In the past, when you wanted to buy a home, you simply turned to your local bank or credit union for a mortgage. Today, there are many home-financing providers that are competing for your business. How do you choose a lender? 

Mortgage banks

A mortgage bank is a direct lender that reviews your mortgage application and makes the decision to lend you money. The bank will then probably sell your loan on the secondary market. You know you are dealing with a mortgage bank when the lending agent is the one to make the mortgage approval.

A mortgage bank is a reliable source for a mortgage. Local mortgage banks are regulated by state and federal agencies and are fairly trustworthy. It helps if you have ties to the bank to start with.

With a mortgage bank, you have someone local that you can deal with. You can walk into their office, sit down and talk things over. As the loan originator, the bank usually charges lower fees and offers you better terms based on your loyalty and business with the bank. This is often a fast, hassle free way to obtain a mortgage if you have good credit.

But mortgage banks offer limited programs. They are competitive in their rates, but don't offer many exotic, high risk mortgages. If you are looking for a special type of mortgage, they may find that you have to talk to many lenders to find it.

Mortgage brokers

A mortgage broker is the middleman that connects a borrower with the loan products of hundreds of different lenders. The broker looks to match you up with the mortgage that best meets your needs. Once your loan is approved, you will deal directly with the mortgage originator and not the broker.

Brokers give you access to a wide range of different programs and lenders. You may find a better mortgage through a broker than you would on your own. The broker will help find the best national or regional lenders that are likely to approve your mortgage. Chances are that you will get a more favorable loan rate in less time.

You should ask questions and pay attention, because many mortgage brokers increase their profits by writing hidden costs into your loan. Some receive kickbacks for getting you to take a higher interest mortgage than you qualify for. Mortgage brokers are not subject to licensing and regulation in many states.

Banks, thrifts and credit unions

Most banks and financial institutions offer a limited mortgage menu, comparable to mortgage banks. They typically keep their mortgages in house or sell them on the secondary market. With a local bank, you receive the ability to walk in and deal with the lender in person. But your options are limited, so you may need to shop around to find the right mortgage for your situation.

Home builders and real estate agencies

Many home builders and real estate agencies offer mortgage services to make it easier on the homebuyer. These affiliated companies may be mortgage bankers or brokers. They are convenient for most buyers.

Internet lenders

Mortgage lenders are now all over the internet. They offer fast, easy mortgages at fairly competitive rates. Some are online versions of traditional lenders, while others are only on the Internet.

So how do you choose?

You may benefit by using one mortgage source over another. It all depends on your credit history and your financial situation.

If you have excellent credit and have all of your finances in order, you can turn to any lender that offers you the best rates. However, if you are self-employed or don't want to share your income or asset data with a lender, you should turn to a mortgage broker. If you are buying your third or fourth home, you may look at the internet for the best rates. But make sure that you know your mortgage options and finances first.

If you are looking for an adjustable-rate or a one-on-one relationship with a lender, a local bank or thrift may be perfect for you. If you want a quick, no hassle mortgage no matter the cost, turn to your real estate agency lender.

Smart ideas for working with lenders

Get recommendations. Ask your family and friends for suggestions and referrals. Most will be more than willing to tell you their good and bad lending experiences.

Check credentials. Banks, credit unions and mortgage bankers are regulated by either your state's department of banking or division of real estate. Check to see if the lender is in good standing with the state. Mortgage brokers may or may not be regulated. If not, check with the Better Business Bureau and the National Association of Mortgage Brokers to see if they have a clean record. If you haven't heard of the lender and they aren't well known, make sure you check them out. Sometimes, all it takes is a quick internet search to find comments on the lender.

Research the issues. Learn about mortgages and ask plenty of questions. If something doesn't seem right or doesn't make sense, speak up. A broker might be trying to pad closing costs or add extra fees. You won't know if you don't pay attention.

Be careful online. There are lots of nice looking mortgages on the net, but make sure you are dealing with a reliable lender. Don't give out any personal information until you are sure that it will be safe.

Peak seasons bring out the predatory lenders, so be wise when looking at rates or quotes. Unscrupulous lenders will slip in bogus rates or extra costs in hopes that you won't notice.