Real Estate Home Finance

How to Choose a Mortgage Lender: 7 Steps to Finding Your Ideal Match

For many, a mortgage is one of the largest loans they’ll ever take out. Knowing how to choose a mortgage lender is easier when borrowers know what’s available and what questions to ask.
Meghan Wentland Avatar
How to Choose a Mortgage Lender

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What You Need to Know

  • Before a home buyer looks for a mortgage lender, they’ll want to check their credit score, establish a budget, and save for a down payment.
  • Borrowers will want to familiarize themselves with the different types of home loans available before choosing a lender.
  • Once the borrower knows what type of loan they want, they can shop around for quotes and compare loan terms and interest rates.
  • Borrowers will want to get preapproved with several different lenders before choosing the one that works best for them.

A home is one of the most significant purchases many people will make in their lifetime, and many will need to take out a mortgage to be able to afford a home. A mortgage is a type of home loan that provides future homeowners with the money they need to buy a home. They will then pay that money off in monthly installments until the loan reaches the end of its term. Since mortgages are long-term loans, it pays to plan ahead in order to find and qualify for the right loan. Oftentimes, borrowers wonder how to choose a mortgage lender when there are so many factors to consider. By following these steps, borrowers can ensure they have done their due diligence in finding the best mortgage lenders. Then they’ll be able to move forward with their home purchase with peace of mind.

STEP 1: Check your credit report and take measures to improve your credit score, if necessary. 

Before a home buyer begins talking to the top mortgage lenders, they’ll want to familiarize themselves with their current credit score. To do this, the borrower will want to access their credit reports from all three credit bureaus (Equifax, Experian, and TransUnion). There are several ways to do this, but home buyers can avoid scams by going directly to the Federal Trade Commission’s website and accessing a free credit report once a year. Home buyers will want to check their credit reports for errors and make sure that all their payment history is correct. If the buyer notices any errors, they can appeal or ask for corrections. Since this process can take time, however, home buyers will want to do this early in the process. 

Buyers will also want to check their FICO credit score, because that number will determine the different types of home loans they can qualify for and their estimated interest rate. A credit score tells home loan lenders how trustworthy the borrower is when it comes to repaying their debt. One of the best ways for borrowers to boost their credit score and show that they are financially reliable is to pay their bills on time. Borrowers can also work on paying down debt before applying for a mortgage. It’s a good idea to try to get credit balances down to no more than 20 to 30 percent of a borrower’s available credit limit. For example, a borrower with a total of $10,000 in available credit will want to have a balance of no more than $2,000 to $3,000 on their credit cards. This shows lenders that the borrower is responsible with their available credit, which makes them more likely to pay their monthly mortgage bill on time. That, in turn, can lead to the borrower qualifying for a lower mortgage rate.

STEP 2: Establish your budget and save for a down payment.

Once a buyer knows their credit score, they’ll want to determine a budget for their home purchase and begin saving for a down payment. The cost of the home purchase is only one piece of the puzzle; home buyers will also want to consider the cost of utilities and budget for property taxes and homeowners insurance. Home buyers who can put down a chunk of money when buying a home will be able to take on less debt than those who don’t have a down payment. Buyers who put down less than 20 percent of the purchase price on a conventional mortgage will generally be required to pay private mortgage insurance, or PMI, until they reach that 20 percent equity mark. This is because lenders see buyers with a larger down payment as less risky than those with a small (or no) down payment.

When buyers are coming up with a budget for a home purchase, a mortgage calculator can be a helpful tool to utilize. To use a mortgage calculator to estimate monthly payments, borrowers will need to have the following information on hand:

  • The purchase price of the home
  • The down payment amount
  • The loan term (the length of the loan)
  • The potential mortgage interest rate
  • The amount of property taxes owed annually on the property
  • The estimated cost of homeowners insurance
  • Any additional fees, such as homeowners association (HOA) fees or PMI

Once the buyer enters this information into the mortgage calculator, they’ll be able to see their estimated monthly payment. They can then play around with the numbers to see if they can afford a higher mortgage, lower down payment, or shorter loan term based on their current financial situation. This information will help them decide how much mortgage they can afford to take on, which will enable them to look for a home that will fit into their budget without overwhelming their finances.

How to Choose a Mortgage Lender

STEP 3: Know your loan options and consider different types of lenders.

Next, the home buyer will want to consider the different types of mortgages and decide which loan they want to apply for. If their credit score and down payment amount qualify them for a conventional loan, they’ll likely have a wider choice of lenders from which to get a mortgage. If, however, the buyer has a fair credit score and a low down payment, they may need to consider a government-backed loan program, such as  the FHA (Federal Housing Administration), USDA (U.S. Department of Agriculture), or VA (U.S. Department of Veterans Affairs). In this scenario, they may have a better range of choices with lenders who specialize in whichever type of mortgage loan they’re looking for.

The first step for many borrowers to take when looking for the best mortgage lenders (such as PNC Bank or Caliber Home Loans) is to do an online search for “mortgage lenders near me.” However, it’s important for borrowers to consider national lenders and online lenders as well as local options such as credit unions or local banks. Local lenders may have more familiarity with the housing market in their area, but they may not be able to offer as low an interest rate as national or online mortgage lenders. Borrowers can also find a mortgage broker to help them shop around and find the best fit for them, or they can read mortgage lender reviews online to see which ones might be a good fit.

STEP 4: Prepare questions for lenders. 

There are several important questions to ask a mortgage lender that borrowers will want to keep in mind. First, they’ll want to inquire about what types of mortgage loans the lender offers. If the borrower already has a good idea of what they think they’d like, they can say so—and then ask what other options might be available that they may not have considered.

Next, the borrower will want to ask potential lenders about interest rates, closing costs, taxes, mortgage insurance requirements, prepayment penalties, and other fees to give them an idea of what the loan will cost them. Borrowers will also want to ask the lender about its requirements for credit scores, down payments, and debt-to-income ratios (the amount of debt the borrower has in relation to their monthly income). 

Finally, borrowers will want to ask whether the lender offers rate locks. Mortgage rates are constantly fluctuating, so it can pay for borrowers to watch mortgage rate trends closely as they are preparing to apply for a mortgage. This may help them get the lowest mortgage rate and lock it in with the lender if possible. Locking in a rate guarantees it for a certain time period. As long as the borrower can close on the loan before the rate lock expires, that rate should be guaranteed. However, the lender could change the rate if there are any major changes to the borrower’s status, such as a reduced down payment from what was originally agreed upon or a major change in the borrower’s credit score.

How to Choose a Mortgage Lender

STEP 5: Shop around and compare loan interest rates. 

Next, home buyers will want to compare interest rates from several different lenders. One of the biggest decisions borrowers will need to make when getting a home loan is whether to choose a fixed-rate or an adjustable-rate mortgage. Both have their advantages and disadvantages, and the process of how to get the best mortgage rate will be different for each borrower.

  • Fixed-rate mortgage: The borrower will pay the same interest rate for the life of the loan. This can be a good option when interest rates are low, but choosing a fixed-rate mortgage when interest rates are high can translate to thousands more dollars paid in interest by the time the loan is paid off. Buyers who go with a fixed-rate mortgage will have predictable monthly payments, but if interest rates decrease they’ll need to refinance their loan in order to take advantage of those lower rates.
  • Adjustable-rate mortgage: The borrower will pay a lower rate for a fixed period of time, typically between 5 and 10 years. Once that period is up, the interest rate will adjust periodically based on the market. That means the homeowner may see their monthly mortgage payments increase if the interest rate goes up. However, buyers who don’t plan on staying in their home for the full 15 or 30 years of the loan may be able to take advantage of a lower interest rate for the initial period with an adjustable-rate mortgage.

When comparing interest rates, aspiring homeowners will first want to decide which type of interest rate they prefer. Then, they can review average rates online to narrow their list down to a few lenders with rates in the range the borrower is looking for.

STEP 6: Get preapproved for a loan. 

The next step is for the borrower to get preapproved for a home loan. Borrowers may have heard the terms “prequalification” and “preapproval” used interchangeably, but there’s a difference for them to be aware of. 

  • A prequalification shows that a lender has done a quick overview of the borrower’s financial situation and determined that the borrower would likely be extended a loan offer. However, there’s no guarantee on the amount or the interest rate. Prequalifications are helpful for the borrower when determining their budget and figuring out how much house they can buy. 
  • With a preapproval, the lender performs a credit check on the borrower, determines the interest rate, and issues a letter stipulating that, barring major changes in the borrower’s credit or income, the lender will approve a loan for a certain amount of money. A preapproval doesn’t mean a loan is guaranteed to be approved, but it does give a borrower an advantage over buyers without preapproval, which is especially important in a fast-moving real estate market. 

Borrowers can get preapproved with several different lenders so they have options when they are ready to officially apply for a loan. This can make the process of shopping for a mortgage easier.

STEP 7: Compare loan estimates and select the most suitable mortgage lender.

Once the borrower has been preapproved for a loan and has had an offer accepted on a house, they can start the process of applying for a mortgage. But first, they’ll need to decide which lender to go with. Different lenders will offer different rates and terms, so homeowners will want to get quotes from at least three to five lenders in order to find the best mortgage rate. Borrowers can also consider getting quotes from various types of lenders, including banks, credit unions, and the best online mortgage lenders.

The length of the mortgage, also known as the loan term, can affect the mortgage rate as well as the total amount of interest paid over the life of the loan. In general, the interest rate on a 15-year mortgage will be lower than on a 30-year mortgage. That’s because lenders see shorter loans as less risky than longer ones; it’s hard to predict whether the borrower will still be in a position to make mortgage payments decades down the road.

On top of that, the borrower will end up paying less interest over the term of a 15-year mortgage than a 30-year one. Depending on the loan amount, the savings could be in the tens of thousands of dollars range. Buyers will need to remember that a shorter loan term means a higher monthly payment, though, which could limit the amount they are able to spend on a home purchase.

When comparison shopping for a mortgage loan, borrowers will want to request all quotes within the same time frame to make sure the rates are comparable. Doing so will generally not be detrimental to the borrower’s credit if they request all quotes at the same time. The three major credit bureaus give a time frame of between 14 and 45 days for borrowers to get as many quotes as they want without impacting their credit score.

Each quote will give borrowers an estimated interest rate and closing costs. Using that information, they can determine which loan is the best one for them. Borrowers who plan to stay in the home long term may choose a loan with a lower interest rate since that is more likely to save them money in the long run. But those who expect to sell the home and pay off the mortgage within a few years will want to look for a loan with lower closing costs, since they’ll have less time to recoup those costs than a borrower who will stay in the home for a decade or more.

Choosing a mortgage lender is a big decision. Buyers are likely to find the process less intimidating if they go into it feeling prepared. Understanding the mortgage-lending process can make it a more manageable part of the home-buying experience and will allow buyers to feel comfortable as they commit to buying the home they want.