As more people look forward to owning a home, aligning with the best mortgage lenders has become increasingly important. But how do you choose a mortgage lender to start with? McKay Wood understands the overwhelming feeling of making the right choice in these situations and has broken things down into bite-sized chunks for prospective buyers.

Before diving deep into selecting a mortgage lender, you should know the different types of lenders available. They are;

  • Direct lenders
  • Mortgage brokers
  • Correspondent lenders
  • Wholesale lenders
  • Portfolio lenders, and
  • Hard money lenders

Each of these lenders has its pros and cons. We quickly examine these below.

Direct lenders: These are financial institutions like banks, established organizations, and online entities with the power to provide mortgages directly to borrowers.

Pros: They have an in-house process that sees the applicant through from application to closing. Borrowers work with a loan officer.

Cons: Rates vary from lender to lender. Borrowers may need to scout for the best rate. 

Mortgage brokers: These are independent and licensed professionals who act as a bridge between direct lenders and borrowers. Brokers often charge a percentage of the loan amount for their service.

Brokers don’t fund mortgage loans, make lending decisions, or set interest rates or fees.

Pros: They simplify the mortgage shopping process and work with multiple lenders to bring the best deals to applicants

Cons: There may be a conflict of interest, especially for commission-based mortgage brokers.

Correspondent lenders: They originate and fund mortgage loans but sell the loans to larger lending institutions (direct lenders).

Pros: Applicants have access to a variety of loans

Cons: It may be hard to track which entity is managing their mortgage.

Portfolio lenders: They include credit unions, community banks, and savings and loans institutions. They originate and fund loans from their investor or clients’ bank deposits allowing them to hold the loans for longer.

Pros: Borrowers have access to favorable or discounted loans

Cons: Borrowers may have to go through a third party to get wholesale rates.

Hard money lenders: These are private investors or loan companies offering short-term loans to prospective borrowers. They generally have a relaxed requirement but may have a higher interest rate.

Pros: Easier mortgage loan qualifications. They offer mortgage loans to a wider audience.

Cons: Borrowers may face higher rates and fees. Loans are usually short-term and mean higher monthly payments.

How to find the right mortgage lender

You’re likely familiar with the mortgage broker that best suits your needs from the knowledge above. But even within that subset, there are hundreds of options to choose from. Below are some of the important factors that’ll guide your selection.

Get your finances in shape

The first and most important step in getting a mortgage and mortgage lender is your finances. Prospective homeowners should focus on getting their finances in order by planning ahead. They should clear their debt or reduce it to the minimum while saving for the big purchase.

Prospective buyers should also request their credit reports from the three main reporting bureaus to get an idea of their credit score and where they stand.

Set a Budget

Like any other major purchase, you should set a budget for your home buying needs and work towards it. Before setting your budget, decide on the type of house you’re interested in, the neighborhood, and the amenities. You can then research the average selling price of those properties to get a realistic value for your budget.

Explore your mortgage options

Go over the different types of mortgage lenders, their pros and cons, and what you can get from them. Select the ones that fit your situation and request recommendations from loved ones.

Examine the recommended lenders, search online for options, and read reviews from homeowners. Compare the rates and terms offered by multiple lenders and select one that works best for you.

You can work with a mortgage broker if you don’t have the time to do the entire research. Mortgage brokers can help streamline the available options to ease decision-making.

Get pre-approval 

Once you’ve selected a mortgage lender, discuss the most appropriate mortgage loan options and submit your application. It is always advisable to get pre-approved before shopping for houses.

Your pre-approval guarantees how much you’ll get towards your home purchase. It also gives you a better chance to plan your finances and repayment.

Please note that you don’t necessarily have to exhaust the amount pre-approved for your home loan. If needed, you can spend less than the approved amount and use the remaining for renovations.

Working with a mortgage lender can be overwhelming. However, it is worth it when you make the right decisions. Follow the tips above to guide your steps.