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Smart Money

6 Steps to Choose a Mortgage Lender

Choosing the right mortgage lender requires shopping around and preparing your finances. Here are six steps to help you make this important decision.

Choncé Maddox • September 6, 2022

In This Article

  1. Where can you get a mortgage?
  2. How to choose a mortgage lender: step-by-step
  3. Take the time to choose the right mortgage lender

You find the perfect home on Zillow and attend the open house that weekend. Then you learn the seller is only considering applicants who are pre-approved for a mortgage. During your research, you find too many options for a mortgage lender. 

How do you shop for a mortgage and choose the best one?

Where can you get a mortgage?

You can get a mortgage from several places. Whether you’re looking to work with a mortgage loan officer in person or fill out a quick pre-qualification form online, it’s easier than ever to find a lender that works for your situation. Here are a few places to start.

Banks

Banks are a popular place to apply for a mortgage because you may already have an account and a relationship with the staff. They offer different types of standard mortgages, such as:

  • Conventional
  • FHA
  • Fixed-rate
  • Adjustable rate

Banks are subject to federal compliance and reporting laws, so they may have stricter eligibility requirements. However, banks will know all about homebuyer assistance programs available in your area and may offer special mortgage rates to existing customers.

Pros:

  • Offers different types of mortgages
  • May have special rates and discounts for customers
  • Manage your finances, savings, and mortgage all in one place

Cons:

  • May have stricter requirements
  • Less likely to get the best interest rate if you don’t shop around

Credit unions

Credit unions are similar to banks but have more of a community-minded mission since they are non-profit and member-owned financial institutions. There are 5,204 credit unions in the U.S., and many issue mortgages as well as checking and savings accounts.

When you get a mortgage through a credit union, they will likely continue to own your loan during repayment. Other lenders might sell it to a third-party service over time. You can also expect competitive mortgage interest rates since credit unions don’t have to focus on making a profit like banks do. 

There’s also a personal touch aspect when working with a credit union. As a member, you may be able to get lower closing costs, homebuyer’s assistance programs, and even year-end loan interest refunds. 

Pros

  • Competitive mortgage rates
  • Flexible requirements
  • Personal aspect and community-feel

Cons:

  • Must be a member to receive most services
  • Limited branch access (for local credit unions)

Online lenders

Online lenders are not banks, and they offer financial services exclusively online. An online platform streamlines getting pre-approved for a mortgage, funding the loan, and closing on the home. 

Online lenders provide a variety of mortgage loans and may have more lenient requirements since they aren’t regulated as strictly as banks. A mortgage lender might sell your mortgage to another lender after closing, but your terms should stay the same. 

Pros:

  • Various mortgage options
  • Quicker mortgage approval process
  • More lenient requirements

Cons:

  • No physical location
  • May sell your loan to another lender after closing

Mortgage brokers

A mortgage broker helps you shop around for the best mortgage terms by comparing offers from different lenders. If you are unsure where to start when looking for a mortgage lender, a broker can help by utilizing their network of lenders. 

Mortgage brokers also come in handy if you have a unique situation and need to narrow down the best mortgage option. They can help gather all your documents and provide them to the underwriter. Using a mortgage broker could cost you more since they charge a fee as part of your closing costs.

Pros:

  • Compare offers from different lenders
  • Help with preparing documents for underwriting

Cons:

  • Added fee during closing costs
  • Limited to that mortgage broker’s lender network

Mortgage marketplaces

Mortgage marketplaces are companies and websites that let you review mortgage quotes from different lenders online. Start by filling out a short form to answer a few questions about your finances and the type of home you want. 

These forms usually don’t require a credit check and will only result in a soft credit pull. From there, you can browse mortgage rates and offers from different lenders all in one place. 

While mortgage marketplaces don’t offer mortgages, they can connect you with a lender that provides terms that work for you. All of this is done in minutes online as you shop around to ensure you’re getting the best rate and terms.

Pros

  • Compare offers from multiple lenders
  • (Usually) only a soft credit pull
  • Estimate your monthly payment before applying for a mortgage

Cons:

  • Not an actual lender in most cases
  • May not get a clear impression of fees and other costs upfront

How to choose a mortgage lender: step-by-step

Finding a mortgage lender is one of the many decisions you’ll face when buying a home. Friends or your realtors may give their recommendations, which can be helpful, but it’s always wise to make sure you consider your unique situation. 

These six steps will help simplify finding a lender for your next mortgage.

1. How to improve your credit score

Credit is an essential factor that mortgage lenders consider when you apply for a mortgage. The higher your credit score, the less risky your application will seem to lenders. A better credit score could also lead to more flexible loan terms and a lower interest rate, saving you money over time. 

Build a positive credit history before you begin shopping for a home. Pay down outstanding debts, make on-time credit card payments, and limit hard inquiries on your credit report. If you’re spending more than 30% of your total credit utilization, try to lower your spending. 

Even if your positive credit history is limited, you can always build or rebuild your credit over time. Start building credit with everyday purchases and on-time payments1 with the Chime Credit Builder Secured Visa® Credit Card.

2. How to figure out your budget for a home

Buying a home is a large purchase, but you can put your mind at ease by coming up with a budget. Research home prices in the area where you plan to live and calculate how much you’d need to save or put down on a home. 

Figuring out your budget early on can also point you to the mortgage lender that offers the loan you need.

Additional costs like the appraisal, origination fee, and property taxes will also factor into your budget for a home. 

Closing costs range from 2% to 7% of the price of the home. Add this to your down payment amount to estimate how much you’d need to borrow for a mortgage. 

While factoring in closing costs and other expenses, figure out exactly how much you need saved to buy a house.

3. How to choose between the types of mortgage

Not all mortgages are created equally. Some have different benefits, terms, and limitations. Conventional mortgage loans are the most common but have more strict requirements, like putting a minimum of 5% down. 

Meanwhile, FHA loans allow you to put down as little as 3% and have more lenient credit score requirements. Government-based loans like VA and USDA loans are available if you meet certain requirements. 

Once you know which mortgage loans are available, decide the features that mean the most to you.

  • Do you need a larger loan due to higher housing prices in your area?
  • Does a shorter loan term sound appealing?
  • How much are you able to put down?

No matter your needs, there is likely a mortgage lender who offers a loan that’s ideal for you. All you need to do is put your best foot forward financially to improve your credit and prepare enough savings.

Learn the details of all the main types of mortgage loans so you can shop around with confidence.

4. How to compare rates from multiple lenders

Once you know which type of mortgage you’re leaning toward, start comparing rates and terms from multiple lenders. Whether you choose a bank, online lender, or credit union, they may all offer different rates and terms. Why not search for the best possible deal by shopping around if you’re not partial to one specific lender? 

A rate difference of 1%, or even 0.25%, could affect how much interest you pay over time. Use a mortgage marketplace like LendingTree to compare rates from other lenders. 

Or, you can research banks and credit unions on your own to see what their rates are. If you can pre-qualify without a hard credit inquiry, the rates will be more realistic and tailored to your situation.

Mortgage brokers can also do the rate shopping for you if you tell them the type of mortgage and terms you want. Consider the interest and annual percentage rate (APR) when comparing rates. Interest rates are: 

  • Fixed or variable 
  • Based on the market 
  • Influenced by your credit score 

An APR is based on the lender’s interest rate and borrowing fees. With APR, you can get a long-term estimate of how much your mortgage will cost, while the interest rate reveals what you might pay monthly at the start of the mortgage.

5. How to get pre-approved for a mortgage

It’s almost time to start looking at homes and attending open houses. First, you’ll want to get pre-approved for a mortgage. That way, if you see a home you like, you already have a lender and can move quickly to make an offer. 

Getting pre-approved allows the lender to examine your financial fitness to see if you can realistically manage and repay the mortgage loan. It also allows you to uncover any credit or debt-to-income ratio issues you should resolve before moving forward with a home purchase.

Most pre-approvals are conducted online, but you may be able to share your information over the phone or in person at your local bank or credit union. You’ll need to submit details like:

  • Employment and income 
  • Desired down payment
  • Existing debt amounts
  • Social security number (to check your credit score)
  • Bank account information
  • Existing assets
  • Current monthly housing cost
  • Previous addresses

Some lenders may ask for your two most recent check stubs or other proof of income. The pre-approval process doesn’t take long, and if you’re completing it online, you may receive an answer in minutes. 

If you are pre-approved, the lender will give you an official letter showing the maximum amount you can borrow. This pre-approval letter will also include the type of mortgage loan, term, and estimated monthly payment. The letter is valid for 30, 60, or 90 days so you can use this time to shop for a home. 

6. How to choose your final mortgage with loan estimates

You find a home you like, and the seller accepts your offer. It’s almost time for celebrating, but you still need to apply for a mortgage, even if you’re pre-approved. 

For the application, your lender will still want to see additional documents like updated check stubs and bank statements. In addition, you’ll need to submit the purchase agreement and proof of your earnest money deposit. You’ll need to show at least two years of tax returns if you’re self-employed. 

When your mortgage application is submitted, it goes into processing which can take a few weeks as the loan officer and underwriter verify all your information. 

You’ll receive a loan estimate within three days of completing your mortgage application. This estimate shows the expected costs of your mortgage, including:

  • Loan amount 
  • Interest rate
  • Taxes and insurance
  • Closing costs
  • Fees
  • Earnest money deposit
  • Any seller and lender credits

Review your loan estimate in detail and present any mortgage questions to your lender if something doesn’t make sense. Now is the time to decide if you’re okay with the terms and compare estimates from other lenders.

Once your home inspection, appraisal, and underwriting are complete, the lender can confirm your closing date, and you’ll be issued a closing disclosure.

While the loan estimate showed you the expected costs of your mortgage, the closing disclosure confirms those costs so you can lock in everything.

Take the time to choose the right mortgage lender

Your ideal mortgage lender is out there somewhere. Choosing a lender is now simpler than ever. Take the necessary steps to prepare your credit, get pre-approved, and shop around for rates to set yourself up for success early on. That way, all you have to do after closing is move into your home, knowing you are comfortable with your mortgage rate and terms. 

Before you plunge into the housing market, find out if now is a good time to buy a house.

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