ratio up to 50 percent. To keep your DTI ratio manageable, avoid taking on new loans or making large purchases on credit cards for at least three months (or more) before applying for a mortgage.
Sure, you want to find the right mortgage, but you’ll need a good handle on how much you can afford, too. Even if you qualify for a given loan amount, it’s wiser to zero in on the monthly payment you can comfortably afford.
Lenders preapprove you based on your gross income, outstanding loans and revolving debt, Bates says. However, they don’t look at other monthly bills, such as utilities, gas, day care, insurance or groceries, in their calculations.
To get a more accurate idea of what you can afford, factor in these monthly bills, along with other financial goals such as saving for emergencies, retirement and college. Look at your monthly net income (after all bills and living expenses are met) to calculate how much you should spend on a mortgage payment. Otherwise, you risk becoming house-poor.
“Make a line-item budget for all your monthly expenses, and be conservative about the monthly mortgage payment,” says Bates, who adds that this is especially true for first-time homebuyers who may not get their ideal home right away.
A key aspect of finding the best mortgage lender is being able to speak their language. This includes knowing the different types of mortgages and lenders. Some upfront research also helps you separate mortgage facts from fiction.
“Traditionally, when it comes to getting a mortgage, a lot of peoples’ first thoughts are to go to a bank or that they need a 20 percent down payment to afford a home,” says Mat Ishbia, president and CEO of United Wholesale Mortgage. “That’s an outdated way of thinking.”
Many lenders offer conventional loans with as little as 3 percent down, and some government-insured loans require no down payment while others require just 3.5 percent down. Keep in mind that if you put down less than 20 percent, many lenders charge higher interest rates and require mortgage insurance.
Doing your homework on the basics of mortgage lending early on can set you up for success. It also helps you get better acquainted with the different types of mortgage lenders out there. Here’s a quick overview of the main ones:
Mortgage lenders: These are companies that lend money to a borrower to purchase a home and set the terms of the mortgage, including interest rates, term, conditions, repayment schedule and lending fees.
Mortgage brokers: Brokers are independent, licensed professionals who act as matchmakers between lenders and a borrower to find loans that best suits the borrower’s needs. Brokers are paid by either the borrower or the lender (but not both) and charge a small percentage of the loan amount (1 to 2 percent) for their services. They do not fund loans, and they don’t set interest rates or loan origination fees, or make lending decisions.
Retail lenders: Retail lenders (also called direct lenders) sell their own mortgage products directly to clients, without a middleman. Retail lenders do this in person, by phone or online, and offer their companies’ loan products only.
Correspondent lenders: These lenders originate and fund their own loans but quickly sell them to larger lending institutions on the secondary mortgage market after the loan closes.
Wholesale lenders: Unlike retail lenders, wholesale lenders never interact with borrowers. They usually work with mortgage brokers and other third parties to offer their loan products at discounted rates, and rely on brokers to help borrowers apply for a mortgage and work through the approval process.
Portfolio lenders: These lenders originate and fund loans from their clients’ bank deposits so they can hold on to the loans and not resell them after closing. Typically, portfolio lenders include community banks, credit unions and savings and loans institutions.
Hard-money lenders: Hard-money lenders are private investors (an individual or group) who provide short-term loans secured by real estate. While traditional lenders look closely at your financial ability repay a mortgage, hard-money lenders are more concerned with the property’s value to protect their investment. Hard-money lenders require repayment in a short time frame, usually one to five years. They also charge steeper loan origination fees, closing costs and interest rates, as much as 10 percentage points higher than conventional loans.
Settling on the first lender you talk to isn’t the best idea. In fact, you want to rate-shop with lenders of different kinds – banks, credit unions, online lenders and local independents – to ensure you’re getting the best deal on rates, fees and terms. You’re also more likely to find a lender that communicates the way you prefer, whether it’s online, via text or in person.
Why should you shop around? Simply put: You’ll leave money on the table, according to research from Freddie Mac. In fact, borrowers could save an average of $1,500 over the life of their loan by getting at least one additional rate quote, and an average of $3,000 by getting five quotes, Freddie Mac found. However, nearly half of all homebuyers do not rate-shop during their mortgage search.
You can compare mortgage rates and lenders on Bankrate.com.
Another option to consider: working with a mortgage broker. A mortgage broker can do the legwork for you by evaluating your mortgage application and then gathering quotes from multiple lenders who closely match your needs. See how the loan offers from a broker compare against those you find on your own. Look at differences in rates, fees, points, mortgage insurance and down payments — and compare what your bottom-line costs will be.
Applying for a mortgage preapproval with three or four different lenders, or having a mortgage broker do this legwork for you, gives you an apples-to-apples comparison on loan offers. It’s really the only way to get accurate loan pricing because lenders do a thorough review of your credit and finances.
Lenders may have different documentation requirements for preapproval. Generally, you’ll need to provide several details, such as:
- Driver’s license or other government photo ID.
- Social Security numbers for all borrowers (to pull credit).
- Residential address history, as well as names and contact information for landlords in the past two years.
- Pay stubs from the past 30 days.
- Two years of federal tax returns, 1099s and W-2s.
- Printouts of bank statements for all accounts for the past 60 days.
- List of all financial accounts (checking, savings, brokerage accounts, 401(k) and other retirement savings plans).
- List of all revolving and fixed debt payments, including credit cards, personal and auto loans, student loans, alimony or child support.
- Employment and income history, along with contact information for your current employer.
- Down payment information, including the amount, source of the funds and gift letters if you’re receiving help from a relative or friend.
- Information on any recent liens or legal judgments against you or other borrowers such as IRS actions, bankruptcy, collections accounts or lawsuits.
Be careful: a mortgage preapproval doesn’t mean you’re in the clear. Lenders can re-check your credit, employment and income histories and your assets at any time during the process. If you take out a new car loan, for example, that changes your financial picture and can derail your entire loan.
Ishbia says borrowers should “hold tight” after preapproval and avoid taking out new credit, moving around money in your bank accounts and changing jobs before – and during – the buying process.
We get it: Mortgage documents make your eyes glaze over. But if you don’t read them closely and there are any errors or surprises, you could feel buyer’s remorse later. The Consumer Financial Protection Bureau created a thorough explainer on the loan estimate form lenders are required to give you within three days of receiving your mortgage application.
Pay close attention to your interest rate, monthly payments, lender and loan processing fees, closing costs and the down payment amount. These items shouldn’t change dramatically from preapproval to closing if your credit and financial profile stay the same.
Lenders sometimes offer credits to help lower the amount of cash due at closing. Beware, though: These credits often come with higher interest rates, which means you’ll pay more in interest over the life of the loan.
As you compare loan estimates from different lenders, you’ll see a slew of third-party costs, such as lender’s title insurance, title search fees, appraisal fees, recording fees, transfer taxes and other administrative costs. You can negotiate some of these closing costs, but know that lenders don’t set the fees for third-party services.
Always ask questions if you don’t understand certain fees or you spot errors in the paperwork (such as a misspelled name or a wrong bank account). Getting ahead of any issues now can save you a lot of headaches (and money) later.