How to Choose a Mortgage Lender: 4 Steps to Follow

Knowing how to choose a mortgage lender that can translate your financial situation into the right loan option can make the home-buying process go more smoothly for you. The right mortgage lender can also potentially save you thousands of dollars at closing—and throughout the life of your loan.

Plus, if you can find a good mortgage lender, they can become someone you’ll likely work with long after your actual home purchase, whether that’s for a refinance, home equity loan, or buying your next home.  

What to prepare before you choose a mortgage lender

Before jumping headfirst into your mortgage lender search, you need a clear understanding of what you’re looking for with a loan. Do some research and information gathering on the following before you start meeting with lenders: 

• Credit score: Your credit score is one of the key factors that lenders use to determine your loan eligibility. Check your score, and request free copies of your credit report from AnnualCreditReport.com to spot errors that might be dragging down your score.[1]
• Budget: Assess your finances to determine your home-buying budget. Decide on a down payment that’s manageable and how much you can realistically afford as a monthly mortgage payment. Most financial professionals recommend keeping your mortgage payment between 25% to 28% of your gross monthly income, although lenders will often approve you for a mortgage with a higher payment than that so don’t take that as a sign you can afford it.[2]
• Loan type: A conventional loan is a common home loan option among lenders, but it’s not the only loan type available. For example, jumbo loans, Veterans Affairs (VA) home loans, Federal Housing Administration (FHA) loans, or niche options like physician mortgage loans.
• Loan term: Common home loan terms have 15-, 20-, or 30-year repayment periods. A longer term means smaller monthly payments, but more interest charges over time. You can calculate your principal and interest to get a ballpark idea of what term is right for you.  
• Rate type:  Mortgage loans can have fixed, adjustable, or hybrid rates. A fixed rate never changes during your loan repayment term, but an adjustable-rate mortgage can fluctuate. 

How to choose a mortgage lender in 4 steps

After getting a sense of what personal financial stats you’re working with and the type of loan you’re leaning toward, here’s how to find the right mortgage lender.

If you’re a first-time homebuyer, you might not have a specific lender in mind for your home purchase. Real estate agents commonly refer their preferred lender to clients if you don’t have someone specific in mind. It’s a helpful start, but it shouldn’t be where your search ends. Shopping around with a handful of lenders can help you find the most competitive mortgage rate and financing terms for your situation.

Here’s how to choose a mortgage lender that’s right for you.

Step 1: Research different types of mortgage lenders.

Mortgage loans are available through a variety of sources, like banks, credit unions, online lenders, and mortgage brokers. Regardless of which one you choose, there are pros and cons to consider with each:

• Banks and credit unions: Your existing bank or credit union can be a potential mortgage lender. Some banks and credit unions offer competitive rates for customers. Plus, you’re already familiar with their level of service and likely have access to nearby branches for in-person support. However, generally, banks or credit unions can have rigid borrower qualifications.   
• Online lenders: Online mortgage lenders are a convenient and fast option. Applications and all communication are handled digitally, and mortgage rates are typically competitive since these companies have less overhead. The downside is the experience can be impersonal—especially if you have nuanced questions—and typically there’s no access to face-to-face loan officer support.
• Mortgage brokers: Brokers are the middlemen of mortgage financing. They have access to multiple lenders and a variety of mortgage products. They also facilitate any necessary steps for loan approval. In exchange for this convenience, mortgage brokers typically earn a commission paid by the lender, the borrower, or both. Sometimes this appears as an origination fee or is built into the interest rate.[3] The benefits of going with a mortgage broker is you can shop multiple rates and lenders through them, making it easier to find the best mortgage lender for you.

Step 2: Read lender reviews from multiple sources and ask for personal recommendations.

Whether you deal with a brick-and-mortar lender, online institution, or a broker, do your research. Check independent online reviews on third-party websites and read what past customers have reported to the Better Business Bureau. 

Also, see if the lender has had any regulatory complaints filed against them. Illegal discrimination complaints are filed through the Department of Housing and Urban Development, and deceptive mortgage practices and scams are reported to the Federal Trade Commission. For general complaints regarding the mortgage lender’s services, check the Consumer Financial Protection Bureau.[4]

Step 3: Get pre-qualified and/or pre-approved with your top lenders.

After narrowing down your list of lenders, the next step is getting prequalified with multiple mortgage lenders. A prequalification lets you know the loan type and amount you might be approved for if you applied for a mortgage loan. This assessment is based on your unverified, self-reported information. It involves a soft credit check so it won’t hurt your credit. 

Note that you might see the phrases “mortgage prequalification” and “mortgage preapproval” used interchangeably, but they’re different steps along the mortgage loan process. 

A “preapproval” is based on your verified financial information, and requires a hard inquiry into your credit history.[5] Hard credit checks for mortgage preapprovals can temporarily lower your credit score. To minimize adverse effects, inquiries within a 45-day shopping window are reflected on your credit report as one inquiry.[6] So, be sure to meet with all your top lenders within the 45-day shopping window if you plan on getting preapprovals from all of them..

Depending on your readiness to buy a home, you might be able to skip prequalification and go straight to preapproval. A preapproval letter includes details about the lender’s tentative financing offer based on certain criteria. Again, it’s crucial to get a handful of preapprovals since each lender has its own underwriting requirements, rates, and fees. You’ll want to compare them thoroughly before you make your decision.

Each preapproval letter outlines a more realistic estimate of what you might expect if you moved forward with a loan application. It has details like the following:

• Property assumptions
• Maximum home purchase price
• Loan amount
• Loan term
• Interest rate

In addition to helping you find the best mortgage loan offer, these stages give you a better feel about how responsive and transparent each lender is. You’ll have to work with them closely during the weeks you’re closing on a house and will likely have to handle some unexpected curveballs, so you’ll want to make sure they’re easy to work with and proactive.

Step 4: Ask your mortgage lender the right questions.

Before moving forward with any mortgage lender, ensure that they’ve answered all of your questions thoroughly and clearly. Here are some important questions to ask your mortgage lender: 

• What type of loan products would fit my needs?
• What type of interest rates are available to me?
• Do I qualify for any homebuyer assistance programs?
• What upfront fees or closing costs can I expect?
• Which fees are negotiable or can be waived?
• Is a rate-lock available?Iif so, for how long and is there a cost?
• What happens if rates go down after my rate is locked in, but before I submit an application?
• Are there prepayment penalties? 
• What’s your typical loan processing time?
• How will I be informed of my loan status?

Bottom line: Doing your research pays off when choosing a mortgage lender

Choosing the right mortgage lender takes effort, but it can save you thousands and make your home-buying experience far smoother. By researching your options, comparing offers, and asking the right questions, you’ll be better prepared to find financing that fits your budget and long-term goals. For more guidance on navigating the process, check out our complete home-buying checklist. 

Having a savvy agent on your team is crucial. Clever Real Estate agents offer expert guidance from start to finish so you can feel confident about buying your next home. Connect with a Clever agent today.