How to Choose a Mortgage Lender: 10 Steps For Success

Key takeaways

• Shop around for the best mortgage lender: Compare offers from multiple lenders, including banks, credit unions, and online lenders, to find the best rates and terms for your mortgage.
• Understand loan options: Learn about different mortgages like conventional, jumbo, and government-backed loans (FHA, VA, USDA). Compare terms and interest rates to find the best fit for you.
• Prepare thoroughly: Improve your credit score, set a budget, and get pre-approved to streamline the home-buying process and secure a favorable mortgage.

Choosing the right mortgage lender is a vital step in the home-buying process. With so many options available, it can be challenging to know where to start. In this Redfin article, we’ll guide you through ten essential steps to help you select a mortgage lender that meets your needs and ensures a successful home purchase. Whether you’re looking for a suburban home in Denver or a condo in New York City, understanding each step will make your journey smoother and boost your confidence as a buyer. 

Step 1: Strengthen your credit score

Before you begin shopping for a mortgage lender, it’s essential to understand and improve your credit score. A higher credit score can help you secure a lower mortgage interest rate and better loan terms. Here’s how to boost your credit score:

• Check your credit report: Obtain a copy of your credit report from all three major credit bureaus (experian, equifax, and transunion) and look for errors.
• Pay bills on time: Consistently paying your bills on time boosts your credit history and score.
• Reduce credit card balances: Aim to keep your credit utilization ratio below 30%.
• Avoid new credit: Refrain from opening new accounts or closing old ones before applying for a mortgage.

Deciding between renting or buying your next home? Explore your options.

Compare the costs of renting vs buying and find a lender to secure your mortgage.

Deciding between renting or buying your next home?

Compare the costs of renting vs buying and find a lender to secure your mortgage.

Step 2: Determine your budget

Understanding your budget is crucial before approaching lenders. While lenders will pre-qualify you for a certain amount, it’s essential to ensure this fits within your overall financial picture. 

• Follow the 28/36 rule: Housing costs should not exceed 28% of your gross monthly income, and total debt payments should not surpass 36%.
• Calculate potential costs: Include property taxes, insurance, lender fees, closing costs, and down payments in your budget.
• Use online tools: Utilize mortgage affordability calculators to estimate the home price and monthly payments you can manage.

Step 3: Explore different lender types

There are various types of mortgage lenders, each offering different advantages:

• Conventional banks: Banks offer a range of financial services, including mortgages. You can apply in person or online, and if you already have an account, you might receive personalized service.
• Credit unions: These member-owned institutions provide a variety of financial services, including mortgages. Membership often requires a common bond, like geographic location or employment. Credit unions are known for personal service and members-only deals.
• Non-bank mortgage lenders: These lenders, often operating exclusively online, issue more mortgages than traditional banks. They are known for their speed and willingness to work with borrowers with less-than-perfect credit or those needing non-conventional loans.
• Mortgage brokers: Brokers search multiple lenders to find the best loan options for you. They act as intermediaries, handling the application and documentation process. While convenient, using a broker might incur additional fees.
• Mortgage marketplaces: These platforms allow you to compare interest rates and fees from multiple lenders in one place. Once you choose a lender, they take over the process, making it easier to find the best deal without visiting multiple sites.

Tip: Ask each lender about any special programs or discounts they offer, especially if you are a first-time homebuyer or belong to certain professions like teaching, healthcare, or military service.

Step 4: Compare mortgage rates and terms

Comparing rates and terms from different lenders can save you money and help you find the best mortgage for your needs. When shopping around, it’s important to look beyond just the interest rate and consider the full spectrum of costs and conditions associated with each loan. This includes understanding how different loan terms can impact your monthly payments and the total interest paid over the life of the loan. Here are key aspects to focus on when comparing rates and terms:

• Loan estimates: Request loan estimates from multiple lenders to compare interest rates, APRs, and fees.
• Interest rates vs. APR: The APR includes both the interest rate and fees, providing a more comprehensive cost comparison.
• Fees: Look at origination fees, application fees, closing costs, and mortgage points.

Step 5: Understand loan options

Mortgages come in various forms, each affecting your down payment, loan cost, and monthly payments. Understanding these options can help you choose the best mortgage for your financial situation. Common types of mortgages include:

• Conventional loans: Typically require a 3% down payment; private mortgage insurance (PMI) is needed for down payments below 20%. These loans are not backed by the government and are suitable for borrowers with good credit scores and stable income.
• Jumbo loans: Suitable for purchasing high-value properties that exceed the conforming loan limits set by the federal housing finance agency (FHFA). They often require a higher credit score, a larger down payment, and come with higher interest rates due to the increased risk to the lender.
• Government-backed loans: Include FHA, VA, and USDA loans, each offering unique benefits:
  • FHA loans: Require a lower down payment (as low as 3.5%) and have more lenient credit score requirements, making them accessible to first-time homebuyers and those with less-than-perfect credit.
  • VA loans: Available to veterans, active-duty service members, and eligible surviving spouses, these loans offer competitive interest rates, no down payment, and no PMI, making homeownership more affordable for those who qualify.
  • USDA loans: Designed for rural and suburban homebuyers, these loans offer no down payment and reduced mortgage insurance premiums. They are available to borrowers with moderate incomes who meet specific eligibility criteria.

Evaluate the loan terms (15 years vs. 30 years) and interest rate types (fixed vs. adjustable) to find the best fit for your financial situation. Shorter loan terms (15 years) have higher monthly payments but lower total interest costs, while longer terms (30 years) offer lower monthly payments but higher overall interest. Fixed-rate mortgages provide stable payments, while adjustable-rate mortgages (ARMs) may start with lower rates that can change over time.

Step 6: Get pre-approved for a mortgage

A mortgage pre-approval provides a conditional commitment from a lender on how much you can borrow. This can strengthen your position when making an offer on a home. Aim to get a few pre-approval letters to compare offers and choose the best terms.The pre-approval process involves:

• Credit check: Lenders will perform a hard inquiry on your credit.
• Documentation: Provide pay stubs, tax returns, bank statements, and information on debts and assets.

Did you know? Getting pre-approved by multiple lenders within a short period (typically 45 days) can minimize the impact on your credit score, as credit bureaus treat these inquiries as a single one.

Step 7: Consider customer service and support

Now that you’re close to making a final decision, consider the lenders’ customer service and support, as it can significantly impact your homebuying experience. Consider things like:..

• Responsiveness: How quickly and effectively does the lender communicate?
• Support: Does the lender offer guidance and answer your questions clearly?
• Process transparency: Are the steps and costs involved clearly explained?

Step 8: Submit formal applications

After deciding which lenders to proceed with based on pre-approval offers, submit formal mortgage applications to those lenders. This involves providing detailed documentation about your income, assets, debts, and personal information. Be prepared to supply the following:

• Income verification: Pay stubs, W-2 forms, tax returns, and possibly verification of employment from your employer.
• Asset documentation: Bank statements, retirement account statements, and other asset information.
• Debt information: A list of your current debts, including credit card balances, auto loans, student loans, and other financial obligations.
• Personal identification: Government-issued ID and Social Security number.

Within three business days of submitting your formal application, you will receive a loan estimate from each lender.

Step 9: Receive, review, and compare loan estimates

Once you have received loan estimates from the lenders you’ve applied to, carefully review and compare the detailed terms and costs of each offer. The loan estimates will include important details about the loan, such as:

• Interest rate: Confirm whether it’s fixed or adjustable. Fixed rates offer stable payments, while adjustable rates can change over time.
• Loan term: The duration of the loan, typically 15, 20, or 30 years. Shorter terms have higher monthly payments but lower total interest costs; longer terms offer lower monthly payments but higher overall interest.
• Fees and costs: Look at closing costs, origination fees, and any potential prepayment penalties. These can include appraisal fees, title insurance, title search fees, recording fees, transfer taxes, and other administrative expenses. Some costs may be negotiable, so ask your lender.
• Balloon payments: Check for any large lump-sum payments required at the end of the loan term.
• Escrow requirements: Determine if an escrow account for property taxes and insurance is needed, which affects your monthly payment.
• Rate locks: Understand the terms of your rate lock, which guarantees your interest rate for a set period during loan processing.

When comparing loan estimates from different lenders, pay close attention to the variety of third-party costs. If you encounter any unclear fees or errors in the paperwork (like incorrect personal information), address them immediately to prevent future complications. 

Step 10: Choose your mortgage lender

After thorough comparison, select the lender that provides the most favorable terms and rates for your financial situation. Make sure you review and understand all terms and conditions before making your final decision. 

Finally, inform the chosen lender of your decision to move forward with them in the mortgage process, and begin preparing for the next steps towards closing on your home. Congratulations!

Choosing a mortgage lender FAQ’s

1. What is the difference between pre-qualification and pre-approval?

Pre-qualification is an initial assessment of your financial situation to estimate how much you might be able to borrow, often based on self-reported information. Pre-approval, on the other hand, involves a more detailed evaluation, including a credit check and verification of financial documents, resulting in a conditional commitment from the lender.

2. How do I know if I’m getting a good interest rate?

Research current market rates and compare offers from multiple lenders. Consider factors like your credit score, loan type, and down payment, as these can affect the rate you are offered. A good interest rate is one that is competitive within the context of your financial situation and the current market.

3. Can I negotiate mortgage terms with a lender?

Yes, you can and should negotiate mortgage terms. You may be able to negotiate a lower interest rate, reduced closing costs, or other favorable terms. It’s helpful to have multiple loan offers to use as leverage in negotiations.

4. How long does the mortgage approval process take?

The mortgage approval process typically takes 30 to 45 days from application to closing. This timeline can vary based on factors like the lender’s efficiency, the complexity of your financial situation, and the responsiveness in providing required documentation.

5. What should I do if my mortgage application is denied?

If your mortgage application is denied, ask the lender for specific reasons and take steps to address them. This might involve improving your credit score, paying down debt, or saving for a larger down payment. You can also consider applying with a different lender or exploring alternative loan programs.

What questions should I ask a mortgage lender? 

If you’re a first-time homebuyer, you might be wondering what questions you should ask when talking to a mortgage lender. Here are some of the top questions to ask your lender:

• What will my fees and payments be?
• Which type of mortgage terms do you offer?
• What credit qualifications do you require?
• Do you offer mortgage points?
• Do I need an escrow account?
• What is the interest rate and APR?
• Do you offer a mortgage rate lock?
• Do you offer preapproval or prequalification?
• What is the best down payment needed to buy a house?
• Is there a prepayment penalty?