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How to Choose a Mortgage Lender — Home Buying Step 3
How to Apply for a Mortgage Without Accidentally Sabotaging Yourself
Before anything else, you must understand how to choose a mortgage lender who will guide you through the process instead of just selling you a product.
Most buyers begin their home search online, and that is where the ads from lenders appear. Many big-name and online lenders are reputable and can close loans, but they all share one limitation: they are not local. A local lender is easier to reach, easier to hold accountable, and easier to sit down with when something goes wrong.
When you begin the buying process, one of the most important early decisions is to understand how to choose a mortgage lender who will guide you instead of pushing products.
If you haven’t already reviewed your credit report or created a realistic home buying budget, start with Step 1: Know Your Credit and Step 2: Build a Budget That Tells the Truth. These two steps prepare you for the conversations you’ll have with a lender.
Rate shopping still matters. Over a 30-year mortgage, a quarter percent difference in interest adds up. But the relationship matters just as much as the rate. Your lender will examine your bank statements, tax returns, income history, spending habits, and assets. They learn more about your financial life than almost anyone else, which is why trust and communication matter so much.
Several years ago, I worked with a couple who chose an online lender. Everything went smoothly until three days before closing, during the week after Christmas. Their loan officer went on vacation. The person covering the file did not understand it and asked for nearly every document to be resubmitted. With a local lender, the replacement likely would have been in the next office and the problem could have been solved quickly. Distance and call centers make everything harder when something unexpected happens.
How to Choose a Mortgage Lender
A good lender does more than quote rates. They should walk you through how your income, credit history, employment, deposits, and existing debts will be evaluated. They should also be upfront about which loan programs you may qualify for and which ones would be a stretch. When you feel comfortable asking questions—and getting clear, direct answers—you are far less likely to be surprised later in underwriting. Choosing the right lender sets the foundation for the entire loan application that follows.
How to Complete the Loan Application When You Choose a Mortgage Lender
Nearly all lenders use the Uniform Residential Loan Application, also known as Form 1003. How you complete this form determines how many questions the lender has to ask later. Before you choose a mortgage lender, it helps to understand how the loan application is evaluated and why small errors can slow approval.
Fill Out Every Section
If a section does not apply to you, write “N/A.” Leaving blanks usually leads to follow-up questions and additional document requests. Clear answers at the start mean fewer headaches later.
Tax Returns: How Many Years Do Lenders Need?
When I worked at USDA Rural Development, we requested two years of tax returns as a standard rule. If you apply early in the year and have not yet filed the current return, the lender uses the previous two years and then requests the new return once filed. Most lenders follow this pattern—they want a consistent income history, not a single good or bad year taken out of context.
Provide Only What Is Requested
One of the most common problems I saw was borrowers sending far more documentation than requested. If we asked for two months of bank statements, some people sent six or twelve. If we asked for two years of tax returns, some sent ten. I also routinely received hundreds of pages of self-pulled credit reports.
Lenders cannot use consumer credit reports. They must use their own official Tri-Merge Credit Report (TMCR). But once you send a document—whether they asked for it or not—they must review it. That review sometimes raises new questions, slows the file, and occasionally derails approval. The same is true for extra bank statements, extra pay stubs, and extra letters of explanation.
This is another reason to choose a mortgage lender who explains what they need and why, instead of overwhelming you with unnecessary requests. The safest approach is simple: give the lender exactly what they ask for, no more and no less.
Why Lenders Examine Deposits and Transfers
Lenders must determine where your money comes from and whether it is stable and allowable for mortgage approval. That includes both assets and income.
USDA Rules for Deposits
Under USDA’s current guidance, any cash deposit or unexplained deposit over $100 must be documented and explained for loan qualification purposes. Once such deposits appear on your bank statement, the lender must obtain an explanation. If funds cannot be documented, they cannot be counted as income, reserves, or down payment contributions.
This is why it is important to avoid random, undocumented deposits when preparing to apply for a mortgage.
If You Run a Small Business or Side Gig
If you earn money through a small business or side gig and receive income via CashApp, Venmo, PayPal, Zelle, or cash deposits, assume the lender will ask for more than a bank statement. You may need to provide:
- Business profit-and-loss statements
- Business tax returns, if applicable
- Evidence that funds are business income and not gifts
- Documentation showing how long the income has been received
Keep separate accounts for business and personal funds. Mixed accounts make it harder for lenders to determine what counts as stable income. If income cannot be documented clearly, lenders are not allowed to count it.
How Student Loans Affect Your Mortgage Approval
Student loans are one of the most misunderstood pieces of the debt-to-income puzzle. As discussed in Step 2, your debt-to-income ratio (DTI) is a key number that determines how much house you can afford. Even if loans are deferred or in forbearance, they generally must be counted. You don’t need to memorize these rules—this section exists to show why clear explanations from your lender matter.
USDA and FHA Loans
For USDA and FHA loans, lenders use:
- The actual payment shown on the credit report or billing statement, or
- 0.5% of the outstanding balance when no payment is listed or the listed payment is $0.
This means student loans count toward your DTI even when you are not currently paying on them.
VA Loans
For VA loans, lenders generally use the actual fully amortizing payment. If no payment information exists or the loan is in certain kinds of deferment, lenders calculate a payment equal to 5% of the outstanding balance divided by 12.
Conventional Loans
Conventional lenders may use the actual documented payment or, if none is available, a payment equal to 1% of the loan balance. Some lenders may allow lower documented payments from approved repayment plans.
The takeaway is simple: student loans always matter, and the rules vary by program. Understanding these differences is easier when you choose a mortgage lender who can explain them.
Rate Shopping Without Derailing Your File
To issue a pre-approval, your lender must pull a hard inquiry on your credit report. Multiple mortgage inquiries within a short period typically count as a single inquiry, so smart rate shopping is expected and acceptable.
However, other kinds of new credit activity can harm your application, especially during the mortgage process:
- New credit cards
- Auto loans
- Personal loans
- Furniture and store financing
- Buy Now, Pay Later (BNPL) plans
Buy Now, Pay Later (BNPL) and Your Mortgage
BNPL can affect a mortgage in two ways. First, many BNPL accounts now appear as tradelines, increasing your monthly obligations and affecting your DTI. Second, missed BNPL payments can trigger hard hits and negative marks that delay approval.
Even when BNPL payments do not appear as tradelines, underwriters still see recurring app payments on bank statements and may classify them as ongoing obligations.
If you are preparing to apply for a mortgage, the safest option is to keep your financial life quiet and predictable—no new credit and no BNPL.
Your Lender vs. Your Realtor: Privacy and Fiduciary Duty
One important distinction often surprises buyers: your lender knows more about you than your Realtor ever will. They see your bank statements, spending patterns, transfers, debts, and deposits in detail. If you spend $50 a week at a liquor store—or anywhere else—they will see it.
Your Realtor does not have access to this information unless you choose to share it. And even when you tell us things, we are bound by a fiduciary duty to protect your confidentiality.
What Is Fiduciary Duty?
Fiduciary duty means your Realtor must act in your best interest at all times. In Texas, this includes:
- Loyalty — placing your interests above all others
- Confidentiality — not revealing private information without your permission
- Disclosure — telling you anything we know that could affect your decisions
- Obedience — following lawful instructions from you
- Reasonable care — providing competent guidance
- Accounting — safeguarding your funds and documents
This means you can speak candidly with your Realtor about concerns, obstacles, or potential problems without fear that the information will be used against you. Your lender may need to question your documentation, but your Realtor’s role is to guide and protect you.
Why You Must Choose a Mortgage Lender Before Comparing Loan Types
Loan programs—USDA, FHA, VA, and conventional—each have unique rules, costs, and property requirements. Your loan type influences how much money you need to bring to closing, what properties qualify, and how forgiving underwriting will be.
Most mortgage types—FHA, VA, USDA Guaranteed, and conventional—can be shopped among many approved lenders. But a few programs work differently. For example, USDA Direct is not offered through banks or mortgage companies at all; you apply directly with USDA Rural Development. Some other specialty or nonprofit loan programs also use a single designated lender or a very limited list of approved lenders. For nearly all buyers, though, choosing the right lender comes before deciding which loan program fits best.
Before jumping into those differences, it makes sense to choose a mortgage lender who explains your options clearly. But first, there is one more optional step for buyers whose first answer is “no.”
Step 4A: “Your Lender Said No — Now What?”
Not everyone qualifies on the first try. Step 4A explains what to do next, how to avoid making the situation worse, and how to work toward a future approval.
For earlier parts of this series, see Step 1: Know Your Credit and Step 2: Build a Budget That Tells the Truth.
About Me — Doug Berry, MBA, REALTOR®
The Bow Tie Agent
I’m a REALTOR® with Better Homes & Gardens Senter, Realtors who focuses on helping buyers understand the real-world side of homeownership — from lending and budgeting to navigating underwriting without surprises. With an MBA and experience as a lender with USDA Rural Development’s mortgage programs, I approach the process the same way I do with clients: clearly, calmly, and without sales pressure.
If you have questions about this step, need help preparing for a home purchase, or have a topic you’d like me to cover in a future article, feel free to reach out:
