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How to choose a mortgage lender 2023

Find the right lender before house hunting

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Whether you're buying a new home or refinancing your current mortgage, the lender you choose can significantly influence not only the process but also the amount of time, money and stress involved. Not every lender will be a good choice for every buyer or homeowner, so you should consider what type of home loan you need and where your credit score stands before you start comparing rates and companies.

Regardless of your unique homebuying or refinancing situation, these steps will help you start your search.

Key insights

  • You can choose to use a local credit union or bank to finance your mortgage or go with an online lender or broker.
  • It is common for a lender to sell your loan to a servicer.
  • When shopping lenders, don’t just compare rates but also closing costs and down payment requirements.

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.

Recommended forGovernment-insuredMinimum credit scoreLearn more
Conventional Traditional buyers with good credit No 620 Compare lenders
FHA Buyers with lower down payments/credit scores Yes 500 Compare lenders
VA Military members and veterans Yes 580 to 620 Compare lenders
USDA Buyers with low to moderate incomes in rural areas Yes 620 to 640 Compare lenders
Jumbo Buyers of high-priced homes No 680 to 720 Compare lenders

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?

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    How can I strengthen my credit score before applying for a mortgage?

    Some of the ways to improve your credit score before applying for a mortgage include correcting any errors in your credit report, paying down any revolving account balances you have and making on-time payments for all your credit products over a period of a year or more. Avoid taking on new debt or applying for new credit cards in the months leading up to your mortgage application, as this could potentially lower your score.

    Why is it important to compare rates from different lenders?

    Even a slight difference in the interest rate between lenders can translate into thousands of dollars saved over the life of your loan. Comparing rates also allows you to understand the market better and gives you leverage when negotiating with lenders. Remember to compare other aspects of a loan as well, like fees, closing costs and loan terms, to make sure you're getting a comprehensive comparison.

    What questions should I ask potential lenders?

    Ask lenders about the estimated timeline for approval and closing, as this will give you a clear expectation of the process. It is also a good idea to know if you will need an escrow account and how long your rate is locked in for.

    What does a lender consider to be valid income sources?

    In general, lenders are looking for stable, reliable income that you can use to pay back your loan. This can come from full-time employment, part-time work, self-employment or even a side gig. Pensions and retirement accounts, alimony, child support and government benefits like Social Security can also be considered valid income sources.

    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.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, “What happens when a mortgage lender checks my credit?” Accessed Sept. 11, 2023.
      Consumer Financial Protection Bureau, “What happens if my mortgage is sold? Is my loan safe?” Accessed Sept. 13, 2023.
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