How to Choose a Mortgage Lender

A mortgage lender is a bank or other financial institution that issues mortgages. Traditionally, home buyers looked for a lender after they had found a house to buy. These days, real estate agents typically encourage home buyers to work with a lender before looking at properties. There are two good reasons for this:

• Setting a price range: Since lenders will tell you exactly how much they’re willing to lend you, you can shop for a house with your actual price range in mind.
• Preapproval: Sellers feel more comfortable selling to buyers who have been preapproved for a loan. If you’re preapproved, you’ll have more leverage in your negotiations with the seller. You’ll also stand out in situations in which several other buyers are bidding. For more on the process of getting prequalified and preapproved, see The Mortgage Application Process.

How to Find a Mortgage Lender

You can find a mortgage lender either on your own or through a mortgage broker, a professional who specializes in finding lenders for prospective home buyers.

• On your own: Working directly with a lender is a fine option for most home buyers. If you do pursue lenders on your own, just be sure to visit and compare at least a few prospective lenders. The mortgage business is a relatively unregulated industry, so if you encounter a lender that feels at all shady, move on. If you’re uneasy about choosing a lender on your own, either work with a broker, or stick with big-name banks that offer mortgages, such as Washington Mutual, Wells Fargo, or Countrywide Financial.
• Through a mortgage broker: Working with a mortgage broker is often helpful for first-time home buyers or buyers with special circumstances, such as serious credit problems. Not all brokers charge fees to borrowers—those who do typically charge a commission of 0.5–2% of the principal. Brokers who don’t charge fees receive a commission from the lender, which usually requires the lender to raise the loan’s rate slightly. If you work with a broker who charges a commission-based fee, don’t pay more than 1%. To find a broker in your area, ask your real estate agent, use the yellow pages, or search online.

Searching for a Lender Online

Websites such as LendingTree.com (www.lendingtree.com) and E-Loan (www.eloan.com) provide free services that match up borrowers with lenders nationwide. Though these services can be helpful, it’s probably best to avoid them as a first-time home buyer—if you’re new to the process, it’s better to work with a lender in person.

What to Look For in a Mortgage Lender

As you look for a lender, try to find one that offers the best combination of the following factors:

• Reputability: Work only with lenders who demonstrate an earnest commitment to helping you through the process. If it feels like a lender just wants your money, move on. Good follow-up is also key—avoid lenders who dodge your questions or fail to respond to your requests in a timely manner. Ask lenders for references from previous clients, unless you were referred by someone you trust.
• Fees: Nearly all lenders charge an origination fee (generally 0.5–1% of the principal) to cover the expenses they incur to assess your creditworthiness and process your loan. Lenders who charge no origination fees usually offer higher interest rates.
• Rates: Don’t choose a lender based on its advertised rates—since rates depend on your personal situation, the rates you receive will likely differ from these rates. Instead, choose a lender that offers realistic rates that are also competitive with other lenders in your area.
• Specialization: Lenders you pursue should specialize in the specific type of loan you want, with a variety of options, such as a choice of terms, balloon loans, interest-only options, and so on.

What to Tell Prospective Mortgage Lenders

When you visit a lender in person, it’s helpful to know what to say and what not to reveal. In general, explain the basics of your situation without revealing too much detail.

• Tell the lender: The type of home you’re considering (such as a two-bedroom condo or a single-family house), as well as the basics of your financial situation, including your income, savings you have available for the down payment and up-front costs, and your credit score. With that information, the lender should be able to give you the information you need.
• Don’t tell the lender: The maximum budget that you have in mind for the home and, therefore, for your loan. You might also avoid telling the lender your credit score right off the bat—unless it’s very high—since you don’t want to deter a lender from considering you based on credit score alone.