How to choose a mortgage lender and get the best deal

With almost 5,000 mortgage lenders in the U.S. to choose from, how do you pick the right one?

Comparing interest rates and fees is part of the answer. After all, nobody wants to pay more than necessary. But there's more to consider.

The top mortgage lenders save money while also providing a seamless experience for borrowers. The right lenders help bring your home buying dreams to life without delays and stress.

Different types of mortgage lenders

The first question many new borrowers ask: What type of mortgage lender should I contact?

Here are the main choices: 

Banks and credit unions

Large and small banks offer a variety of mortgage loans and may reward existing customers with relationship pricing or simplified applications.

Most credit unions offer services similar to banks. Often, credit unions can save borrowers money since they operate as nonprofits.   

These financial institutions usually offer in-person customer service, often from the convenience of your neighborhood. Because they provide such a wide variety of financial services, they can't specialize in mortgages.

Direct lenders

Unlike banks and credit unions, direct lenders provide only loans to finance property purchases, including mortgage loans and refinances. Direct lenders also use money from investors to fund loans rather than using on customer deposits.  

Many direct lenders have in-person offices; others operate mostly online. 

Mortgage brokers

Mortgage brokers connect home buyers with a variety of potential lenders. Brokers can present your application to various institutions simultaneously. Brokers can usually offer personalized mortgage advice throughout the process. Their services often include additional fees.

Fintech lenders

Digital mortgage platforms have reshaped lending in recent years. These tech-driven lenders, including Better, can deliver faster application processes, quicker approvals, and sometimes better rates due to their lower operating costs.

Many online platforms feature advanced tools like mortgage calculators and real-time rate comparisons, making options clearer for first-time home buyers. The digital approach often creates more transparency with straightforward fee structures and clear communication.

Your ideal choice depends on factors like comfort with technology, desire for personal guidance, and unique financial needs.

...in as little as 3 minutes – no credit impact

What to look for in a lender

Whether you walk into a neighborhood bank branch or reach out to a fintech lender online, you have the same goal: financing a home purchase.

When evaluating any type of mortgage lender, borrowers should pay attention to:

Interest rates and APR

Interest rates help set your monthly payment amount and the total cost of the loan. With interest rates, a small decrease can have a large effect. For instance, a quarter-percent difference can could save thousands over a 30-year term.

For a $400,000 mortgage, dropping from 7% to 6.75% saves about $58 per month. That's nearly $21,000 over the loan's lifetime.

Home buyers should request quotes from multiple lenders and compare the Annual Percentage Rate (APR), which includes both the interest rate and some ongoing fees.

Learning how to shop around for mortgage rates can significantly reduce your long-term costs.

Loan programs and flexibility

Rates and APRs can vary a lot depending on the loan program borrowers use. FHA loans, for example, can offer lower rates to borrowers with average credit and small down payments. VA loans help military families buy with no down payment and no mortgage insurance while still offering competitive rates.

Meanwhile, conventional loans rely more on the borrower's credit history and down payment to set rates. Borrowers with excellent credit and large down payments can save more with these loans.

Not all lenders offer all loan types. For example, USDA loans and Jumbo loans aren't available with many lenders. Loan terms may also vary by lender and loan program. Home buyers should learn about loan types before choosing a lender. 

Learn more about FHA vs conventional loans.

Closing costs and fee transparency

Closing any new home loan requires fees known as closing costs. The lender charges some of these fees directly, but other fees pass through the lender to the borrower. 

Solid lenders won't shy away from discussing fees with home buyers. Buyers should request a breakdown of all fees, including those charged by third parties.

In total, closing costs typically range from 2 to 5 percent of the loan amount. For a $500,000 mortgage, that's $10,000 to $25,000 in upfront expenses. 

Some lenders offer to pay closing costs, which sounds like a great deal. But lenders usually charge higher interest rates in exchange. This arrangement can cost the borrower more long term. 

Service quality and communication

Lenders who communicate clearly with borrowers throughout the loan process can reduce stress and bypass annoying and expensive delays. 

Be sure to check out independent customer reviews on TrustPilot and other platforms to get a sense for what other customers think about each lender you're considering. Look for consistent comments in reviews. A problem that appears only once in a thousand reviews doesn't represent the overall customer experience.

Also, when comparing lenders, pay attention to each lender's typical response times to questions and to online form submissions. This can indicate the lender's response time. 

Digital tools and efficiency

New technology, including AI, can streamline your mortgage experience a lot. AI can do the repetitive work freeing up your loan officer to spend time thinking strategically about your needs.

Also, look for helpful tools like mortgage calculators that clarify potential costs before you spend time applying for a loan.

Look for fast response times for preapprovals. Better's preapproval can show estimated costs in as few as three minutes. 

...in as little as 3 minutes – no credit impact

How to pick a lender: A step-by-step guide

Here's the main thing: Don't compare lenders randomly or accept a friend's recommendation at face value. It's more important to find a lender that meets your unique needs. 

Following these steps to find the right lender can help[ get the most out of your homebuying journey. 

Know your personal finances

Collect essential financial documents: tax returns, pay stubs, and bank statements. Lenders scrutinize these documents because they have to know how much you can afford to spend on housing.

Also, check your credit report for errors that may be pulling down your credit score. A higher credit score usually allows more affordable mortgage loans at lower interest rates, so improving your score before applying can pay off.

Here's what to know about your personal finances:

• Credit score: Scores above 740 typically qualify for the best rates, while scores between 620-740 still open doors to competitive options. Someone with a credit score as low as 580 may still get approved for an FHA loan, but other types of mortgages will be off the table. Income stability: Do you have two years of consistent employment history? This strengthens your application, but there are workarounds for people new to the workforce or self-employed borrowers.
• Manageable monthly debt: Lenders measure debt-to-income ratio, or DTI, to see how much house payment your budget can allow. Paying down credit card debt before applying for a mortgage helps with this.
• Asset reserves: A healthy savings account, one with two to six months of mortgage payments saved up, reduces lender risk and can lead to lower mortgage rates. If you're not sure where you stand, find out before applying for a mortgage or get a preapproval to see how your personal finances look from the lender's point of view.

More about debt-to-income ratio

Not sure how to calculate your debt-to-income ratio and what it means?

You can find this number by adding up all the debt payments you make each month. For credit cards,  use the minimum payment due. Debt also includes personal loans, student loans, car loans, and any other installment loans – including the new mortgage payment. Don't include current rent or utilities or mortgage payments for a home you're about to sell.

Once you have your total monthly debt tallied up, divide it by your gross monthly income, which is the income you earn before taxes and benefits come out.

Someone with $4,000 in monthly debt and $10,000 in gross monthly earnings would have a DTI of 40 percent which is low enough to keep most mortgage loans moving forward toward approval.

DTIs of 45 to 50 percent or higher make mortgage approval more difficult. 

Get preapproved with lenders

Submit mortgage preapproval applications with three to five different lenders. Unlike prequalifications, preapprovals verify your financial data rather than taking your numbers at face value. Preapproval gives borrowers reliable numbers to compare.

A preapproval letter also gives you credibility with sellers because they know you can get mortgage approved and won't be wasting their time trying to arrange financing later. 

Preapproval typically takes up to three business days with many lenders. Since it uses modern digital tools to verify numbers, Better's preapproval process can show results in as few as three minutes. 

Compare offers

Analyze each Loan Estimate side by side. Beyond interest rates, examine APRs, closing costs, and loan terms carefully. Ask questions about unclear terms or fees. Reputable lenders welcome these conversations.

Red flags to avoid when comparing mortgage lenders

A mortgage can affect the borrower's life for decades into the future, so it's important to work with a lender that puts the borrower's needs first.

These red flags can mean the lender is looking out for itself more than you, the borrower. 

'No cost' loans

"No cost" mortgages aren't actually free. These lenders typically hide expenses by rolling them into higher interest rates or increasing your loan principal. These loans solve an immediate problem for cash-strapped borrowers, but they can also lead to tens of thousands of dollars in extra costs over the life of the loan.

Legitimate lenders offering a no-closing-cost mortgage will explain these trade-offs. They might work in your favor, especially if you plan to move or refinance the home within five to 10 years. Still, the borrower should be making an informed decision. 

No credit check or appraisal

Some new borrowers like the sound of this for obvious reasons, but "no credit check or appraisal" is a sure sign you should change lenders.

Reputable lenders have a legal obligation to verify your creditworthiness and measure the property's fair market value. Companies promising to skip these essential steps often charge excessive fees or interest rates, leaving borrowers with loans they can't afford. This makes foreclosure more likely.

Sparse details

Lenders who provide vague information about loan terms, interest rates, or closing costs should raise immediate concerns. Transparency matters throughout the mortgage process. Mortgage lending is complicated, but borrowers should have access to all the details they need. 

No answers to basic questions

Quality lenders readily answer questions about their mortgage rates and processes. If a loan officer seems evasive or rushes you toward a commitment, consider this a warning sign.

Non-QM loans

Non-Qualified Mortgage loans don't have the government oversight that protects consumers from unfavorable fees and terms. Non-QM loans have their place, especially for investors, but first-time homebuyers and most people buying a primary residence should steer clear.  

Key questions to ask when choosing a mortgage lender

Once you've narrowed your list of lenders, ask questions like these:

What documents do I need to close the loan?

Ask for a complete documentation checklist upfront. You'll typically need proof of income, tax returns, bank statements, and identification documents. Getting this list early lets you prepare thoroughly, potentially cutting your closing timeline.

Organized borrowers consistently experience smoother approvals because they've tackled documentation requirements from the start.

How do long-term and short-term costs compare?

Monthly payments tell only part of the story. Ask about your loan's total lifetime cost, including potential prepayment penalties or future rate adjustments.

Use a mortgage calculator to test different scenarios yourself. First-time homebuyers should examine how various down payment amounts impact both immediate expenses and long-term mortgage rates.

Can you explain your underwriting steps?

Understanding a lender's approval process sets realistic timeline expectations. Ask about typical underwriting duration, conditional approval possibilities, and how they handle unique financial situations. 

When can I lock in my interest rate?

Lenders should communicate with borrowers before locking in an interest rate on the loan. This step normally happens a week or two before closing day. Also, borrowers who are opening an adjustable rate mortgage should find out when their initial fixed rate will change.  

How do I avoid private mortgage insurance?

Private mortgage insurance, or PMI, annoys many borrowers since it adds money to each monthly mortgage payment. But for borrowers with lower down payments, PMI can make the loan affordable which leads to approval.

That said, loan officers can tell borrowers how to cancel PMI on their conventional loan later. Typically, borrowers can cancel their PMI once they pay the loan balance down to 80 percent of the home value.

FAQs about how to choose a mortgage lender

Want to know more about choosing a mortgage lender? These frequently asked questions can help:

What documents are typically required for a mortgage application?

Most lenders require proof of income (such as pay stubs and tax returns), bank statements, identification documents, and information about your assets and debts. It's best to ask your potential lender for a complete checklist of required documents early in the process to ensure a smooth application.

How much income do I need to qualify for a $400,000 mortgage?

Mortgage lending isn't absolute, so the income required to borrow a $400,000 mortgage varies depending on factors like your debt-to-income ratio, credit score, and down payment. Generally, you might need an annual income between $120,000 to $125,000. But it's best to consult with lenders since qualification criteria can vary.

Should I choose an online lender or a traditional bank for my mortgage?

Online lenders can offer streamlined processes and potentially lower rates due to reduced overhead. Traditional banks might provide more personalized service and may have advantages for existing customers. Consider factors like interest rates, fees, customer service, and your comfort with technology when making your decision.

Low costs, transparency, and speed: The home loan winning formula

The right mortgage lenders help home buyers get the most out of their investment.

Look deeper than interest rates and closing costs. These costs matter a lot, but the best lenders also respond quickly to questions, offer transparent customer service, and act quickly to keep the buying process on track.

Better's preapproval process is designed to combine all of these factors – competitive rates, transparency, and speed.

...in as little as 3 minutes – no credit impact