Best Mortgage Lenders of 2021

A house is likely the biggest purchase of your life, and you will need a mortgage to buy one, unless you are flush with cash. The best mortgage lender not only saves you money but also takes stress out of the homebuying process. This guide can help when you are ready to choose a mortgage lender.

Locking in a low mortgage rate today can save you thousands over the life of your loan. Compare your mortgage rate offers with national average trends.*

A mortgage is a loan from a bank or other lender used to buy or refinance a home.

Mortgages are secured loans: The property acts as collateral as you repay the loan in monthly installments, including interest, usually over 15 to 30 years. If you fail to pay, the lender can foreclose on your home.

You don’t fully own your home until the mortgage is paid off. If you reach that milestone, you will need to check that the lien on your property was released by contacting your local secretary of state or county recorder of deeds. Your lender should also return the original promissory note to you.

According to a new U.S. News survey of prospective homebuyers, 83.7% of respondents are facing significantly higher prices in the locations they are hoping to buy.

In today’s market, homes are scarce and prices keep rising. It’s the affordability of homes that’s more worrying to people, however, not the availability. The survey found that 37% of respondents are more concerned about finding a home they could afford, while 26.9% of respondents are more concerned about finding a home they liked. A large group of respondents (35%) are concerned about both affordability and availability.

To have a chance of successfully purchasing a property, many buyers are being proactive: 51.2% of respondents are saving to make an extra-large down payment, while 39.3% are getting preapproved for a mortgage so they can make an offer quickly.

Additional survey insights:

For the vast majority of respondents, home prices have risen significantly in the area where they are looking to buy.

Respondents are most concerned about finding a home they can pay for.

Prospective homeowners are doing many things to prepare for their home purchases; almost two-thirds of respondents are saving for a down payment.

To give themselves a greater chance of successfully buying a home in today’s competitive market, more than half of respondents are saving to make a competitive offer with an extra-large down payment.

Of the prospective homebuyers surveyed, just less than half are still waiting to make an offer on a home.

Even though interest rates have been historically low recently, that was only the third-most-common reason why people are looking to buy a house. More people are moving for personal or familial reasons.

About an equal percentage of respondents plan to buy a home that costs $200,000 and under or a home between $200,001 and $400,000.

The most important factor when it comes to evaluating mortgage lenders is interest rates and fees.

The mortgage process depends on whether you are purchasing or refinancing a home. Here are the basic steps to buying a house:

Your mortgage interest rate is the annual cost to finance your home, expressed as a percentage of the loan amount. A 3.11% interest rate on a mortgage means you will pay 3.11% of your loan’s balance in interest each year.

Mortgage interest rates can be fixed or adjustable.

Fixed rate: A fixed-rate mortgage keeps the same interest rate throughout the entire loan term, and your monthly mortgage payment stays the same. You don’t have to worry about costs going up, but you can’t benefit if market rates fall unless you refinance.

The monthly payments on a fixed-rate mortgage are typically higher than the initial monthly payments on an adjustable-rate mortgage because the lender can’t increase your interest rate later.

Adjustable rate: The interest rate on adjustable-rate mortgages can change over time, which means your monthly payments can rise or fall based on market rates. Adjustable-rate mortgage interest rates depend on a benchmark rate, such as the prime rate.

When benchmark rates go up or down, so does your interest rate – and your monthly mortgage payment. Adjustable-rate mortgages can make sense when you plan to sell or refinance your home before the rate increases, or if you expect market rates to decrease.

Whether a fixed-rate mortgage or an adjustable-rate mortgage is best can depend on your market conditions, your finances and how long you plan to keep your mortgage.

Your mortgage rate is determined by a mix of factors linked to your risk as a borrower, your home and your loan, plus economic conditions. When lenders set your mortgage interest rate, they consider your:

As you’re comparing mortgage offers, you should consider both the interest rate and the annual percentage rate, or APR. The interest rate is the cost of borrowing money each year, expressed as a percentage. The difference between the two is that the APR reflects your interest rate plus other charges, such as closing costs, discount points and origination fees.

The right mortgage for you will depend on your finances, plans and preferences. Here are the common types of mortgages:

Nonconforming loans. These include government-backed loans and jumbo loans, which don’t meet Fannie and Freddie’s criteria for purchase. Jumbo loans exceed conforming loan limits and have stricter qualification standards because of the risk to lenders.

Conventional mortgages. These mortgages are not guaranteed by the federal government and are funded by private lenders. You’ll need a minimum credit score of 620, a low debt-to-income ratio and a down payment of at least 3% to qualify for a conventional loan. However, you will need to buy private mortgage insurance anytime your down payment is less than 20%.

Government-backed loans. These include Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture loans, which are less risky for lenders because the government agency insures the loan. You may have more success getting a government-backed loan if you can’t qualify for a conventional loan.

Most lenders require a credit score of at least 580 and a down payment of 3.5% for an FHA loan, but you could qualify with a credit score between 500 and 579 and a down payment of 10%.

The VA allows you to buy a home with no money down and sets no minimum credit score but requires a lender to review your full financial profile. You will need a Certificate of Eligibility, or COE, to show your lender that you qualify for the VA loan based on your service.

Most lenders require a credit score of 640 with no money down for USDA loans. You will need to meet income requirements and buy a home in eligible rural areas.

Fixed-rate mortgages. Interest rates and payments do not fluctuate with fixed-rate mortgages, which provides stability for budgeting. But if interest rates fall, you will have to refinance to take advantage of savings.

Adjustable-rate mortgages. These loans have interest rates and monthly payments that can rise and fall for the duration of the loan. An adjustable-rate mortgage has lower rates and payments early in the term compared with a fixed-rate mortgage, but rates can dramatically increase over the life of the loan.

Balloon mortgages. These home loans feature interest payments over a relatively short term of five to 10 years, after which a lump sum payment is made. The lower monthly payment compared with a traditional mortgage may appeal to a buyer who plans to sell or refinance before the balloon payment is due.

The right mortgage term for you will depend on your financial goals and circumstances. Short-term mortgages will save on interest and build equity faster, but long-term mortgages are more affordable. Along with the length of your mortgage, you will need to select a fixed or adjustable rate.

Here is more about the most common mortgage terms to help you pick the best one:

30-year fixed-rate mortgage. This tends to be the most popular choice because monthly payments stay low over the loan’s life span.

15-year fixed-rate mortgage. This loan typically comes with a lower interest rate compared with a 30-year loan and even more interest savings because you pay it off in half the time.

5/1 adjustable-rate mortgage. Your initial rate is fixed for five years, and then the rate adjusts once a year until the loan is paid off. If you won’t be staying in a home long, this could be a good choice.

10/1 adjustable-rate mortgage. Your initial rate is fixed for 10 years, and then the rate adjusts once a year for the remainder of your loan term. If you plan to sell or refinance before the 10-year fixed period ends, this mortgage might work for you.

Mortgage lenders want to know the risk of lending you money. A lender will look at not only your credit score but also your income, down payment and other key factors when reviewing your application.

Credit score: Your credit score is a major factor, but the minimum credit score can vary by lender and loan program. A conventional loan typically requires a minimum FICO score of 620, but some programs allow you to qualify with a lower credit score. You may be able to qualify with a lower score if the lender uses manual underwriting for your application.

Home price and loan amount: The larger your mortgage, the greater the risk for the lender. Lenders limit risk by following government loan limits. If you want to buy a property that costs more than these limits, you can apply for a jumbo loan.

Down payment: Your down payment is the amount you pay upfront for the property, while the mortgage covers the rest. A larger down payment leads to a lower interest rate on your mortgage. You’ll be borrowing less money, so lenders are taking on less risk.

Loan term: The longer the length of your loan, the higher the interest rate may be.

Loan type: Government-backed loans typically charge lower rates than conventional loans, but FHA loans can be more expensive once you factor in other fees, such as mortgage insurance.

Before you begin to browse homes, you should start the mortgage preapproval process. Some sellers only work with preapproved buyers, plus preapproval allows you to make an offer as soon as you find a place you love.

If you are ready to apply for a mortgage, here are the steps you will need to take:

1. Check and improve your credit. Review your credit history and fix problems with your credit report before you apply for a mortgage by contacting each of the three credit bureaus separately to dispute errors.

2. Gather documents. For your loan application, you will need pay stubs, tax returns and bank account statements.

3. Apply with a few lenders to allow for comparison shopping. Your credit score will not suffer as long as you contain this process to 45 days.

4. Compare offers. Each lender will provide you with a loan estimate showing your interest rate, monthly payment and other key details, such as closing costs.

5. Choose a lender. Select the best option after you have evaluated the features of each loan.

6. Respond promptly to requests during loan processing and underwriting. Expect questions and document requests.

7. Clear to close. The lender must send you the closing disclosure, which will show your final mortgage costs, at least three business days before your scheduled closing date. Compare the closing disclosure with your most recent loan estimate to check whether any fees have changed and, if so, why.

8. Close. Plan to pay your down payment and closing costs, which range from 2% to 5% of the purchase price. You will sign a heap of documents to complete your purchase. Congratulations!

You can evaluate mortgage companies based on four key factors:

If you’re in a tough financial position and can’t make your mortgage payments, you need to move quickly to protect your home. Whether the reason for your struggles is COVID-19 or something else, reach out to your lender right away to discuss your options if you can’t keep up with your mortgage payments.

COVID hardship forbearances are available for federally backed mortgages, which included Fannie Mae and Freddie Mac loans. If you don’t have a federally backed mortgage, you may still be able to skip mortgage payments under a forbearance or deferment agreement. You can also modify your loan to make monthly payments more manageable.

Record-low interest rates and pandemic-related relocations have sparked a homebuying frenzy, despite tightened lending standards.

The minimum FICO score to buy a home in 2021 will depend on the type of mortgage you want. You will need a FICO credit score of at least 620 for a conventional loan and at least 580 for an FHA loan with a 3.5% down payment. Steady employment is also a key factor for lenders as the pandemic continues.