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- Mortgage rates and fees can vary from one lender to the next.
- Comparing offers from three or more lenders can help you find the best deal on your loan.
- If you don’t want to shop around on your own, a mortgage broker can do it for you.
Just as you’d compare options when buying a new laptop or pair of jeans, you also need to shop around when getting a mortgage. In fact, it may be even more imperative in this scenario – at least for your bank account.
That’s because mortgage options, rates, and fees can vary quite a bit from one lender to the next. Shopping around can save you money – on your monthly payment, upfront fees, and in long-term interest.
How to shop for a mortgage in 5 steps
If you plan to use a mortgage loan to buy a house, comparing your options is critical to getting the best deal.
“Not all banks and lenders have the same rate and fees,” says Nicole Rueth, senior vice president of The Rueth Team at OneTrust Home Loans. “You would think they should, but due to access and overhead, the cost to the consumer can be different.”
Are you preparing to buy a home? Here’s how to start the mortgage-shopping process.
Your estimated monthly payment
- Paying a 25% higher down payment would save you $ 8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $ 51,562.03
- Paying an additional $ 500 each month would reduce the loan length by 146 months
1. Check your credit
Your credit will play an important role in your mortgage application, determining what loan programs you qualify for and the interest rates you receive. So, before you start searching for mortgages, pull your credit report and credit score.
Every American is entitled to a free annual credit report from all three credit bureaus at AnnualCreditReport.com. These reports don’t include your score, though you may be able to pay an extra fee to get it. Your bank or credit card company may also offer free credit score monitoring, so check there first.
Once you have both, you should:
- Look over your credit report for any errors. If you find any, dispute them with the credit bureau. Errors can be removed and help improve your score.
- Check for late payments. Late payments are concerning to lenders and could make it hard to qualify for a loan. You’ll want to settle these up and make sure all future payments are on time.
- Compare your score. The exact credit score requirements for a mortgage depend on the loan program, but you’ll get the best rates with a credit score in the mid-700 range or higher.
If your score’s not great, you might want to improve it before applying for a mortgage.
“While some lenders accept credit scores as low as 580, it’s best to have at least 620 or higher when you apply,” says Curtis Wood, cofounder of Florida-based mortgage app Bee. “Your credit score determines the rate you get, and the higher the score is, the better the rate becomes.”
2. Pick a loan type
You also need to know what type of mortgage you’ll be using before you can begin shopping around.
“First, find out what you qualify for,” Rueth says. “Asking a lender ‘What’s your rate?’ is an irrelevant question if you don’t know what program you qualify for. “
There are four major types of mortgage loans you can consider:
- Conventional loans: Conventional mortgages have the lowest down payment requirement (aside from veteran loans) at 3%. They typically require at least a 620 credit score.
- Federal Housing Administration loans: FHA mortgages are loans guaranteed by the Federal Housing Administration. They allow for the lowest credit scores – down to 500 if you have a 10% down payment. If you have at least a 580 credit score, the down payment requirement is just 3.5%.
- Veterans Affairs loans: VA mortgages are reserved for military veterans, active duty military personnel, and their spouses. There’s no down payment requirement, and the minimum credit score varies by lender. You can generally expect to need a score of at least 620.
- USDA loans: These are mortgages for buyers in designated rural areas (though some suburban areas qualify, too). They require no down payment and a credit score of at least 640.
It’s possible you may qualify for more than one loan type. If you’re not sure which is right for your goals and budget, talk to a loan officer or mortgage broker for help.
3. Gather financial documents
To apply for and compare mortgages, you’ll need a number of financial documents on hand. The lender will use these to evaluate your finances and determine your eligibility.
Typically, you’ll need the following:
- Copies of your most recent pay stubs
- Copies of the last two to three months of bank statements
- Your two most recent W-2s (or tax returns, if you’re self-employed)
- Statements for any investment or retirement accounts you have
Lenders will also ask for your permission to pull a credit report (for a fee). You’ll need to provide personal identification, like your driver’s license, too.
4. Explore lenders and compare preapproval offers
Once your credit and financial documents are prepped, you can start comparing lenders. The best way to do this is to apply for preapproval with each lender. This requires filling out an application, submitting your financial documents, and agreeing to a credit check.
After a lender has evaluated all of that, you’ll get a loan estimate – essentially a breakdown of all the terms and costs of the loan it’s prepared to offer you.
You’ll also get a preapproval letter, which states how much you will likely be able to borrow. You should submit this with any home purchase offers you make, as it can give sellers more confidence in your bid and show them you’re a good candidate to get approved for a loan.
When applying for preapproval with each lender, make sure to request the same loan amount and loan program. This will ensure you’re making an apples-to-apples comparison. You should also be sure to include a variety of lender types in your search – an online lender, the financial institution you bank with, and at least one more.
Then, once you have your loan offers, compare each one on fees, terms, and, most importantly, the interest rate. You can use this handy worksheet to keep track of all the details.
“The interest rate determines what your monthly principal and interest payment is, which determines how much money you pay back over the life of the loan,” Wood says. “For budget-conscious buyers, this is the key metric to look at.”
5. Choose a lender and lock in your rate
Once you’ve compared your loan offers, you can choose your lender and lock in your rate. This means it can’t fluctuate for a set period of time.
“Rates change, up and down, every day, and sometimes multiple times per day,” Wood says. “Shop as fast as you can, then lock in the winning rate before they have a chance to go up.”
Just make sure you’re close to purchasing a home. Most rate locks last just 15 to 90 days. If you’re unable to find and close on a home within that period, your rate could increase. You can also ask about extending your rate lock for a fee.
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How many places should you shop for a mortgage?
“I would contact, at most, three options that were referred to me by my agent or someone I trust with finances,” Rueth says. “More options than that can create a wild goose chase or confuse the situation.”
Too many quotes can also hurt your credit, particularly if they’re spread across many months. To mitigate this issue, try to apply for all your preapprovals at once.
“Having the same type of inquiry at a very similar time is essentially treated like one inquiry,” says Tom Lawler, head of consumer lending intelligence research at JD Power. “The key is that you are searching for offers around the same time – in a 45-day window – so the multiple credit checks are logically related to the same borrowing need.”
Should you hire a mortgage broker?
If you don’t want to handle all the logistics of shopping around yourself, you might consider using a mortgage broker.
Brokers work with several lenders and can shop around on your behalf. They can also help you determine the best loan program for your needs if you’re not sure which one is right.
“The easiest way is to apply with a mortgage broker that works with multiple lenders,” Wood says. “Brokers usually get paid on the loan amount, so they’re simply trying to match you with the lowest rate option available. You will pay a broker fee, but the lower rate plus the time savings from not having to haggle with three different lenders tends to make it worth it. “
Some brokers are also paid by the lender you end up doing business with, so you may not owe a fee at all for using their services.
The bottom line
Not all mortgage loans or lenders are created equal, so make sure you’re shopping around before you buy a home. It could help save you significantly on your interest rate, payment, and long-term costs as a homeowner.