All About How To Shop For A Mortgage: 11 Steps
Whether you’re buying a house for the first time, thinking about relocating to a new residence or considering refinancing, there’s no shortage of home loan options or providers to pick from.
Good news: The process doesn’t have to be confusing. With a little upfront research and planning, you can find the right mortgage for you.
So, if you’re curious about how to shop for a mortgage, fear not. Let’s take a closer look at tips and tricks you can use to secure the best lenders and rates with our handy, step-by-step guide to mortgage shopping.
Key Takeaways:
- If you have decent credit and enough money saved to cover the upfront costs, getting a home loan is an attainable goal.
- A home loan is also a large financial commitment, so you’ll want to pick the right loan for your circumstances and budget.
- Understanding how the mortgage process works and the options available can help you find a mortgage that’s the right fit for you.
1. Review Your Finances
It’s important to get your personal finances in order and well-documented before you start the home loan process. The first things lenders will want to know are whether you can afford a mortgage and how likely you are to pay it back.
As part of the application process, you’ll need to provide documentation such as pay stubs, bank statements and tax forms that prove your employment and income. Mortgage lenders will also take a close look at any debts you hold and review your credit score and credit history.
Here’s how you can prepare your finances before you dive into the mortgage shopping process:
- Get a credit report. You’ll need to know your credit score, as there are minimum requirements to obtain certain types of mortgages. A higher credit score may unlock more mortgage opportunities and lenders for you, as well as more favorable interest rates and loan terms.
- Calculate your debt-to-income ratio. Your DTI ratio is a percentage that represents how much of your income is taken up by your fixed monthly debt obligations. This includes credit card debt, student loans, car loans, child support, alimony, and rent or mortgage payments. Once you’ve added up your total monthly debt payments, you divide that amount by your gross monthly income and multiply by 100 to get your DTI ratio. Your DTI ratio gives mortgage lenders a snapshot of how much room you have in your budget to comfortably spend on housing.
- Assess your savings. Take a look at how much you have saved to cover the upfront costs of buying a home, which includes the down payment and closing costs. It’s important that you have enough so that you won’t be dipping too far into your emergency savings fund.
What’s Your Goal?
Home Purchase
Home Refinance
Tap Into Equity
2. Figure Out How Much You Can Afford
Once you’ve taken a look at your finances, it’s time to determine how much house you can afford. You’ll need to consider both the upfront costs of buying a home and the ongoing costs of owning a home.
The upfront costs of a home purchase include:
- Down payment. You’ll need to determine how much of a down payment you can make on your new property. Making a larger down payment can help you get a lower interest rate, lower monthly payment and access to more loan types. If you make a down payment of at least 20% on a conventional loan, you can avoid paying for private mortgage insurance.
- Closing costs. Your closing costs are all the fees associated with taking out a mortgage and closing on your home purchase – and they typically range from 2% to 5% of the purchase price.
It’s also important to consider the recurring costs of homeownership, which include:
- Mortgage payment. You’ll need to be able to afford your monthly mortgage payment. You can use our mortgage calculator to determine what your monthly payment would be based on the home price, interest rate, down payment and loan term.
- Property taxes. Property taxes are taxes collected by the local and state governments to cover public services such as schools, police, firefighters and infrastructure.
- Homeowners insurance. Lenders typically require you to purchase homeowners insurance to cover your property and belongings in the event of an accident or a disaster.
- Homeowners association fees. If your home belongs to a homeowners association, you’ll also have to pay HOA fees that fund shared services and amenities for the community.
Ready To Become A Homeowner?
Get matched with a lender that can help you find the right mortgage.
3. Get Prequalified
After you’ve figured out how much house you can afford, the next step is to start estimating how much mortgage lenders may be willing to let you borrow. You can do this by getting prequalified for a loan. Prequalification provides a rough idea of your expected loan amount based on information you report about your financial situation. Prequalification doesn’t guarantee you’ll get approved for the loan, but it helps you estimate how big of a loan you’ll be able to get.
Take The First Step To Buying A Home
Find a lender that will work with your unique financial situation.
4. Research Mortgage Options
There are many types of home loans that you can apply for. Let’s take a look at some common types of loans and what sets them apart from one another.
Conventional Loans
Conventional loans are mortgages that are not backed by the government. They typically cost less than FHA loans but have stricter eligibility requirements. Conventional loans can either be conforming or non-conforming.
- Conforming loans. These are the most common type of loans and have maximum amounts that are set by the government.
- Non-conforming or jumbo loans. These are loans that exceed government limits or don’t meet other requirements set by the government.
Government-Backed Loans
Government-backed loans are mortgages insured by a government agency, so they pose less risk to lenders if you default. As a result, these loans come with looser eligibility requirements, though they’re not all accessible to everyone.
- FHA loan. These loans are backed by the Federal Housing Administration and allow borrowers to have lower credit scores than required for most conventional loans.
- USDA loan. These loans are offered by U.S. Department of Agriculture for low- and moderate-income borrowers buying homes in certain rural areas.
- VA loan. These loans are offered by Veterans Affairs to eligible military service members, veterans and their surviving spouses.
Loan Term
The term of your loan is the amount of time you have to pay it back. Your loan term will affect your monthly payment, your interest rate and the amount you pay overall for the loan.
- 30-year loan. These loans have lower monthly payments but also typically have higher interest rates and higher overall cost.
- 15-year loan. These loans have higher monthly payments, but the perks include lower interest rates and lower total cost.
- Short-term mortgages. These loans have terms that are under 15 years. You can expect an even higher monthly payment, but you can save a lot on interest and overall cost.
Interest Rate Type
The type of interest rate you choose will affect how much your mortgage will cost each month:
- A fixed-rate mortgage is a loan that has a set interest rate for the term of the loan, keeping your monthly payments predictable.
- An adjustable-rate mortgage is a loan with an interest rate that is fixed for an initial period – typically three, five or 10 years. The initial rate is often lower than the rate on a fixed-rate mortgage, but the rate changes in relation to the financial markets – and may increase – after the introductory period.
5. Apply For Preapproval
Once you’ve identified a lender and loan type, it’s wise to apply for mortgage preapproval. Unlike prequalification, preapproval acts as an actual conditional mortgage commitment for how much you can expect to borrow. With preapproval, a lender goes more in depth by running a credit check and examining financial statements.
It’s important to obtain a preapproval letter, which states that the lender is open to lending you up to a certain amount of money. Real estate agents and home sellers like to see borrowers secure a preapproval letter because it implies that you’re creditworthy enough to purchase a home and live up to any financial commitments proposed in an offer.
6. Consider A Rate Lock
A rate lock – or lock-in – allows you to set your interest rate so that it won’t change between the loan offer and the closing, as long as you close within a specified time window. Otherwise, you run the risk of your interest rate increasing before you close on the loan. Rate locks are typically available for 30, 45 or 60 days but may also be available for longer.
7. Shop For A Home
Here comes the fun part – it’s time to start touring homes and attending open houses. Ask people in your network for referrals of real estate agents they’ve had a good experience working with. Your real estate agent will be able to help you refine your home search and send you listings based on your needs and priorities.
8. Make A Successful Offer
Once you’ve found a home you want to buy, your real estate agent will help you put together an offer. You’ll need to consider the listing price, what you can afford, market conditions and any competition you might be facing from other prospective home buyers. Research what similar houses in the area have recently sold for, and consider any repairs or renovations that will be needed. You’ll also need to decide which contingencies to include in the purchase agreement that will allow you to back out of the deal without penalty if you need to. If the seller makes a counteroffer, your real estate agent will be able to help you negotiate with the seller until you come to an agreement.
9. Apply For Loans
Once the seller has accepted your offer, it’s time to formally apply for a home loan. Most mortgage lenders will have you fill out a nine-page standardized form called the Uniform Residential Loan Application to collect information about your income, employment, assets and debts. Lenders use this information to determine your eligibility for a mortgage and how much they’re willing to loan you.
10. Compare Loan Estimates
Pro tip: Don’t settle for the first home mortgage offer that comes your way. There are literally thousands of loan providers are competing for your business these days, meaning that it pays to shop around. As you start receiving loan estimates from mortgage lenders, be sure to compare the following:
- Interest rate
- Monthly payment
- Closing costs
- Taxes
- Homeowners insurance
- Possible prepayment penalty
Be advised: Many lenders will advertise promotional interest rates or list them on their website. Not all of these will carry through to closing, and each lender will charge various loan fees. Assess each prospective loan’s annual percentage rate, since some lenders may offer low mortgage rates but could have high upfront fees and closing costs attached.
11. Choose A Loan
Now it’s time to pick a loan and commit to a lender. Choose the loan with the terms that best fit your financial situation so that your monthly mortgage payment won’t be too big of a burden to keep up with over time. Also, don’t be afraid to negotiate: If you have a specific provider that you’d like to work with but have received a competitive offer from another lender, let your preferred choice know. They may be willing to match or beat the offer.
You’ll need to notify the lender if you plan to proceed with your mortgage application within 10 business days of receiving their loan estimate. If you wait longer, they can revise the terms and costs of the offer. You should also tell any lenders whose offer you’re not accepting. After you’ve notified the lender you’ve chosen, you’ll typically need to pay an application or appraisal fee and provide full documentation of your finances. On closing day, you’ll sign the necessary documents, and your mortgage and home purchase will become official.
How To Shop For A Mortgage Without Hurting Your Credit
When you apply for a mortgage, the lender will pull your credit report to determine your eligibility. This will result in a hard inquiry that can temporarily lower your credit score. Here are some ways that you can otherwise protect your credit score while shopping for a mortgage:
Keep The Time Frame Tight
Credit-scoring models typically count multiple credit inquiries in a limited time as one event. That’s because this indicates that you might be shopping around, which is considered responsible financial decision-making. Similar loan-related inquiries that occur within 45 days of each other are treated as one event. Hard inquiries for mortgage loan applications are ignored entirely if you close on the loan within 30 days. So if you shop around and choose a loan within that time window, you can protect your credit score.
Consider Getting Prequalified
While mortgage preapproval typically results in hard credit inquiry, mortgage prequalification only results in a soft inquiry. Unlike a hard inquiry, a soft inquiry will not harm your credit score. Prequalification is not a guaranteed offer, but it does give you an idea of how much a lender is willing to lend you based on a cursory review of your financial information.
But if you do get preapproved, your credit score will only drop slightly and it will be temporary. The benefits of getting preapproved should outweigh the risk, since acquiring a preapproval letter will make lenders view you as a more appealing borrower.
Don’t Apply For New Credit
Try to avoid applying for new lines of credit while you’re shopping for a mortgage. This includes credit cards, personal loans, car loans, etc. These will be considered multiple hard inquiries and will hurt your credit score. If you’re racking up more debt, it will also increase your DTI ratio, which could jeopardize your eligibility for the mortgage.
FAQ
Here are answers to some frequently asked questions about shopping for a mortgage:
The Bottom Line
Shopping for a mortgage starts with getting your finances in order, researching potential home loan products, and looking at different types of lenders. After obtaining a preapproval letter and shopping for your new home, you can ultimately decide which lender and loan will work the best for you.
More From Quicken Loans:
Scott Steinberg contributed to the reporting of this article.
