How to Choose a Mortgage Lender

How to Choose a Mortgage Lender

The right mortgage lender can make for an easier, more efficient homebuying process and it could even save you money on your interest rate, monthly payment and closing costs.

To choose your mortgage lender, follow these steps:

1. Consider Your Financial Situation

Understanding your financial profile is a critical first step as you prepare to choose a mortgage lender.

You'll need to consider the following factors:

• Your budget: Determine how much you can spend each month on your home. One popular guideline recommends keeping your housing costs at or below 28% of your gross monthly income. This 28% would include your mortgage payment, insurance, property taxes and any homeowners association fees.
• Your credit: Depending on what type of mortgage you choose, you'll need a minimum credit score of at least 500 to 700. A higher credit score, though, can qualify you for a lower interest rate and better loan terms. You can check your FICO^® Score^☉ with Experian for free to gauge where you stand.
• Your debts: Lenders consider your debt-to-income ratio (DTI) when you apply for a mortgage. This is a formula that reflects how much of your income goes toward your monthly debt payments—including your mortgage. Most lenders prefer a DTI under 36%, though some may allow up to 50% or more, depending on loan type.
• Your savings: You'll typically need a down payment of at least 3% for conventional loans and 3.5% for Federal Housing Administration (FHA) loans, the two most popular types of mortgages in 2023, according to data from the Consumer Financial Protection Bureau (CFPB). You can also expect to owe closing costs—a mixture of lender fees, third-party fees and prepayments—when finalizing your sale. These typically cost 2% to 5% of the sale price.

Learn more: How Much Should I Save for a Down Payment?

2. Decide on a Mortgage Type

Before you can choose which lender is best for your home mortgage, you'll need to decide what type of mortgage you want to use. There are several types of mortgage loans you can use to finance a house, each with different requirements. Not every lender offers every loan type.

Here's a look at three common mortgage types you can choose from.

Government-Backed Loans

Government-backed mortgages tend to have looser qualifying requirements than other popular mortgage types because they are insured by the federal government and thus carry less risk for the lender. They can be good options if you have a low credit score or down payment or would otherwise have trouble qualifying for a different loan program.

Government-insured mortgage loan options include:

• FHA loans: These require a 3.5% down payment with a 580 credit score or higher, or a 10% down payment with a credit score of 500 to 579. FHA loans are guaranteed by the Federal Housing Administration and tend to be good options for first-time homebuyers.
• USDA loans: These loans are insured by the U.S. Department of Agriculture. They can only be used in eligible rural and suburban parts of the country, and they come with income limits, which are based on local median incomes. USDA loans require no down payment, and you'll usually need at least a 640 credit score.
• VA loans: These mortgages are backed by the U.S. Department of Veterans Affairs and are for buyers who are military members, veterans or surviving spouses. VA loans also require no down payment, and lenders tend to have looser credit score requirements than on conventional mortgages.

Only approved lenders can issue VA loans. If you need to find one in your area, contact the VA Regional Loan Center near you.

Conventional Loans

Conventional loans are mortgages that are not insured by any governmental agency. They are issued by private lenders, and they are the most popular type of mortgage loan, accounting for about 77% of all mortgage loans originated in 2023.

There are two types of conventional loans: conforming and non-conforming.

Conforming loans require a down payment of at least 3%, a minimum FICO^® Score of 620 to 660 and a maximum DTI of 45% to 50%. Standards for these loans are set by Fannie Mae and Freddie Mac, which guarantee the bulk of mortgages across the U.S.

Non-conforming loans, such as jumbo and portfolio mortgages, do not meet the requirements set by Fannie Mae or Freddie Mac and may come with higher interest rates than conforming mortgages. They may allow for higher loan amounts or cater to borrowers with lower credit scores or those who are self-employed.

Jumbo Loans

Jumbo loans are non-conforming mortgages that offer higher loan amounts than Fannie Mae and Freddie Mac standards allow for. As these tend to be riskier loans for lenders, you will usually need a higher credit score—700 to 720, in many cases—and a larger down payment to qualify for a jumbo loan.

Other Loans

There are mortgage options beyond these three categories too. Some additional mortgage types you might consider include:

• Construction loans: These help you finance the costs of buying land and building a new home on top of it. They cover labor, materials, permits and other fees.
• Professional loans: Some lenders offer mortgages for specific types of professionals, including attorneys, doctors or other high earners.
• Piggyback mortgages: Piggyback loans help you make up for a smaller down payment. For example, you could put a 10% down payment on your home and use a piggyback mortgage to provide another 10%, giving you 20% total. This would allow you to avoid private mortgage insurance (PMI) requirements on conventional loans.
• Non-qualified loans: These mortgages can help you get a loan if your income is hard to document, you're self-employed or you have debt or credit issues. They may be more expensive than other loan options.

Learn more: What Type of Mortgage Loan Is Best?

3. Compare Rates and Terms

Deciding on your interest rate type and loan term are next. On interest rates, you have two choices:

• Fixed interest rates: Fixed-rate mortgages have the same interest rate for the entire loan term. These are a good option if you plan to stay in your home a long time and would like a consistent monthly payment.
• Adjustable interest rates: Adjustable-rate mortgages (ARMs) have rates that fluctuate. You will typically start with a lower initial rate than a fixed-rate loan would offer, but the rate can rise or fall after that. ARMs are best if you plan to move or refinance before your rate can adjust.

As for terms, you'll usually have several options. For example, a fixed-rate loan may come in a 15- or 30-year term. A 15-year term typically comes with a higher payment but allows you to pay off your loan faster and with lower interest costs. A 30-year term, on the other hand, offers a more affordable monthly payment but will cost you more over time.

ARM terms work differently. With these, you will choose two terms: The length of your initial fixed-rate period—or how long your introductory interest rate lasts—and your adjustment period, meaning how often your interest rate changes after that point. A 5/1 ARM, for instance, has a set interest rate for five years, and then the rate changes once a year after that. A 7/6 ARM has a fixed rate for the first seven years, and then adjusts every six months.

Mortgage calculator

4. Get Preapproved

Once you've determined the above details, you can create a shortlist of lenders who offer the loans, terms and rates you're looking for, and then apply for preapproval with a few of them. Borrowers who get at least four quotes can save as much $1,200 annually, according to Freddie Mac.

To get preapproved, you will need to fill out an application and provide information about your identity, income, debts and assets. You will also need to submit documentation.

Tip: The 2-2-2 rule can help in gathering your documentation. You'll typically need two years of W-2s, two years of tax returns and your two most recent pay stubs.

Lenders will also pull your credit when you apply to get preapproved. This results in a hard credit inquiry and can temporarily lower your credit score by a few points. To minimize the impact of applying with multiple lenders, apply for all your preapprovals within a short time period. Credit scoring models treat all inquiries for certain loan types—including mortgages—within 14 to 45 days (depending on the scoring model) as one single credit check.

Once you're done, you will receive a preapproval letter that details how much you can likely borrow, your interest rate, fees and closing costs, as well as a loan estimate, which you can use to compare each lender more carefully.

Learn more: How Long Does a Mortgage Preapproval Letter Last?

5. View Your Loan Estimates

A loan estimate is a standardized document that lenders must provide you within three days of receiving your application. You can use these to compare lenders and loan options in great detail—going line by line, fee by fee.

Some key details to pay attention to include:

• The total loan amount and interest rate they've quoted you
• The total monthly payment, which includes principal, interest, mortgage insurance and escrow costs
• If there is a prepayment penalty, which penalizes you if you pay off your loan too soon
• Estimated closing costs and cash to close, which details what you'll owe at closing
• Costs in five years, which shows you how much of your principal balance you will have paid off after five years of the loan term

Compare loan estimates carefully and note any differences you see. You may be able to negotiate with lenders, and showing a competitor's loan estimate can help.

Learn more: What Is Principal, Interest, Taxes and Insurance (PITI)?

What Are the Different Types of Mortgage Lenders?

Mortgage lenders come in several forms. They can be traditional brick-and-mortar banks, credit unions or online banks.

Banks

Many banks both large and small offer mortgage loans. Because banks work with a wide range of borrowers, they often offer multiple mortgage loan types, including conventional, government-backed, jumbo loans and more specialty loans. You may find that interest rates and fees at banks are higher than some other borrowing options.

Credit Unions

Member-owned credit unions also often offer mortgage loans, though your options may be limited to a few types of loans. For example, a credit union may offer conventional loans but not some government-backed loans. You will have to be a member of a credit union to apply for a mortgage, and they often have lower interest rates and fees than many brick-and-mortar banks.

Online Lenders

Mortgages are also available at a wide variety of online lenders. Because they often don't have the overhead that many banks and credit unions do, their interest rates and fees may be among the lowest. However, some online lenders may specialize in specific loan types, such as loans for borrowers with bad credit, so it may take some searching to find the right fit.

Tip: A mortgage broker is a middleman who helps connect borrowers with the right lender and loan program, usually at no cost to the borrower. They're not tied to one financial institution, so they can help you find the best rate and terms for your situation. They can also help you through the loan process and assist with paperwork.

What to Look for in a Mortgage Lender

Depending on your loan term, you could be with your mortgage lender for a long time. Always consult several sources when comparing mortgage companies to ensure you choose the best one.

Read online reviews, discuss options with friends and family members, and get recommendations from your real estate agent and other industry professionals. You should also consider these factors:

• Interest rates and fees: Rates and fees can vary among lenders, so your costs can too. Pay specific attention to the annual percentage rate (APR) a lender offers. This reflects the total annual cost their offer comes with.
• Reputation: Make sure you're choosing a reliable lender. Check out online reviews and ratings, and check for issues noted on a lender's Better Business Bureau and Nationwide Mortgage Licensing System (NMLS) profiles too.
• Range of loan options: Not all lenders offer every loan option. If you're eyeing a specific type of loan, you may need to shop around to find a lender that has it.
• Customer service: Good customer service can go a long way in making the mortgage process easier for you, so consider how a lender and its representatives interact with you along the way.
• Speed and efficiency: Not all lenders go about the mortgage process the same. Some may require in-person applications or appointments, while others may allow you to complete the entire process online. Consider what works best for your goals.

As you shop for a mortgage loan, it's important to protect your credit. Experian's free credit monitoring can give you access to your Experian credit report and FICO^® Score and alert you in real time to any changes that could hurt your mortgage application.

Mortgage Lender Red Flags

Not all mortgage lenders are created equal, and you may encounter predatory lenders during your search. To make sure you choose a mortgage lender that's trustworthy and honest, watch for these red flags:

• Skipping the credit check: A good lender will always do a credit check before making you a loan offer, as it helps them gauge how you manage debts. Predatory lenders may skip this step and offer loans that could strain you financially.
• Pressure tactics: If a lender is pressuring you to act quickly or risk losing out on some valuable rate or deal, consider it a bad sign. It could mean they're trying to trap you into an agreement that's not in your best interests.
• No loan estimate: Lenders are required to send you a loan estimate within three days of your application date. If they don't, they may be trying to sneak in hidden fees or pricey late payment fees, application fees or other charges that can deplete your budget.
• Unusually high (or low) rates or fees: When you're comparing your loan estimates, look at how lenders measure up on rates and fees. If one is charging notably more or less than another, it could be a bad sign.

Learn more: Lender Red Flags to Look Out For

The Bottom Line

Choosing the right mortgage lender can help ensure a smooth and affordable mortgage process. Before you get started, check your credit report and FICO^® Score for free with Experian to get insights on what's helping and hurting your score the most. Then, try to take steps to improve your score as you search for the right lender and home to buy. Ultimately, this could help you get a lower mortgage rate.