How To Choose a Mortgage Lender

Couple compares mortgages with laptop on counter.

If you’re planning to buy a house and need a loan, then you’ll need to find a mortgage lender that fits your needs. While there’s no shortage of mortgage lenders out there, they all offer loans with different terms, rates, fees, and experiences.

Here’s a game plan for narrowing down your choices and how to find the best mortgage lender for you.

Review Your Finances

Before reaching out to lenders, it’s good to assess your financial situation and understand what you can afford. More specifically, you’ll want to determine how much you can put toward a down payment and what’s a comfortable monthly mortgage payment.

You also will want to look at your credit score, which is an important factor in determining your eligibility for a loan and what interest rate lenders will offer to you. In general, the better your credit score, the lower the interest rate you’ll get.

Lenders also look at your debt-to-income ratio to see how much of your income is already committed to debts and how much of a monthly payment you can afford. Calculate your DTI ratio by adding up your monthly debt payments and dividing that number by your gross monthly income. Lenders will vary in their requirements, but many won’t want your DTI ratio to exceed 43%.

Get Mortgage Preapproval

Applying for preapproval from a lender can help give you an idea of what you’re able to afford. The preapproval letter will tell you how much money a lender expects you’ll qualify to borrow. Preapproval also shows real estate agents and sellers that you are serious about buying a home and have the ability to secure financing.

To preapprove you for a loan, your lender will review your financial situation. You’ll likely need to provide the following documents:

  • Personal identification.
  • Credit report.
  • Proof of income:
    • Pay stubs.
    • W-2s or 1099s.
    • Bank statements.
    • Tax returns.
  • List of debts.

Compare Mortgage Offers

Comparing offers from different lenders is a good way to make sure you’re getting the lowest interest rate and best overall deal. Remember there are different types of mortgage lenders to choose from.

After you apply for a mortgage, you’ll receive a three-page form called a loan estimate within three business days. The loan estimate contains important information about the mortgage that the lender is offering, including the estimated:

  • Interest rate.
  • Monthly payments.
  • Closing costs.
  • Taxes and insurance.

The loan estimate also will indicate the type of loan, the loan term, and whether your interest rate can change. All lenders are required to use a standardized loan estimate form, which makes it easier for you to compare loan offers from different lenders and decide which is right for you.

FAQ: Choosing a Mortgage Lender

Here are answers to some frequently asked questions about choosing a mortgage lender.

What are some things to look for when choosing a lender?

The first thing you’ll want to do is confirm that the lender is reputable. By taking out a home loan, you’re entering a long-term relationship with your lender, so it’s important that you feel comfortable working together. You’ll also want to compare loan estimates from several lenders so that you can determine which one offers the most favorable terms for you.

Is it better to use a local lender?

There can be pros and cons to using a local lender. If you’re looking for more personalized customer service, you may prefer to work with a local lender. A local lender likely will be knowledgeable about the market in your area and can help you find the right loan for your situation. However, larger or online lenders may be able to offer lower interest rates and fees because operating on a bigger scale reduces their overhead costs.

Do mortgage brokers get better rates?

A mortgage broker is a licensed professional who serves as an intermediary between you and potential lenders. Brokers can collect your financial information in one place and shop around on your behalf for the best loan options. There’s no guarantee a broker can get you a better rate compared to working with a lender directly, but their experience in the market and familiarity with lenders can make it more likely you’ll get the best deal.

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