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5 Tips for Choosing the Best Mortgage Lender
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It may be easy to apply for a home loan, but picking the wrong lender could make the mortgage process harder than it has to be. There are plenty of mortgage companies out there, but choosing the best mortgage lender for you depends on a number of different factors.
Here are five tips for picking the best mortgage lender.
- Learn what mortgage lenders look for
- Determine what type of mortgage you need
- Gather your paperwork
- Shop around with multiple lenders
- Vet your lender carefully
1. Learn what mortgage lenders look for
Mortgage financing involves a deep dive into every aspect of how you earn, spend and save money. Knowing some of the language and terms gives you an edge when you’re trying to pick your best mortgage lenders to buy a home.
Here’s what lenders focus on:
Your credit score. Every credit account you open, make payments on and balance you carry is reflected in the three-digit number making up your credit score. Mortgage lenders typically pull information from at least three credit bureaus, using the middle score as the benchmark for your interest rate and loan approval. The higher your credit score, the lower your interest rate and monthly payment will be.
Mortgage credit tips:
- Boost your score by paying bills on time and keeping balances to 30% or less of your maximum credit line.
- If you recently paid off credit card balances, it might take a few months before your scores reflect the changes.
Your debt-to-income ratio (DTI). Lenders must verify your ability to repay a mortgage. One way they measure this is by dividing your total debt by your gross monthly income to determine your debt-to-income ratio (DTI). The Consumer Financial Protection Bureau (CFPB) recommends a DTI of 43% or less, although some loan programs are more flexible.
Mortgage DTI tip:
- If you have installment debts within a year of being paid off, consider paying down the balance so that less than 10 months of payments remain. The lender may not count the debt against you, which means you’ll qualify for more home.
Down payment and closing costs. The most popular loan programs offered by conventional lenders require a 3% down payment, while some government-backed loans don’t require any money down. Budget at least 2%-6% of the loan amount for closing costs, depending on how much you borrow.
Mortgage down payment and closing cost tip:
- Check out down payment assistance programs offered by local housing agencies and nonprofits if you don’t have the money saved up. Some of these agencies might offer closing cost assistance, too.
2. Determine which type of mortgage you need
Before shopping for a mortgage lender, learn about key mortgage lender requirements. Some lenders specialize in specific loan types, and may not offer a program that fits your needs.
For example, some of the best mortgage lenders for bad credit may offer only government-backed loans, such as FHA and VA loan programs. The Federal Housing Administration (FHA) can insure loans with scores as low as 500. The U.S. Department of Veterans Affairs (VA) may guarantee mortgages without a minimum credit score, but VA lenders often have a minimum credit score requirement of 620.
The table below details the minimum mortgage requirements for the most common loan types.
| Minimum mortgage requirements for common loan types | ||
| Loan program | Key requirements | Best program if you: |
|---|---|---|
| Conventional loan | 3% down payment 620 minimum credit score DTI ratio up to 43% (and up to 50% in some cases) | Have good credit Can make a 3% down payment Have a stable income |
| FHA loan | 3.5% down with 580+ credit score 10% down with a credit score of 500-579 DTI ratio up to 50% in some cases | Have poor credit Can make a 3.5% down payment Have a higher DTI ratio than conventional loans allow |
| VA loan | No down payment required No credit score minimum (620 is recommended) DTI ratio up to 41% (can be higher in some cases) | Are an active-duty service member, veteran or eligible spouse Want to put 0% down Need flexibility on credit score and DTI ratio |
| USDA loan | No down payment required 640 minimum credit score Recommended DTI ratio up to 41% | Are buying in a USDA-designated rural area Have good credit Earn a low- or moderate-income |
| Alternative lender | 5% minimum down payment (or higher) Qualify with bank statements Flexibility for major credit problems | Have complicated tax returns or variable income Don’t want to provide tax returns Just completed bankruptcy or foreclosure |
3. Gather your paperwork
Lenders request a lot of paperwork in the mortgage application process, so you’ll need some key documents handy to get preapproved. A standard loan document checklist includes:
- Last 30 days of pay stubs
- Last two years W-2s and federal tax returns
- Past 60 days’ worth of bank statements
- Home addresses and employers for last two years
- Divorce decrees, bankruptcy papers or any other legal financial documents
- Proof of rent payments in the last year
Paperwork and qualifying tips:
- Provide accurate contact information for income and employment. Lenders may verify your salary and job status with your employer several times during the loan process.
- If you’re thinking of switching careers or changing how you’re paid, don’t make a move until speaking to a loan officer. Job or income changes can derail your loan approval.
- Don’t make large cash deposits before you apply for a mortgage.
- Don’t open new credit accounts (or close existing ones) before or during the loan approval process.
4. Shop around with multiple lenders
Contact several different types of lenders to get a feel for how they do business. Pick some local mortgage lenders, online mortgage companies and local banks or credit unions. Try a comparison rate site to shop for mortgage rates. Lenders will call you with competing offers so you don’t have to do all the legwork yourself.
Contact at least three to five companies. Follow these steps to make the most of your mortgage lender shopping.
- Request price quotes on the same day. Because rates change daily, shopping for mortgage rates on the same day yields apples-to-apples cost estimates.
- Ask the same questions. To prevent any bogus rate quotes, give the same information about the property type, loan program, down payment and credit score to each lender. Your list of questions should include some or all of the following:
- Are the rates quoted the lowest that day or for the week?
- What fees are charged upfront and at closing?
- What is the annual percentage rate (APR)?
- Is the rate fixed or adjustable?
- Are points being charged for the quoted rate?
- How long does it take to get a mortgage preapproval?
- How does the loan process work?
- Describe any unique challenges or issues (like bad credit, nontraditional income or unusual down payment sources).
- Are there any prepayment penalties?
- Why should I do business with you?
- Expect a loan estimate within three business days of submitting your application. Federal law sets a three-day timeline for you to receive a loan estimate. Keep the estimates on hand to compare rates and fees as you make your final decision about which mortgage lender to choose.
5. Vet your lender carefully
Some of the best mortgage lenders may not be ones with the lowest rates or the fastest approval timelines. When you’re vetting a loan officer to make your final choice, consider the following:
- Was the loan officer easy to understand? Mortgage terms can be confusing. If you don’t feel like your mortgage is being explained in simple terms, consider a different lender.
- Did you receive helpful mortgage tips? If lenders talk more about cutting fees or closing costs gifts, and less about why the selected loan program is the best match for you, keep shopping around.
- How much experience do they have? If you’ve got some twists and turns in your credit or income history, an experienced loan officer can help focus on your strengths and minimize weaknesses.
- Check for licensing and complaints. All licensed mortgage loan officers are required to have a valid mortgage loan originating (MLO) license in the state they do business in. Check on the status of their license at the Nationwide Multistate Licensing System (NMLS). You can check the CFPB’s complaint database, too.
There’s no set method for how to choose a mortgage lender. A mortgage lender for refinances may not be the best mortgage lender for a first-time homebuyer, for example. If you need a fast turnaround time from application to closing, online lenders may be worth considering. However, if you prefer a face-to-face meeting, your current bank or a local mortgage broker may be a better choice.