How to Choose a Mortgage Lender

Unless you have a few hundred thousand dollars sitting around, you’ll likely need to get a mortgage to finance a home. However, you’re not alone: more than 62 percent of Americans have a mortgage. Unfortunately, some homebuyers don’t know how to choose a mortgage lender and end up with unfavorable terms and higher interest rates.

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Whether you’re passively looking or ready to buy a home in the next few months, it’s never too early to start researching mortgage lenders. Here’s how to choose a mortgage lender:

Determine the Type of Mortgage You Want

Before picking a lender, you must decide which type of mortgage best suits your financial situation. You may also qualify for government-backed loans, such as VA or USDA loans, that come with flexible terms. The most common types of mortgages include:

FHA loans
VA loans
Conventional mortgages
USDA loans
Jumbo loans
Hard money loans

Understand the Types of Lenders

After determining the type of mortgage you want, you should better understand the lenders available to you. These lenders may or may not be applicable depending on the type of mortgage you decide to get. For example, you can’t get a VA loan from a hard money lender.

Let’s explore the lenders that provide mortgages and look at some of the critical differences.

Portfolio Lenders

A portfolio lender is a financial institution that cuts out the middle man. These lenders don’t sell their loans to other companies. Instead, the lender originates and services the loan, and it will stay in its portfolio (thus the name, “portfolio lender.”). Because a portfolio lender is involved in every facet of the lending process, their loans typically have high-interest rates. Portfolio lenders don’t have to meet guidelines set forth by Fannie Mae; therefore, the underwriting process is a bit more lenient. Not only that, but portfolio lenders tend to offer more flexibility and can accommodate various types of buyers.

Mortgage Bankers

Unlike portfolio lenders, mortgage bankers typically don’t service a loan. A mortgage banker makes money from the loan origination fee and then sells it to another company. Although some mortgage bankers service the loan, many do not keep it in their portfolios. Lender institutions employ mortgage bankers, enabling them to approve or deny loan applications in many instances.

Retail Lenders

Retail lenders give loans directly to the borrower – there’s no financial institution that acts as an intermediary. These lenders don’t just provide mortgages; they also offer car loans, credit cards, personal loans, and various other forms of credit. A retail lender touches every step of the mortgage process, from the initial application to funding the loan. Thus, retail lenders are very “hands-on” and don’t generally outsource functions like portfolio lenders and mortgage bankers. There’s a good chance that you currently borrow funds from a retail lender, especially if you have a credit card.

Wholesale Lenders

Most wholesale lenders are behind-the-scenes intermediaries. These lenders provide loans to other parties, such as banks and credit unions. The third party directly interacts with the prospective borrower from the initial point of contact to the funding state. Additionally, wholesale lenders typically allow third-party institutions to underwrite the loans per the wholesaler’s guidelines. Wholesale lenders don’t usually keep loans in their portfolios; instead, they sell them to another servicer. Many financial institutions work with various wholesale lenders, allowing them to offer their customers a wide variety of loan products.

Hard Money Lender

Borrowers may turn to a hard money lender when they can’t get a loan from another source. Because these loans are riskier, lenders charge higher interest rates and require high down payments. Moreover, hard money lenders don’t pay as much attention to your credit score. Instead, they use the property as collateral. Run-of-the-mill financial institutions don’t typically provide hard money loans – you usually get them from a private investor or small firm. Hard money loans are non-conforming and thus, don’t have to meet the same standards as traditional loans. In general, hard money loans are typically a last resort for those denied a conventional mortgage or who have poor credit.

Online Lenders

Online lenders typically offer an automated preapproval paired with longer customer service hours. These lenders can fall into the above categories – portfolio lenders, mortgage bankers, retail lenders, and so forth. The primary difference is that online lenders do not have a physical presence. The entire process, from the application to the funding, occurs online. An advantage to online lenders is that they have lower overhead, resulting in more competitive interest rates. However, online lenders aren’t as personable as your local credit union or bank branch.

Compare Interest Rates

A lender’s interest rates should significantly impact your decision to use the lender or not. Fortunately, various websites you can use to compare interest rates amongst different lenders, such as Zillow. You should create a list of 10 –20 lenders and the current interest rate for the loan you desire.

Read Reviews

Before you take out a loan with a lender, you should read reviews from an unbiased source. However, you’ll need to be careful cause many websites publish reviews while simultaneously advertising the lender with an affiliate link. An excellent resource for impartial reviews is Ripoff Report. Although this website attracts customers with negative experiences, it also helps identify potential red flags. Another reputable where you can read reviews is the Better Business Bureau. The BBB gives every business a grade, and you can read complaints by category, such as “billing and collections” and “program with a product or service.”