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Shopping for a new home is exciting, but shopping for a mortgage? Not so much.
Unless you’re paying cash, finding the right mortgage lender is as crucial as finding the perfect place to call home. It could mean the difference between a seamless home-buying experience and one filled with endless requests and delays. You could also save thousands in interest and fees over the loan term by doing your homework. Here’s how to find a mortgage lender so you can bring your homeownership dreams to life.
Learn more: The best low- and no-down-payment mortgage lenders
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Mortgage lenders want reassurance that you can afford the monthly payments. Most prefer at least 24 months of consistent, verifiable income. However, some will accept less than two years of employment history in certain situations.
Self-employed borrowers with proof of income and tax returns, along with those who were enrolled in college, switched careers, or suffered from a serious medical issue, may still qualify. Some lenders also make exceptions for those who took time off for parental leave, to care for a loved one, or for a work sabbatical. You also might qualify for special types of home loans, such as non-qualifying mortgages, that target people with unique financial circumstances.
The higher your credit score, the better. A credit score of 740 or higher opens the door to the best rates and lowest fees, but a 620 is enough to get approved for a conventional loan.
You could have luck with a government-backed home loan product if your score is lower. FHA loans only require a 580 (or 500 with a 10% down payment). VA and USDA loans do not specify a minimum credit score, although each lender has its own requirements.
Read more: The credit score needed to buy a house
Lenders also assess your debt-to-income (DTI) ratio. Here’s how your DTI ratio breaks down:
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Front-end ratio: This represents the percentage of your pretax income spent on housing costs and should be around 28%. Calculate it by dividing your monthly mortgage payment (including escrow) by your gross monthly income.
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Back-end ratio: Your back-end ratio is the percentage of income used to cover all monthly debt obligations. Depending on the type of mortgage loan, it should be between 36% and 50%. Compute it by dividing the sum of your monthly debt payments (including the projected monthly mortgage payment) by your monthly gross income.
Dig deeper: The 28/36 rule — How your debt impacts home affordability
Not having a 20% down payment isn’t a deal breaker. Some loans require just 3% down or nothing at all. Still, offering more may get you a better rate and lower mortgage payments. Just be sure the funds are easily accessible.
Mortgage reserves may move the needle if the lender has doubts. These are your remaining cash and liquid assets after making the down payment. Reserves show lenders you have a cushion to fall back on if you hit a rough patch.
Learn more: How much money do you need to buy a house?
Conventional loans require a 620 credit score and usually just 3% down. But you’ll need to pay private mortgage insurance (PMI) until you reach at least 20% in home equity.
These mortgage products help make homeownership more accessible:
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FHA loans: Mortgages insured by the Federal Housing Administration, or FHA loans, require a 580 credit score and 3.5% down (or a 500 score with a 10% down payment). You’ll pay mortgage insurance for the life of the loan.
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VA loans: VA loans, insured by the Department of Veterans Affairs, are reserved for military-affiliated borrowers and offer 100% financing. The VA does not specify a minimum credit score, but you’ll typically need a score of 580 or higher.
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USDA loans: USDA loans, backed by the U.S. Department of Agriculture, are for borrowers looking to buy in rural areas. They don’t require a down payment, but there are income restrictions, and most lenders prefer a credit score of at least 640.
Need a little (or a lot) more than a conforming conventional loan offers? Jumbo loans are for borrowers looking to purchase luxury homes or live in pricier markets. Expect more stringent eligibility guidelines than you’ll find with conforming and government-backed loans.
Dive deeper: The different types of mortgage loans
Banks, credit unions, and online lenders fall into this category. You’ll work directly with these lenders from start to finish. Some feature down payment assistance programs or flexible loan options to help you get approved. Start with your financial institution to see if incentives are available to current customers. Also, ask friends and relatives for recommendations.
After closing day, some direct mortgage lenders service your loans themselves, meaning they process your monthly mortgage payments. Others will have a separate loan servicer handle your payments.
Mortgage brokers take the guesswork out of finding the best deal on a home loan. They are licensed professionals who shop for lenders in their network to find the best match and deal for your situation. In exchange for their time, either you or the lender typically pays a fee between 1% and 2% of the loan amount.
Do you have a large down payment but can’t get approved for a traditional loan? You might want a hard money loan, sometimes called a bridge loan.
Hard money lenders give short-term loans based on how much equity you have in the house. A hard money loan can be good if you’re a homeowner buying a house and need a financial cushion until your first home sells. However, be prepared for a higher interest rate, steeper fees, and a shorter loan term.
Lenders on your shortlist should be open to answering any questions you have about buying a house. Otherwise, it’s a red flag and a sign to move on.
Don’t know where to start? Here are some questions to get you moving in the right direction:
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What types of mortgages do you offer?
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How quickly do you process applications for preapproval?
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Do you offer a rate lock, and how long does it last?
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When do you provide a good-faith estimate?
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Who will be the primary point of contact?
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What are your hours of operation?
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Is support available in person or solely by phone or online?
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Are application updates provided through a client portal?
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Is an eClosing an option?
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Do you offer down payment assistance programs?
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Do you have escrow requirements?
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What forms of support are available once the loan closes?
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What payment options are available?
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What are the lending guidelines for your loan products?
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What are the current interest rates and APRs?
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What costs should you expect at closing?
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Will you service the loan or sell it after closing?
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Do you impose prepayment penalties?
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What does the underwriting process look like for the average borrower?
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How long does the underwriting process typically take?
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What’s the average timeline from preapproval to closing?
Considering a mortgage broker? Inquire about their processes. More specifically, how do they choose which lender best fits your situation? Also, confirm the cost of using their services and who pays the commission.
Read more: The best mortgage lenders for first-time home buyers
Most lenders let you apply for preapproval and upload the required documents online. Apply with at least three lenders if you’re not using a broker. Each preapproval requires a hard credit pull, but your credit will only get dinged once if you submit all your applications within 45 days.
Compare the rates, origination fees, mortgage insurance rates, and estimated closing costs of each loan quote to find the best lender for your financial situation.
Also, take a look at online reviews for your top picks. You’ll get a feel for how they do business and the customer support level.
If you feel overwhelmed or want to explore other options, it’s worth pausing your search and reaching out to a broker for assistance.
Learn more: Does mortgage preapproval hurt your credit score?
The best mortgage lender depends on your financial situation, credit score, debt load, personal preferences, and desired loan type. Start with your current bank or credit union and ask around for recommendations. Also, consider using an online lending marketplace to get a feel for what other direct lenders offer. Or hire a mortgage broker to do the legwork for you.
Inquire about lending guidelines, rates, fees, and what to expect after applying for preapproval. More specifically, what’s the price you’ll pay for a home loan? What does the process entail from application to approval? How long does it take the average borrower to close on a loan? And does the lender typically sell loans off once they’re closed? These are just a few questions to ask to move the conversation with prospective lenders in the right direction.
Unfortunately, some lenders engage in unscrupulous lending practices. They prey on innocent consumers by assessing hefty up-front fees, failing to disclose key details about their offerings, or operating without the proper licensing. Negative reviews are also a telltale sign of lenders you should avoid.
This article was edited by Laura Grace Tarpley.