How to choose a mortgage lender: 5 steps

- First, take a look at your finances and decide what type of mortgage you need — loan programs vary widely.

- Next, find a few different lenders who offer the type of loan that suits you.

- Finally, compare rates and fees by getting a preapproval from at least three lenders before deciding on one.

From banks and credit unions to online lenders and mortgage brokers, hundreds of companies are competing for your homebuying business. Here’s what to know when you’re choosing a mortgage lender.

Here are five strategic steps to finding the ideal mortgage lender.

Understanding your financial situation will help you figure out the type of mortgage you want, and therefore the best lender for you. It’s important to know:

- Your credit score: Most lenders require a score of 620 or higher. If your score is at least 740, you shouldn’t have a hard time finding a lender, but if it’s on the lower side, you’ll have fewer choices. Some lenders specialize in borrowers with credit challenges.

- Your debt-to-income (DTI) ratio: This measures the amount of your monthly income that goes toward debt payments, including your mortgage. Lenders prefer your potential housing costs not exceed 28% of your monthly gross income, and your total debt payments (including housing) not exceed 36% of your monthly income — but some lenders and loan types are more flexible.

- Your homebuying budget: Having a general sense of how much you are able to spend on a house can also help you choose a type of mortgage. For example, if you’re planning to spend more than the conforming loan limit, you’ll need a jumbo loan.

Learn more: How much house can I afford?

Now you can use that information about your finances to choose a loan type. Common options include:

- Conventional loans: These are mortgages issued by private lenders with fairly strict financial requirements. It’s possible to qualify with as little as 3% down, but you’ll need to pay for private mortgage insurance (PMI) until you reach 20% equity in the home. Almost all lenders offer these loans.

- Government-backed loans: FHA, VA and USDA loans typically have looser requirements than conventional loans, and some don’t require a down payment.

- Jumbo loans: These loans are essential if you’re buying a home in an expensive area, but they’re harder to qualify for than standard conventional or government-backed loans.

Beyond your credit score and debts, there may be other factors that influence your mortgage options. For example:

- If you’re self-employed, you’ll need a loan that doesn’t require W-2 forms to verify income.

- If you’re a military member or veteran using a VA loan, you might prefer a lender who specializes in that type of mortgage.

- If you’re a first-time buyer who hopes to take advantage of down payment assistance, you’ll want a lender that has experience with those programs. In that case, look for one that participates with your state’s housing finance agency.

Learn more: 5 types of mortgage loans for homebuyers

Once you’ve picked a loan type, you can start shopping around for lenders that offer it. Your current bank or credit union is always a good place to start — though you’re under no obligation to stick with them — and you can ask friends and family for recommendations, too. You can also search online for lender reviews.

Beyond loan type, you’ll want to consider:

- Customer service options: Make sure the lenders on your shortlist have customer service options that work for you. For example, if a lender’s phone availability conflicts with your work schedule, it may not be a good fit.

- Sample rates: Many (but not all) lenders offer sample rates on their websites. These can help you decide if a lender’s offerings are competitive before you apply for preapproval.

- Perks: Lenders often offer discounts or special services to qualifying applicants, such as existing customers, veterans, first-time homebuyers or other groups. If a lender has a program or savings opportunity that applies to you, consider adding it to your list.

Learn more: Compare current mortgage rates for today

Getting a mortgage preapproval is the only way to get a firm sense of how much you can likely borrow, and what your interest rate is likely to be. The process may also reveal which lender you prefer in terms of technology, customer service or other factors. After you’ve picked the few lenders you want to compare, you can get started.

During the preapproval process, lenders thoroughly review your credit and finances. While the required paperwork for preapproval can vary, you’ll generally need to provide things like pay stubs, tax returns, bank statements and more.

** Keep in mind: ** A mortgage preapproval doesn’t mean you’re guaranteed the money, or even that exact amount of money. That doesn’t happen until after you formally apply for a mortgage on a specific property and the lender does a deeper dive into your finances — a process called underwriting.

Remember, shopping around for the best loan won’t significantly lower your credit score, as multiple mortgage inquiries within a 45-day period count as one inquiry on your credit report.

Learn more: How to get preapproved for a mortgage

Within three days of applying for a mortgage, your lender must provide you with a loan estimate. This document explains the exact terms of the loan, including the interest rate, repayment term and fees.

As you compare loan estimates, you’ll see a slew of third-party costs, which can include title insurance, a title search fee, an appraisal fee, a recording fee, transfer taxes and more. You can negotiate some of these expenses, but know that lenders don’t determine the fees for most of these services. On the other hand, that may mean you can shop around for these services, too.

Money tip: Financial institutions sometimes offer lender credits to help lower the amount of cash due at closing. Be aware, though: These credits can push up the interest rate on your loan, which means you’ll ultimately pay more.

Focus not just on the interest rate you’re offered, but also on the APR, which reflects the true cost of your loan, including interest, mortgage points and other fees. Differences in these expenses impact the overall cost of the loan — sometimes significantly.

Ask questions if you don’t understand certain fees or spot errors in the paperwork, such as a misspelled name or an incorrect bank account number. Getting ahead of any issues early can save you a lot of headaches later.

After you’ve reviewed all your loan estimates, you can weigh the information against your other options to decide which lender you want to go with.

Learn more: How to compare loan estimates

When shopping around, there are several questions you can ask to make sure you understand each lender’s process and options. Here are a few key ones:

- What paperwork do you require?

- Do you specialize in the type of mortgage I need?

- How many loans of the type I want did you close in the past year?

- How long does your rate lock last?

- How long do your mortgages typically take to close, and how frequently do you fail to close a loan on time?

- What are the steps in your underwriting process?

- How will I need to submit my documents? Online, by mail or in person?

Learn more: Bankrate's best mortgage lenders