Many traditional lenders tightened restrictions on mortgage loan approvals after the housing market crash about 10 years ago. Since that time, there has been a boom in alternative lenders such as mortgage loan marketplaces and online mortgage lenders. The Federal Reserve’s bulletin on Residential Mortgage Lending found that in 2015, these alternative lenders originated about half of all owner-occupied home purchase loans.
With this shift, your options for finding a mortgage have widened considerably to include bypassing banks and shopping for your home loan from home on your computer. But how can you find the best mortgage rates online?
Here’s what you need to know.
Shopping for rates
Your first instinct is probably to shop around by looking for the best-advertised interest rate. However, the advertised rates are commonly based on a hypothetical borrower, typically one with great credit and lots of money for a down payment. For example, a lender may advertise a 3.47% rate, but that is for someone with a credit score higher than 680 seeking a non-jumbo loan and who has a 20% down payment. Your situation is assumably different.
The only way to find out what rate you qualify for is by applying for preapproval. Lenders typically need the following information from you:
- Proof of income.
- Social security number to pull your credit report.
- Other loans or financial commitments you have.
- Value of the house you intend to buy (or value of current house if refinancing).
- How much you want to borrow.
- Guarantor (if applicable).
If lenders don’t ask for enough information to understand your financial situation, the quote can’t be very accurate, so look for lenders with a thorough preapproval process.
You don’t want to seek preapproval from too many lenders, because of the time commitment and because too many inquiries can hurt your credit score. Here’s how to build a shortlist of the best online lenders for your situation.
How to find the best lenders for you
Online lender types
First, you should know about the different types of online lenders available.
- Marketplace lenders and brokers connect borrowers with lenders and earn commission on referrals.
You can apply as a borrower and then are connected with a number of potential lenders. Our top recommended marketplace lender is the Blackhawk Investments Corp.
- Online mortgage lenders issue loans directly with no middleman.
Browsing individual lenders may take more time but allows you to review companies without any bias from a broker, who is getting a cut. Our top direct lender picks are Quicken Loans and USAA.
- Online traditional lenders are big banks.
Many are now offering an online approval process so borrowers don’t have to go into a branch. US Bank and Chase are two examples. This makes getting a traditional mortgage more convenient, but it’s still more difficult to get approved.
Loan product options
- Fixed loan options:
Fixed loans have interest rates that don’t change, so payments remain the same throughout the loan. Options typically include 15- and 30-year terms, however, some lenders offer terms of 10, 20, 40 and even 50 years. You may also see variations, such as introductory interest-only periods. In this case, you pay an interest-only monthly payment for a period of time, and then the payment goes up to compensate for the period of lower payments. Compare loan length and introductory offers among lenders.
- Adjustable loan options:
Adjustable loans have interest rates that change based on the activity of the index they are tied to. You want to compare the loan lengths, introductory rates, intervals when the rate adjusts and limits to how much the rate adjusts. There are typically three limits:
- Initial cap: How much the interest rate can change after the initial introductory period.
- Periodic cap: How much the interest can change at each interval.
- Lifetime cap: How much the interest rate can change throughout the whole loan.
- Jumbo loans:
If you are interested in a home loan that will exceed conforming loan limits, then you’ll want to ensure the lender offers jumbo loans.
Read about choosing the right loan type for your mortgage
Government loan programs
Check whether the lender provides federal government loan programs.
- FHA: A Federal Housing Administration loan is a mortgage insured by the agency that lowers the risk for lenders. An advantage of this program for many people is that the required down payment is smaller, as low as 3.5%.
- USDA: Run by the U.S. Department of Agriculture, this loan is available for people living in rural areas. It is designed for those with a low to modest incomes who are unable to buy a house through other mortgage options.
- VA: This loan offering from the U.S. Department of Veteran Affairs is for U.S. military members, veterans, reservists and National Guard members. As with the FHA program, loans are insured and guaranteed by the federal government. One advantage of this program is no down payment is necessary.
When reviewing online lenders, you want to consider how streamlined the approval process is, how long it takes to process the loan if you are approved, their customer support and whether they provide online tools to help you manage your loan. Quicken Loans, for example, claims it can get you approved for a mortgage in eight minutes.
Find out what others have to say about lenders.
- The Consumer Financial Protection Bureau (CFPB): It maintains a record of complaints registered against mortgage lenders.
- SuperMoney home loans review and compare page: We also collect and provide free reviews on a wide range of lenders.
- Loan limits: Loan limits vary by lender. Make sure the lender will loan the amount you need.
- Credit score requirements: Some lenders cater to borrowers with a certain credit score, so check eligibility requirements.
- Availability: Some lenders only serve certain states, so be sure to check whether lenders serve your area.
Review and compare mortgage lenders
Finding the best mortgage rate online can be a confusing process because there are so many lenders advertising great rates, but you don’t necessarily qualify for them.
By using the guidelines above, you can streamline the process. Find the lenders who suit your needs, make a shortlist and then apply with each of them to find out what your rate will actually be and whether that lender is best for your situation.
Ready to start shopping around? Check out our home loan review page, where you can review and compare a wide range of online mortgage lenders in one convenient location.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.