How to choose the best mortgage Lender

Mortgage Loans, Types | How to Choose Best Mortgage Lender

While purchasing a home, we often give more importance to the home loan process but overlook the mortgage loan aspect.  A mortgage is also a type of loan where you use your real estate property as collateral against the loan.  If you are about to purchase a home and looking for a lender, here, we have covered what a mortgage loan is and how to choose the best mortgage lender.


  1. Mortgage loans are loans where home buyers use their real estate property as collateral.

  2. There are different types of mortgage loans, like fixed-rate mortgages, variable mortgages, or split mortgages.

  3. When borrowing from a lender, it is important to consider a loan type, loan term, interest rate, and other associated fees.

  4. A credit score is an important aspect of a mortgage loan; if you have a high credit score, you get a lower interest rate and reduce your monthly mortgage payments.

What is a Mortgage? 

Mortgage loans are also known as loans against property, where a home buyer pledges their property as collateral against the loan.  Mortgage loans are secured loans that are specifically tied to real estate.  It is a long-term loan that offers a variety of loan terms, such as the length of time to repay the loan, which is between 8 and 30 years.  Mortgage payments include interest, principal, and escrow payments covering property taxes and homeowners' insurance.

A mortgage loan is a type of loan where a consumer who purchases a house agrees to repay the loan in small, equal and fixed monthly payments or specified periods.  

Here, it is important to understand when you should get a mortgage.  A simple time to get a mortgage is when you are considering buying a house, but you can only afford to pay part of the price of the house in full and upfront.  One way to bypass this hefty process is to pay a portion of your home's value upfront, called a down payment.  The money you borrow from the bank called a mortgage, is repaired with interest, and you get your home in exchange.

What are the requirements for a Mortgage?

You must consider a few requirements if you are looking for a mortgage loan.

1. Credit score

A credit score is an important aspect and requirement before taking a mortgage loan.  It shows your financial history and also indicates your creditworthiness to lenders.  If you want to secure reasonable interest rates against the loan, it is good to have your credit score ranging from good to exceptional category. 

2. Income

There is no minimum requirement for income if you are applying for a mortgage.  However, your income can limit the amount you qualify for the loan.  Lenders also look for your income stability and two years of employment proof. 

Lenders consider different types of income, like overtime, commission, bonus, dividend, social security, alimony, and child support, while making a mortgage application.  Lenders would like to look for your income after deduction if you are a self-employed homebuyer.  Here, many deductions may reduce the loan you qualify for.

3. Assets

Some lenders would like to know about the valuable assets you hold.  If you face financial hardship while paying the mortgage, these assets must be converted into cash.  These assets include cash accounts, retirement accounts, stocks and bonds, jewelry, artworks, or other collectibles.  You must provide proof of ownership and the value of your assets. 

4. Property Type and Purpose

Requirements of a mortgage are based on the buyer's financial history, but the lender also would like to consider the purpose of the property you want to buy.  For example, a primary residence is a house that you buy to live in.  Here, you usually qualify for lower interest rates and better terms, while if you purchase a property as a vacation home or investment property, you might get a higher interest rate.

What Are the Different Types of Mortgages?

Borrowers can choose from three types of mortgage: a fixed rate mortgage, variable rate mortgage,  or split mortgage. 

1. Fixed Mortgage

In fixed mortgages, the interest rates are locked for a certain period, usually between 1 and 5 years.  If in case the lenders increase or decrease the rates, you still make the repayment of the loan for the entire term at a fixed rate.

Fixed-rate mortgages are a good choice for first-time home buyers who are about to adjust to their routine for making loans.  Also, people who are certain about their budget can go for fixed-rate mortgages.  Investors who want to ensure a consistent passive cash flow in their investment properties can also opt for fixed-rate mortgages.

These types of mortgages have numerous benefits for home buyers, but there are some potential disadvantages.  If the interest rates go down, they will not reap the benefits of low-interest rates enjoyed by other borrowers on variable rates.  On the other hand, if you want to break your contract with your lender, you must pay a break fee, which can be more expensive.

2. Variable rate mortgage

In a variable interest rate mortgage, the interest rate changes over the life of the loan.  If the interest goes, your repayment also increases.  If the interest rate goes down, you save a considerable amount.  Apart from that, variable-rate mortgages also offer flexibility when compared to fixed-rate mortgages.  Here, you get the flexibility to make extra payments and access to offset subaccounts.

On the downside, where you reap the benefit of low interest rates during the low interest rate environment, you also get exposed to the risk of high interest rates that can affect your budget when you make loan repayments.

3. Split Mortgage

In Split Mortgage, you can split your loan into multiple accounts.  Here, you get the benefit of variable-rate loans and fixed-rate loans.  You get to reduce the impact of any rate rise while you also get access to flexible features like the ability to make extra repayments.  Here, you can also choose how you want to split your loans, giving you the flexibility to structure your loan according to your terms.

How to choose the Best Mortgage Lender? 

According to a study conducted by Bankrate, it was found that when a borrower compares at least three lenders, he saves a considerable amount compared to those who don't do so.  Before you start your shopping for a mortgage lender, there are a few steps you must consider

1. Build your credit score.

Before looking for a mortgage lender, it is always good to check your credit score and reports.  If you think your credit score is somewhat in the fair or bad category, try to improve it by looking for errors, late payments or any corrections it needs.  If you have any high outstanding balances, free them down to lower your credit score.  Here, you must understand that late payments or high outstanding balances have a 30% weightage in your credit report.

2. Understand your budget

Before starting to shop for a mortgage lender, it is good to understand how much house you can afford.  It doesn't matter whether the lender will preapprove it or not.  This pre-approval is based on your gross income, outstanding loans, and revolving expenses.  However, you must also consider your other monthly bills like utilities, gas, health insurance, etc. 

3. Understand your mortgage options.

There are various types of mortgage loans in the market, and the best way to find the best mortgage lender is to know their different types.  They are conventional, Jumbo loans, FHA, and other government bank loans, fixed-rate mortgages, adjustable-rate mortgages, etc. 

While taking a mortgage loan, we often get stuck to the outdated way of paying a 20% down payment to afford a home.  However, many lenders and financial institutions require only as little as 3% of the down payment.  However, if you put less than 20% of the down payment, you will get a high-interest rate and require mortgage insurance.

4. Compare multiple lenders

Settling on the first lender might not be the best idea.  The better option is to shop for the best interest rate from different lenders like banks, credit unions, online lenders, etc.  Apart from interest rates, you must also shop for long-term down payment requirements, mortgage points, mortgage insurance, closing costs and other landing fees.

5. Get pre-approved for a mortgage.

If you get preapproval with at least 3 or 4 different lenders, you can get the best mortgage.  With the approval process, lenders review your credit and finances.

What credit score do I need for a mortgage loan?

When taking out a mortgage loan, a credit score is a basic requirement the lenders look for.  However, different lenders require credit loans according to their loan time.  The credit score for most loans is at least 620 for buying a house.  If you have a higher credit score, you increase your chances of getting your loan approved.  Also, applicants with a score of 740 or higher get lower interest rates on their loans. Read also... How can I raise my credit score in 30 days

  1. Conventional loan: For a conventional loan, the requirement for a credit score is at least 620.

  2. FHA: For an FHA loan, the credit score requirement is 500, and you have the best home loan, which the Federal Housing Administration insures.

  3. VA loan: Mortgages guaranteed by the Department of Veterans Affairs, also known as VA loans, need a minimum credit score of 640 to buy a house.

  4. USDA loan: The United States Department of Agriculture doesn't have a set minimum credit score requirement; however, the lenders, if they have a credit score 640, are eligible for USDA loans.

  5. Jumbo loan: Jumbo loans require a credit score of 700 or higher because lending much money is quite risky, and lenders look for a solid financial and strong credit score.

Bottom Line

Mortgages are an important part of the home-buying process.  Also, to give the most benefits to the homebuyer, there are different types of mortgages where they get the chance to choose the one that suits their circumstances.  Here, we have covered everything, from what a mortgage loan is to how to choose the best mortgage lender to simplify the homebuying process for you.

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Win Harrison 25 Jun, 2023


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