How to choose a mortgage lender 2023

Decide which type of lender you want

The first step to taking out a mortgage is deciding what kind of lender you want to work with. If you already have a local bank or credit union you like, this could be a great place to start if you want a more personal relationship. However, you should also consider online lenders or brokers that can offer more advanced digital features.

“Pretty much everybody has a mobile app these days,” said Jennifer Ashley, a former mortgage loan officer and mortgage analyst for ConsumerAffairs. But she adds that some homebuyers may choose to work with a bigger mortgage company or bank for 24/7 support, the ability to upload documents and other online features.

Here’s a quick breakdown of different places to turn to when comparing mortgages:

• Mortgage banks are banks that offer a variety of mortgage types, including conforming home loans, which adhere to guidelines set by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency; loans backed by government entities like the Federal Housing Administration (FHA loans) or the Department of Veterans Affairs (VA loans); and nonconforming loans, including jumbo loans.
• Mortgage companies offer home loans but are not licensed banks. Like mortgage banks, mortgage companies may offer many different types of home loans.
• Mortgage brokers are intermediaries between mortgage lenders and borrowers. Mortgage brokers collect your information and shop around for offers from various lenders. They then present these offers to you for comparison.
• Local banks or credit unions are for homebuyers who prefer face-to-face service. Along with personal service and local knowledge of the housing market, you might find that local banks and credit unions offer special loan products and promotions for existing customers.

» MORE: Mortgage broker vs. lender

Know who will service the loan

A loan originator is responsible for creating your mortgage; the servicer is responsible for the administrative aspects of managing the loan until you pay it off. From a homebuyer’s point of view, the servicer is simply who you make your monthly payments to.

Ask who will service the loan before you get preapproved.

When you choose a mortgage lender that also services your loan, “you maintain one relationship,” Ashley said. The same company you applied with will also send out your mortgage statements and handle all the day-to-day tasks, such as tracking principal, interest, taxes and insurance (PITI) and managing escrow accounts.

If your lender sells your mortgage to a servicer, you'll make your payments to that servicer instead. Sometimes loans can be sold several times without the borrower realizing it, though the new owner of your loan is legally required to notify you within 30 days of the transfer.

If your lender is also a servicer, it probably holds onto the majority of its loans. The only advantage to choosing a company that doesn’t service all its loans is that you might have access to a wider range of loan products.

Consider all of your mortgage options

Most people choose between a conventional and FHA loan. FHA loans are popular with first-time homebuyers because they’re relatively easy to qualify for, and their down payment requirement is as low as 3.5% (those with lower credit scores may need at least a 10% down payment). Repeat buyers are also eligible for FHA loans.

Other government-guaranteed loans include VA loans and U.S. Department of Agriculture (USDA) loans. Both have flexible credit requirements and no down payment minimums for those who meet their criteria.

You can also find construction loans to finance building a brand-new house or jumbo loans for amounts above the annual conforming limit — up to $10 million or more. Both of these specialized loan types will typically require a good credit score and a relatively high down payment.

No matter what mortgage type they pick, borrowers will typically be able to choose either a fixed or adjustable rate and a 15- or 30-year term.

Refinance loans

For those who already own a home, a refinance loan pays off your existing mortgage and starts a new loan. If you’re refinancing a home loan, you have a couple of primary options:

• Cash-out refinance: This loan lets you cash out on the equity you’ve built up since you bought your house. The funds can be used to pay for home improvements, debt consolidation and other expenses.
• Rate-and-term refinance: Rate-and-term refinancing replaces your first mortgage loan with a new one that has a better rate and/or a different term. It might make sense if current refinance rates are relatively low or you want to change your loan term.

There are also programs for refinancing VA loans (interest rate reduction refinance loans and cash-out refinances), FHA loans (streamline refinances) and reverse mortgages.

» COMPARE: Best mortgage refinance companies

Get pre-qualified

If you already know what kind of loan you want, look for lenders that can offer that specific product or work with a broker to help you get pre-qualified. Pre-qualification isn’t a loan guarantee, but it can help you compare your top three to five lenders.

The pre-qualification step allows you to see which types of rates and loans you are eligible for with your current credit score. Lenders are more likely to offer you low rates if you have a high credit score, and most consider any score over 740 to be a very good credit score to buy a house.

» MORE: Mortgage pre-qualification vs. preapproval

Compare loan offers

It’s crucial to know the difference between an interest rate and an annual percentage rate when comparing loans. Aside from those rates, some of the most important factors to consider when comparing mortgage loan offers are closing costs, discount points and down payment requirements.

• Closing costs: Closing costs typically include origination fees, property appraisal, title fees, county recording fees, taxes and various other costs. Some closing costs go directly to the lender, and some are collected by the lender on behalf of third parties.
• Discount points: You can buy down your rate by paying mortgage points. This is a one-time purchase made at closing. Most lenders will offer 0.25% off your interest rate for every point you buy, and one point usually costs 1% of your total home loan. Some lenders limit the maximum number of points you can buy.
• Down payment: Your minimum down payment varies depending on your loan type. Some government agencies and nonprofit organizations offer down payment assistance. The amount you put down can affect other terms of the loan, including whether you have to pay for mortgage insurance.

» MORE: 9 mortgage questions to ask your lender

Get preapproved

Once you’ve narrowed down your options to two or three of your ideal lenders, it’s time to get your official preapproval letters, which show how much you're conditionally approved to borrow, your interest rate and other loan details.

Preapproval requires a hard credit inquiry; pre-qualification involves a soft credit inquiry.

Here are some of the documents that you’ll need to supply to obtain preapproval:

• Your driver’s license or other government-issued ID
• 30 days or more of pay stubs
• Two years of W-2s (from all employers)
• Two years of tax returns
• Your two most recent bank statements (all pages, all accounts)

If you apply for preapproval from more than one lender (not a bad idea if you want to compare loan offers in detail), you have a 45-day window when all credit checks are treated as a single hard inquiry, according to the Consumer Financial Protection Bureau.

Most preapproval letters last 60 to 90 days, so you don’t want to complete this step until you're close to putting in an offer on a home. If the letter expires, you may have to apply again for preapproval.

» CALCULATE: How much house can I afford?

Bottom line

When choosing the right mortgage lender, it's not just about finding the lowest interest rate. More importantly, it's about finding a lender that offers a comprehensive package that suits your homebuying needs with favorable loan terms, excellent customer service and a reputation for reliability and transparency.

Your home purchase is one of the biggest investments you will make, so take time to shop lenders, ask questions and read reviews.