How to Choose a Mortgage Lender & Get Approved

By Grant Edrington – Updated August 25, 2023

Are you thinking about trying to buy a home? One of the most important things you can do, even before you start looking for a real estate agent or house-hunting online, is finding a mortgage lender and getting approved to borrow.

You’ll spend a lot of time with your lender, and that person will get to know you intimately, so it’s critical that you find someone you can work well with. And, since you will rely on that person to help you take one of the biggest financial steps of your life, you need someone you can trust — though it doesn’t hurt to educate yourself about the process as much as possible before diving in.

In this article, we’ll walk you through the following steps:

Preparing to Shop for a Mortgage & Getting Approved

Understanding Mortgage Lenders 

Researching Mortgage Lenders 

Finding & Choosing the Right Mortgage Lender

The Pre-Approval Process

The Application Process from Pre-Approval to Final Approval

Navigating the Underwriting Process

Mortgage Approval: Clearing the Final Hurdle

Not Ready for a Mortgage? Consider Divvy

Preparing to Shop for a Mortgage & Getting Approved

When preparing to shop for a mortgage and find a lender, it’s important to understand your finances, including some key terms that we outline below. 

Credit profile: Whether or not you’re looking to buy a home, it’s a good idea to keep an eye on your credit report to make sure there are no mistakes or red flags. You can get your credit score for free through some nonprofit entities, or you can pay for the service. You can also get your credit report — a more comprehensive profile of your background, which the score is based on — for free every year.

Credit score: Generally, you’ll need a credit score of at least 580 to get approved for a mortgage. But you’ll most likely only qualify for government-backed loans like FHA loans or VA loans. You’ll need a higher score — generally 620 or above — to get better terms from traditional or conventional loans.

DTI: Another key factor in qualifying for a mortgage is the debt-to-income ratio. DTI is calculated by dividing your monthly debt payments by your gross monthly income. A DTI of 43% is generally the highest a borrower can have and still qualify for a mortgage, and most lenders would prefer it be no more than 36%.

Employment history: It’s best if you don’t job-hop, though that may not be a deal-breaker if you don’t have gaps between the jobs, and if you demonstrate stable income through that time. When you apply for a mortgage, you need some serious paperwork to apply for a mortgage, including two years’ worth of W-2s and several weeks’ worth of paystubs.

Additional documentation: You’ll also need income tax returns for at least the last two years, several months’ worth of bank and investment account statements, and documentation proving alimony or child support payments, if applicable. In addition, if you are receiving funds toward a down payment as a gift, you’ll want to have a letter explaining the details.

Understanding Mortgage Lenders

Chances are you’ve got a pretty good idea of how important a mortgage lender is to your home-buying process. But just like a lot of other things in the housing market, there’s some jargon that you might want to educate yourself on — and some nuance to who exactly does what.

Mortgage Lenders vs. Mortgage Brokers

As you might know, mortgage lenders are institutions that will make loans that you can use to buy a home. Lenders include banks, credit unions, online mortgage companies, and so on. But you may also encounter mortgage brokers. These are individuals or companies that take your information and connect you to the best loan for your situation.

Which approach is best for you? If you already have a relationship with a financial institution that also lends mortgages, that might be a good place to start. Alternatively, if you fall into particular categories — you’re a veteran, say, or you are planning to buy a home in a rural area — you may want to search for a specialist in VA or USDA loans.

And if you’re not sure where to start, you may want to contact a mortgage broker. Brokers are mortgage professionals who can vet a wide variety of lenders (and types of loans) for your specific situation.

Researching Mortgage Lenders

One of the easiest places to start looking for a mortgage broker or direct lender is through people you know. Getting a mortgage is a big commitment: it takes time and money and has a huge impact on your personal and financial life. But it’s also something you don’t do very often in your life. So if someone you know had a good experience, that recommendation can go a long way.

If you’re already working with a real estate agent, that person will probably have recommendations, as well. But it’s important to note that you should start the process of finding a mortgage lender or broker well before you start house-hunting, so you know how much you can afford.

No matter how you get your recommendations, it’s most critical that you shop around, ideally contacting 3 or 4 loan officers (direct lenders or brokers) to see what they can offer you. See how you like talking to each person, and make sure you feel that they listen to you.

Finding & Choosing the Right Mortgage Lender

Once you’ve identified a few lenders and/ or brokers who seem promising, it’s a good idea to ask for a meeting, even if it’s just on the phone. Tell the loan officer about your situation, and what type of loans or financing strategies you are considering. Ask what they’d recommend, and why. Also ask them to tell you the interest rate, estimated fees, and monthly payments for the type of loan they’d recommend for you. 

Don’t feel you should automatically choose the lender or broker who offers the lowest interest rate. By going through the process described above, you should be able to narrow down your choices to someone who can offer you a good financing strategy, but also be willing to communicate with you and explain why different options might be best for you.

Once you’ve identified a few loan officers, it’s time to get preapproved.

The Pre-Approval Process

You’ve no doubt heard that you should get prequalified or preapproved for a mortgage, but you might not know that the two terms don’t mean the same thing. A prequalification is a much less formal process that simply gives you a general sense of how much you might be able to afford. It isn’t worth much when you go out to look at homes you might want to buy and it doesn’t guarantee you can move quickly if you find a house you love.

In contrast, a preapproval is a stringent process that involves submitting all the necessary documentation to the loan officer you’ve selected. Being preapproved doesn’t guarantee that you will get the mortgage you need, but most sellers will view it as proof that you’re a serious buyer and that you are able to be approved, and you’ll be farther into the process when you are ready to make an offer on a home. 

When Should You Get Pre-Approved?

You will almost certainly need a preapproval before you start house-hunting since any seller will need to know that you are able to make good on your offer to buy. You’ll also want to leave time to catch and correct any errors on your credit profile before you start shopping around.

But a preapproval will likely only be good for a short period, around 45-60 days, so you should complete the process as close to the start of your house-hunting journey as possible. 

What Documents Are Needed for Pre-Approval?

To be pre-approved for a mortgage, you’ll need to round up a lot of documentation. Make sure you have the following:

  • Your last few pay stubs or comprehensive income statements if you’re a non-salaried or self-employed worker.
  • W-2 forms for the last two years, or 1099 or comparable if you’re non-salaried. 
  • Signed Federal tax returns for the last two years
  • Documentation of any other sources of income, such as alimony
  • Bank statements for the last two months
  • Documentation of the source of your down payment: investment or savings account statements showing at least two months’ history of ownership. 
  • If some of the funds were a gift, get a signed statement from the donor stating that the funds were a gift.
  • Proof of your identity (typically a driver’s license or non-driver ID)
  • Your social security number
  • Certificate of housing counseling or home buyer education, if you have one
  • If you are an active service member or veteran, you should obtain a certificate of eligibility from the Department of Veterans Affairs

Once you’ve collected all those documents, make sure you keep updating them with the most current versions of each.

It’s also wise to get preapproved by more than one lender. Research from housing market experts shows that borrowers who shop around can save, in some cases significantly, on their mortgage. 

Keep in mind that every time you apply for a different preapproval, your credit score will get a small ding. But that’s okay: as long as all the credit inquiries are made within 45 days of each other, they will only be recorded on your credit report as a single inquiry. You can read more about what happens when a lender checks your credit here

The Pre-Approval Decision

If your preapproval is declined, you can ask the lender to explain why. You should definitely make sure there are no errors on your credit report, and if there are, get them corrected. If your credit score is too low, you can work to get it higher.

But if you do get preapproved, you’ll be able to view a standardized document, called a Loan Estimate, from each lender, which you should read carefully. Make sure you understand the terms of the loan: how long does the mortgage last? Are you paying the same amount of interest throughout the whole life of the loan? How much is the lender willing to let you borrow? Is the interest rate locked in, and if so, for how long? If any of this info is unclear, you can always ask your lender for more information.

Also, make sure that the Loan Estimates include the APR, or annual percentage rate, for the loan APR can include many things beyond just the loan’s interest rate, such as fees or points. It’s the best way to compare different loans from different sources. 

The Application Process From Pre-Approval to Final Approval

Once you have a preapproval, you’re ready to shop for a home. And once you’ve found a home you want, and made an offer that’s accepted, you’ll probably have to repeat a lot of the preapproval process again. That’s because many of the documents you originally submitted may have become stale — but also because the lender will need information about the property you’re going to buy.

As soon as you can, let the lender know about your situation, and that you are ready to proceed with a mortgage application. Ask what new documentation is needed, and submit that as quickly as possible. Make sure that you understand any deadlines your lender has, and if you’re working with a real estate agent, make sure he or she knows, too.

Confirm that every piece of information you send to the lender has been received, don’t just assume. Check your email, phone messages, and texts frequently during this process to make sure you don’t miss anything. You may hear from more than one person in your lender’s office during this time, especially since they may be working against the clock to get your final application approved.

Underwriting can be a stressful phase. Paperwork may go missing, you may not understand something your lender says, or vice versa. The underwriters — the department in the bank that has the final say over the decision to lend — may ask for more information, additional documentation, or clarification/explanation of something in your application. It’s critical to respond as quickly as you can, and always be honest. 

It’s also important to understand that a mortgage application that drags on for too long could present a problem. Not only could your loan estimate expire, but your interest rate lock, if you had one, could go stale (they’re usually only good for 30, 45, or 60 days.). Interest rates could change enough that you can no longer afford the home you agreed to buy. In a worst-case scenario, you could forfeit your earnest money if you can’t get your mortgage in time to close according to your contract. 

You should also understand that just because you have a preapproval, it doesn’t mean your mortgage approval is necessarily guaranteed. It’s rare for a preapproved borrower to be denied a final mortgage, and if it happens, it’s usually because of something preventable. Here are some possible reasons:

You had a big change in your financial profile after receiving your preapproval

This could be the loss of a job, but it might happen if you make a big purchase that changes your DTI or apply for credit. This is not the time to open a new credit card or buy a new car — wait until after you’re settled in your new home.

You had a negative mark on your financial profile

This is definitely not the time to miss a credit card payment. 

Something changed with the lender or the housing market

Changes in mortgage rates may impact your ability to afford the home of your dreams. Unfortunately, if those changes are big enough, your lender may deny your loan.

The home isn’t one that the lender wants to finance

There are many types of homes that make lenders squeamish about lending, and those that fail inspection or appraise for less than the contract price are two big red flags. 

Mortgage Approval: Clearing the Final Hurdle

Once you have final approval of your mortgage, you are usually cleared to “close” — finalize the purchase — on your new home. Shortly before you get to the closing table, you will receive a Closing Document. Review that closely to make sure the terms match those on the Loan Estimate. 

Some costs associated with your mortgage may change between the time of your preapproval and when you go to close, and by law, some may not. Usually, any changes are the result of something you’ll be aware of, such as a change in interest rates, a decision to lock interest rates or not — or the outcome of your home’s appraisal.

As with every step in the mortgage process, you should read the closing documents carefully to make sure you know what is expected of you, that your information is correct and complete, and that you understand the terms of the loan.

Conclusion/Final Thoughts

If you’ve made it to the closing table, congratulations! Buying a home is a marathon — and homeownership is a big journey. The most important thing to keep in mind is to always ask questions about anything you don’t understand. Don’t assume any step along the way is something you just don’t know, and always read and reread all your documents to make sure they’re accurate.

Not Ready for a Mortgage? Consider Divvy

If you can’t qualify for a mortgage just yet but still want to get on the path to homeownership, Divvy could be a great option. Approved Divvy customers get to choose almost any home on the market (that fits their budget and our criteria), rent it while saving toward homeownership, and have the option to purchase it at a transparent, preset price at any point during their lease. Our qualifications are more flexible than those of a traditional mortgage lender, as we look for:

  • A credit score of at least 550
  • A minimum monthly income of $2,500
  • 3 months of verifiable income
  • A passed background check and valid ID
  • A qualifying debt-to-income ratio

Grant is a member of the marketing team and focuses on connecting aspiring homeowners in our metros with Divvy. He's worked on marketing teams spanning all parts of the homeownership journey, including home loans, power tools and home improvement, siding and flooring, and now Divvy. Grant graduated from Villanova University and became a homeowner in 2021.