How to choose a mortgage lender

Buying a home is an involved, multi-step process, but the first step isn’t what people usually think.

When you take this major life step, you need the right people by your side to guide you through the process and help you make choices that match your unique lifestyle.

What's in this article?

Types of mortgage lenders
How to choose the right mortgage lender for you
What questions should I ask a mortgage lender?
Get preapproved today with Compass Mortgage

That’s why choosing the right mortgage lender is an essential first step in the home-buying process.

Let’s dig into the types of mortgage lenders and the questions to ask, so you know how to choose a mortgage lender that’s right for you.

Types of mortgage lenders

The two main types of mortgage lenders are direct lenders and mortgage brokers. 

As the name suggests, direct lenders work directly with borrowers, while mortgage brokers work to match a borrower with the right lender for them.

Read on to learn more about how these lenders help borrowers.

Direct lenders

Direct lenders include banks, credit unions, or online organizations that create mortgages, fund them, and manage the repayments.

If you get a recommendation for a lender from a friend or family member, it is usually a direct lender. 

Many borrowers continue to use the same lender over time, which can help them secure a better rate due to the established relationship.

Direct lenders determine their own rates and terms, which is why comparison shopping is popular.

Taking the time to shop around for the best rates also can be a downside to those who don’t have the time or resources available. 

This is where the role of a mortgage broker comes into play.

Mortgage broker

Mortgage brokers are considered intermediaries or matchmakers between a borrower and lender.

They help borrowers compare rates by providing them with quotes from different lenders that match a borrower’s unique financial needs. They are compensated with a percentage of the loan amount.

While this may be a good option for some borrowers, the drawbacks can include the fees and the potential for conflicts of interest if a broker is choosing lenders for certain personal reasons rather than the best interest of the borrower.

In either case, it’s best to choose a lender or broker based on experience, recommendations, reviews, and comparison shopping.

Ready To Take Your Next Step?

Purchase - Refinance - HELOAN/HELOC(Required)
This field is for validation purposes and should be left unchanged.

How to choose the right mortgage lender for you

Finding the best mortgage lender is based on a combination of understanding your financial needs and feeling comfortable and confident in their expertise.

Let’s look at four steps you can take to help you find the right lender.

1. Check your credit and set a budget

Before you check out your lender options, take a look at your own personal financial situation to make sure you’re prepared to meet with a lender.

Bringing your own experience to the table will help you better understand what you’re looking for in a lender.

Perform the following steps before you meet with potential lenders:

  1. Pull your free credit report to determine the health of your score
  2. Start saving for a significant down payment (20 percent eliminates private mortgage insurance, but isn’t always necessary for securing a loan)
  3. Determine your debt-to-income ratio (DTI), which is your monthly debts divided by your gross monthly income

Once you understand your credit history and DTI, you can determine which areas need work. 

Many lenders require a DTI of below 43 percent, but some allow up to 50 percent.

Paying down high-interest debts and making all payments on time are the most effective ways to improve your credit score. 

As far as a down payment, this figure can range anywhere from 3.5% to 20% of the home price, depending on the loan product you choose. 

This is another good reason to go through preapproval and meet with a lender before you start your house hunt. Getting an idea of what you need before hand will make the process much easier. 

The better these figures, the better chance you have of securing the best rate and terms for you.

2. Understand your mortgage options

The most popular loan types are conventional loans and FHA loans.

An FHA loan is specifically designed to help those with lower credit scores afford a home loan. Lenders like them because they are insured through the FHA, are low interest, and give their clients an option for lower down payments

But depending on your unique background, you may have other options available that can offer significant savings.

For example, VA loans are available for veterans or active duty service members, and can offer more flexible lending options.

Be sure to ask your lender what loan types are available so you have a full understanding of your options.

3. Compare rates, terms, and fees

Shopping around to compare rates, terms, and fees with multiple lenders can help you not only find the best deal, but to find a lender that you enjoy working with.

This includes a lender who communicates in the way you prefer, is respectful, honest, and supportive, and makes you feel comfortable.

4. Get pre-approved for a mortgage

Mortgage pre-approval is an essential step in not only the lender-choosing process, but the home-buying process in general.

This step allows you to work one-on-one with a lender and determine your loan options based on your current financial picture.

You can get pre-approved with multiple lenders, and make a decision based on this process.

What questions should I ask a mortgage lender?

Building a list of questions to ask each lender is an excellent way to understand their communication style and your comfort level.

You can also gauge what to expect depending on the information they provide.

You may be able to eliminate some potential lenders based simply on how they answer your questions.

The following are ideas of questions you can take to a lender:

  • What are your credit requirements?
  • Which loan types do you offer?
  • What documentation do you require to prove income, debts, etc.?
  • How much of a down payment do you require?
  • Do you offer a mortgage interest rate lock? Can I get an extension if the closing doesn’t take place before it expires?
  • How long should the mortgage process take?
  • Are you my main contact throughout the process? 
  • What is the best way to contact you?
  • Which steps need to take place in person?

These questions should help you get a good idea of what’s required of you and how the lender operates. 

Feel free to add any questions of your own based on our steps for how to choose a mortgage lender.

Your lender is one of your partners throughout the mortgage process. 

Choose wisely, and choose someone you know has the right experience and your best interests in mind.

Get preapproved today with Compass Mortgage

If you’re ready to get started with a mortgage loan preapproval, apply today with the lending experts at Compass Mortgage.

The Compass team is defined by our work ethic and our core values: To treat every person we meet with love and respect, and to go above and beyond in all we do.

“Home to a Better Mortgage Experience” is our motto because we believe our corporate culture, our work ethic and our end results set us apart.

We look forward to helping you through the mortgage process, and answering any questions you may have.

Call us at (877) 793-9362 or fill out our contact form.

Photo by Joshua Mayo on Unsplash