Published by Bankrate

Written by TJ Porter

You’ll find no shortage of banks, online lenders, mortgage brokers and other players eager to take your mortgage loan application. Here’s everything you should know about choosing the mortgage lender that’s right for you.

Types of mortgage lenders
Direct lenders
Mortgage brokers
Correspondent lenders
Wholesale lenders
Portfolio lenders
Hard money lenders
There are six main types of mortgage lenders. Which type is best for you depends on the level of hands-on interaction you like, the legwork you’re willing to do and any restrictions you have on loan types you’ll consider.

Direct lenders
Direct lenders are banks, credit unions, online entities and other organizations that provide mortgages directly to borrowers. They create and fund mortgages and either service them (meaning manage the repayment) or outsource the servicing to a third party. They also establish loan rates and terms; these can differ significantly depending on which lender you work with.

Pros
The process is all with one entity, from application to closing
Borrowers typically work with one loan officer
They may offer competitive rates and fees
Cons
Rates and terms vary widely among lenders
You have to do comparison-shopping on your own
Mortgage brokers
Mortgage brokers are independent, licensed professionals who serve as matchmakers between lenders and borrowers. Brokers usually charge a small percentage of the loan amount (generally 1 to 2 percent) for their services, which the lender pays for (but passes on to you as part of the cost of your mortgage). They don’t fund loans or set interest rates or fees, or make lending decisions.

Pros
They do the legwork for you and shop rates with multiple lenders on your behalf
You can compare multiple loans and rates with only one application
Cons
The broker is paid a commission by the lender and you may get a cheaper loan by not using a middleman
Brokers may prioritize showing you quotes from lenders that pay them the highest commission, even if they aren’t the best option for you as a borrower
Correspondent lenders
Correspondent lenders originate and fund their own loans but quickly sell them to larger lending institutions on the secondary mortgage market after the loan closes.

Pros
Borrowers have access to a range of loan products
They may offer lower fees and interest rates
Cons
You might not immediately know who your servicer is
Depending on when your loan is sold, it may be difficult to keep track of and manage your monthly mortgage payment in the beginning
Wholesale lenders
Unlike direct lenders, wholesale lenders never interact with borrowers. They usually work with mortgage brokers and other third parties to offer their loan products at discounted rates, and rely on brokers to help borrowers apply for a mortgage and work through the approval process.

Pros
Lender’s requirements may be less strict, giving you greater approval odds if you can’t meet traditional lending requirements
They may offer discounted or otherwise favorable loan terms
Cons
Borrowers have to go through a third party (such as a broker) to get a wholesale deal
May not be the best deal since there’s a middleman
Portfolio lenders
Portfolio lenders originate and fund loans from their clients’ bank deposits so they can hold on to the loans, not resell them after closing. Typically, portfolio lenders include community banks, credit unions and savings and loans institutions.

Pros
Can help borrowers with unique circumstances qualify for a loan
Opportunity to work with a local institution
Cons
Potentially limited loan amounts
Potentially less favorable terms
Hard money lenders
Hard money lenders are private investors (an individual or group) that provide short-term loans secured by real estate. While traditional lenders look closely at your financial ability to repay a mortgage, hard money lenders are more concerned with the property’s value to protect their investment. Hard money lenders typically require repayment in a short time frame, usually one to five years. They also generally charge steeper loan origination fees, closing costs and interest rates, as much as 10 percentage points higher than conventional lenders do.

Pros
Borrowers who don’t fit criteria for conventional loans may qualify for these loans
Fast approvals and funds disbursement
Cons
Typically charge higher fees and rates
Shorter-term loan means higher monthly payments
How to find the best mortgage lender
To find the best mortgage lender, you need to shop around. Consider different options like your bank, local credit union, online lenders and more. Ask about rates, loan terms, down payment requirements, mortgage insurance, closing cost and fees of all kinds, and compare these details on every offer.

Before you start shopping, there are a few steps you can take to get the best rate:

Strengthen your credit score
Determine your budget
Know your mortgage options
Compare rates and terms from multiple lenders
Get preapproved for a mortgage
Read the fine print on your loan estimate
Step 1: Strengthen your credit score
Long before you start looking for a mortgage lender and applying for a loan, give your finances a checkup, and improve your standing if needed. This means pulling your credit score and credit reports. You’re entitled to a free credit report from each of the three main reporting bureaus (Experian, Equifax and TransUnion), which you can get through AnnualCreditReport.com.

If your score could use some work, first look through your credit reports for errors, late payments, delinquent accounts in collections and high balances. Paying down each of your credit cards below 30 percent of the available credit and making on-time payments are the best ways to improve your score.

In addition to solid credit, lenders want to see that you can handle your existing debt along with a new mortgage payment, so they’ll look at your debt-to-income (DTI) ratio. This formula adds up all your monthly debts and divides it by your gross monthly income to get a percentage. Many lenders require a DTI ratio below 43 percent, though some loan programs allow up to 50 percent.

To keep your DTI ratio manageable, avoid taking on new loans or making large purchases on credit cards for at least three months before applying for a mortgage. You should stick to this rule until you’ve finalized your mortgage, as lenders can pull up your credit report any time throughout the application process until you close.

Step 2: Determine your budget
An important part of finding the right mortgage is having a good handle on how much house you can afford. A lender could qualify you for a loan that would max out your budget and leave no room for unexpected expenses, but taking out such a mortgage might be a bad financial move.

Lenders preapprove you based on your gross income, outstanding loans and revolving debt. However, they don’t look at other monthly bills, such as utilities, gas, day care, insurance or groceries, in their calculations.

To get a more accurate idea of what you can afford, factor in these kinds of expenses and other financial goals. Look at your monthly net income to calculate how much you should spend on a mortgage payment.

Step 3: Know your mortgage options
A key aspect of finding the best mortgage lender is being able to speak their language, including knowing the different types of mortgages. Some upfront research can also help you separate mortgage facts from fiction.

“Traditionally, when it comes to getting a mortgage, a lot of people’s first thoughts are to go to a bank or that they need a 20 percent down payment to afford a home,” says Mat Ishbia, president and CEO of United Wholesale Mortgage. “That’s an outdated way of thinking.”

Many lenders offer conventional loans with as little as 3 percent down, and some government-insured loans require no down payment or just 3.5 percent down. Consider FHA loans and USDA loans, and if you’re a veteran, look into VA loans.

There are five main types of mortgage loans:

Conventional loans
Jumbo loans
FHA and other government-backed loans
Fixed-rate mortgages
Adjustable-rate mortgages
Keep in mind that if you put down less than 20 percent, many lenders will charge you a higher interest rate and require mortgage insurance.

Step 4: Compare rates and terms from multiple lenders
Settling on the first lender you talk to isn’t the best idea. Rate-shop with different lenders — banks, credit unions, online lenders and local independents — to ensure you’re getting the best deal on rates, fees and terms. Try to find a lender that communicates the way you prefer, whether it’s online, via text or in person.

If you don’t shop around, you could be leaving money on the table. Multiple studies, including out of the Consumer Financial Protection Bureau and Freddie Mac, found that comparison-shopping saves borrowers thousands over the course of a 30-year mortgage.

Start exploring lenders. Bankrate’s editorial team rates lenders based on factors including affordability, availability and customer experience. Here are a few of Bankrate’s top-rated lenders:

lenders do a thorough review of your credit and finances.

Lenders can have different documentation requirements for preapproval. Generally, you’ll need to provide:

Driver’s license or other government photo ID
Social Security numbers for all borrowers (to pull credit)
Residential address history, as well as names and contact information for landlords in the past two years
Pay stubs from the past 30 days.
Two years of federal tax returns, 1099s and W-2s
Printouts of bank statements for all accounts for the past 60 days
List of all financial accounts (checking, savings, brokerage accounts, 401(k) and other retirement savings plans)
List of all revolving and fixed debt payments, including credit cards, personal and auto loans, student loans, alimony or child support
Employment and income history, along with contact information for your current employer
Down payment information, including the amount, source of the funds and gift letters if you’re receiving help from a relative or friend
Information on any recent liens or legal judgments against you or other borrowers, such as IRS actions, bankruptcy, collections accounts or lawsuits
Be mindful: A mortgage preapproval doesn’t mean you’re in the clear. Lenders can re-check your credit, employment and income histories and your assets at any time during the process. If you take out a new car loan, for example, that changes your financial picture and can derail your mortgage.

Ishbia says borrowers should “hold tight” after preapproval and avoid opening new lines of credit, moving around money in your bank accounts and changing jobs before — and during — the mortgage process.

Step 6: Read the fine print on your loan estimate
We get it: Mortgage documents make your eyes glaze over. But if you don’t read them closely and there are any errors or surprises, you could feel buyer’s remorse later. Check out this explainer on the loan estimate form lenders are required to give you within three days of receiving your mortgage application.

Pay close attention to:

Your interest rate
Monthly payments
Lender fees
Closing costs
Down payment amount
These items shouldn’t change dramatically from preapproval to closing if your credit and financial profile stay the same.

Lenders sometimes offer credits to help lower the amount of cash due at closing. Be aware, though: These credits can push up the interest rate on your loan, which means you’ll ultimately pay more.

As you compare loan estimates from different lenders, you’ll see a slew of third-party costs, such as lender’s title insurance, title search fee, appraisal fee, recording fee, transfer taxes and other administrative costs. You can negotiate some of these closing costs, but know that lenders don’t determine the fees for third-party services — just their own.

Always ask questions if you don’t understand certain fees or spot errors in the paperwork (such as a misspelled name or a wrong bank account). Getting ahead of any issues early can save you a lot of headaches later.

Questions you should ask a mortgage lender
When shopping for a mortgage, there are several questions to ask your lender about the process and their loan options. Here are a few:

What paperwork will you need to provide?
How long does their rate lock last?
How frequently do they fail to close a loan in time?
What are the steps in their underwriting process and will you be able to complete everything online, by mail or in person?
Bottom line
Doing your homework on the basics of mortgage lending early on can set you up for success, and help you get better acquainted with the different types of mortgage lenders out there. Mortgages are not one-size-fits-all products, so you need to know how they work and how they differ from one another. This will help you find the mortgage lender and loan that offers what’s best for your situation.

https://www.bankrate.com/mortgages/finding-the-best-mortgage-lender/

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