Once you know what kind of loan you want, the question is who to borrow from. The differences between lenders are real — on the same loan, on the same day, quotes vary — but they are hard to see unless you make the comparison in a structured way. Fortunately there is a standard form designed for exactly this.
The Two Kinds of Lender
Almost everyone you can borrow from falls into one of two camps.
Direct lenders lend you their own money. This group includes commercial banks, credit unions, savings institutions and mortgage banking companies. They show you the menu of loan programs they offer, and if you want to know how that menu compares with someone else’s, you do the comparing yourself.
Mortgage brokers do not lend you money. They take one application and shop it to multiple wholesale lenders, then bring back offers. The appeal is obvious: one application, several results, and access to lenders who do not deal with the public directly.
How Brokers Actually Get Paid
Older advice about brokers often claims their service is free to the borrower. It is not. A broker is compensated on every loan that closes, either by the lender (lender-paid compensation, which is built into the rate you are offered) or by you directly (borrower-paid compensation, which shows up as a fee at closing). Either way, the compensation is disclosed on your Loan Estimate.
This is worth understanding rather than worrying about, because it is regulated. Under federal loan originator compensation rules, a broker cannot be paid by both you and the lender on the same transaction, and cannot be paid more for steering you into a higher-rate or otherwise costlier loan. A good broker earns their compensation by finding you a better loan than you would have found alone. Ask directly how they are being paid on your file — the answer should come easily.
The Loan Estimate Is the Comparison Tool
Apply, and within three business days each lender must give you a Loan Estimate: a standardized three-page form. Because every lender uses the same form with the same figures in the same places, comparison stops being guesswork. (You may see older guides refer to a “Good Faith Estimate.” That form was retired in 2015 and replaced by this one.)
- Page 1 — loan amount, interest rate, monthly principal and interest, whether any of them can increase, and whether there is a prepayment penalty or balloon payment.
- Page 2 — the itemized closing costs, split into what you can shop for and what you cannot, plus cash needed to close.
- Page 3 — the APR, the total you will have paid after five years, and how much of the loan you will have paid off by then.
To compare fairly, request estimates from several lenders within a short window, on the same loan amount, the same term and the same down payment. Then read them side by side, page by page. Later, before closing, you receive a Closing Disclosure in the same format, and you must have it at least three business days before you sign — time deliberately built in so you can check it against the estimate you were given.
Does Shopping Around Hurt Your Credit?
Not meaningfully. Credit scoring models treat multiple mortgage inquiries made within a short shopping window as a single event, precisely so that comparison shopping is not punished. Getting several quotes is the intended behavior, not a risk.
What Else to Weigh
- Does the lender offer the program you need? Not every lender handles FHA, VA or USDA loans, and some rarely handle the loan type you want even when they technically offer it.
- Do they close on time? A purchase contract has dates in it. A lender who misses them can cost you the house.
- Do they listen or sell? If you describe your situation and immediately hear a pitch for one product, you are being sold to rather than advised.
- Are the answers straight? Ask what fees are not on the estimate, whether the rate is locked and for how long, and what happens if the lock expires. Vague answers now become expensive surprises later.
- Who services the loan? Many lenders sell servicing after closing, so the company you pay may not be the company you chose. Ask.
Watch for These
Quotes that arrive without anyone reviewing your actual details are advertising, not offers. Be wary of an estimate that omits property taxes and insurance from the monthly figure, making it look smaller than it will be. And treat a quote that changes substantially once you get someone on the phone as information about the lender rather than about the market.
