How to choose a mortgage lender

Quick insights

• When it comes to buying a home, choosing the right mortgage lender may be just as important as the home itself.
• When comparing lenders, you may want to consider their interest rates, loan terms, reputation, product variety, preapproval process and closing costs.
• Doing your own research, working with a professional, opening a dialogue with the lender and pursuing multiple preapprovals for comparison can help you pick a mortgage lender.

If you’re gearing up to buy a home (especially if it’s your first), you may be looking for ways to narrow down your list of potential lenders to a suitable group. There are several different kinds of lenders and many factors to compare, which may make the decision somewhat intimidating at first glance.

In this article, we’ll explain the general options and provide tips on how to find a mortgage lender that fits your needs.

Types of mortgage lenders

The major types of mortgage lenders include banks, credit unions and online lenders. Choosing a mortgage lender from the various options may seem complicated. To begin demystifying the options, let’s define the typical lenders you may encounter while shopping for a mortgage.

Banks as mortgage lenders

Banks are for-profit enterprises, owned by shareholders, which offer a range of consumer financial products. Mortgage products at a bank may include conforming loans, jumbo loans, government-backed loans (such as FHA or VA loans) and refinancing. Banks typically have an extensive network of in-person branches and a reputation for prioritizing customer experience. Their processes are generally highly standardized with detailed loan criteria.

Credit unions as mortgage lenders

Credit unions are not-for-profit financial institutions that offer many of the same financial products banks do, including different kinds of mortgages. A credit union’s business approach might deliver more personalized service, flexibility and favorable rates. Eligibility for a mortgage loan may depend on an applicant’s employment or location, among other factors.

Online mortgage lenders

Online lenders do business through smartphone or web applications, without any brick-and-mortar branches. This type of lender may offer a range of mortgage types, including conforming, jumbo and government-backed loans (as seen at banks and credit unions), along with other specialized mortgages. Potential advantages of working with an online lender may include convenience, speed and lower rates. On the other hand, a lack of in-person communication may be a drawback for some.

Mortgage brokers

To choose a mortgage lender, many people work with a mortgage broker. This is an intermediary who works to connect borrowers with consumer-facing or wholesale lenders for a range of loan products. Working with a broker may help you find competitive rates quickly or help you navigate complex mortgage situations. However, broker fees can add to the overall cost of a loan. The quality of service can also vary depending on the brokerage.

Behind-the-scenes lenders: loan funding and selling

Customer-facing lenders and intermediary brokers often market the loan, process applications and manage other activities without directly supplying money. The institution may work with financiers behind the scenes to get the money for your loan. Lenders may sell your loan after it’s been written; when this happens, your terms will remain the same, and you will be introduced to a new loan servicer for the duration of your repayment.

Factors to consider before deciding on a lender

Now that you have a primer on the different types of lenders and how they operate, let’s dig into the factors you may use to compare them.

Interest rates and loan terms

The interest rate on your loan is used to calculate the interest charged on your unpaid principal balance every month. The lower the interest rate, the lower the interest charges. Rates can be either fixed (consistent for the term of your loan) or adjustable (tied to changes in the federal funds rate). For some, the dependability of a fixed-rate loan is ideal, while others may prefer an adjustable-rate mortgage.

The “term” refers to the length of the mortgage loan’s repayment period, typically 15, 20 or 30 years. Calculating the affordability of monthly payments based on the loan term and the interest rate a lender quotes you can help hone your lender comparison.

Lender reputation and customer service

Your mortgage may be the biggest debt you ever take on, with potentially decades of payments ahead. As you assess various lenders, finding a trustworthy lender you enjoy working with is worthwhile. You could investigate a lender’s reputation by reading testimonials and researching the lender’s history in the industry. If you decide to reach out for a quote or more information, you can use the lender’s technology, responsiveness and clarity as you assess them.

Product variety and flexibility

Different lenders tend to specialize in certain types of mortgages and financial products. For example, a government-sponsored FHA loan can only be provided by an FHA-approved lender. As another example, a homeowner may someday want to refinance, and it can be convenient to pursue that with the same borrower. Certain lenders may be more willing to tailor a loan’s terms to your situation and needs.

The preapproval process

If you’re serious about buying a home, getting preapproval for a mortgage can help you make an offer quickly in a competitive market. Going through the preapproval process itself can inform you about a specific lender—including its ability to communicate transparently, the efficiency of its system and the terms you qualify for.

Preapproval doesn’t typically obligate you to move forward with a specific loan. While one preapproval has benefits, there’s technically no limit on how many you can have at a time. Gaining multiple preapprovals with different lenders can help you choose a mortgage lender. Keep in mind that applications may require a hard credit inquiry, which may have an impact on your credit score.

Closing costs and fees

Most mortgages will include certain closing costs and fees that are due when you settle on your home purchase. Closing costs can vary and have a major impact on your bottom line. In some cases, certain lenders will be open to negotiating these costs, waiving fees or rolling them into the overall mortgage. Lenders typically include the projected closing costs in a Loan Estimate document, provided after preapproval.

Questions to ask a potential mortgage lender

If you find details or features unclear or unaddressed when researching a lender, a conversation might clarify matters. Do not hesitate to contact a lender and ask questions, such as:

• Do you have any special programs or incentives for first-time buyers?
• How do you determine the interest rate for my loan?
• Are there any prepayment penalties or other hidden fees?
• Can you provide a detailed breakdown of the closing costs?
• Who will be my main point of contact throughout the loan process?

In conclusion

There are many different decisions involved in buying a home, and choosing your lender correctly is key. Everyone usually has different needs, so your unique financial situation, preferences and long-term plan can narrow your choice of mortgage lender. Whether you’ve pursued other preapprovals or are only beginning your research, our home lending advisors are standing by to help with your homebuying needs.