How to shop for a mortgage and compare rates: 7 Tips
To shop for a mortgage, you have to get quotes from three or more lenders. This involves giving each lender basic information about your finances and the home you want to buy, and then comparing their offers.
Shopping for a mortgage takes some leg work, but it’s proven to be worth it. The Consumer Financial Protection Bureau (CFPB) says borrowers could save $300 per year on average by comparing rates from just three lenders. And negotiating your rate may drive even greater savings.
All told, you could save thousands by comparing rates — even tens of thousands. Here’s what to do.
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How to shop for a mortgage: Key takeaways
Shopping for a mortgage is almost guaranteed to save you money because all mortgage companies offer different rates to different borrowers. And if you know what you’re doing, it doesn’t have to be difficult or time-consuming.
Here are the main things you should know about shopping for a mortgage:
- You should get quotes from at least 3-5 lenders
- Compare interest rates and lender fees. Look out for discount points
- You have to get preapproved to know your “real” rate
- You’ll fill out an application and provide supporting documents
- You can use competing offers to negotiate your rate or fees
This involves a little more work than just comparing advertised rates online. But knowing how to shop for a mortgage is worth it. Putting in a few hours of effort could save you thousands in the long run.
How to shop for a mortgage in 7 steps
Shopping for a mortgage isn’t all that hard. At least, not if you know what to expect. Here’s how the process will go:
- Check your credit scores and credit report. Dispute any errors if necessary
- Understand the types of mortgages. Explore conventional loans (backed by Fannie Mae or Freddie Mac) and government-insured loans such as the FHA loan, VA loan, and USDA mortgage
- Understand mortgage repayment terms. Fixed-rate and adjustable-rate loans give buyers options in the interest rate they’ll pay over a 15- or 30-year loan term
- Get your documents together. You’ll need to verify financial information like your income, employment, debt obligations, and tax returns
- Shop around with multiple lenders. Request quotes from at least 3-5 lenders plus your existing lender, bank, or credit union, or mortgage broker
- Understand your mortgage rates. Knowing what affects your mortgage rate can help you get the best deal on your loan
- Compare quotes and negotiate rates. Lenders can be flexible about rates and fees, but only if you ask
We’ll cover these points in more detail below. But those are the basic steps to shopping for a mortgage and finding the lowest rate.
1. Check your credit score
Mortgage companies use credit scores to decide who gets approved for a home loan and what mortgage interest rates they’ll pay. Typically, the higher your credit score, the lower your rates will be.
Annualcreditreports.com provides free copies of your credit reports from the three major credit bureaus: TransUnion, Equifax, and Experian. If your scores are low, then spend some time in the early months of your home-buying journey to improve your scores. Good credit scores will not only help you get approved for a mortgage loan, but they can also save you thousands of dollars over the life of your loan.
Paying down high-interest credit card debt, student loans, and personal loans will increase your score. As will ensuring timely payments for current utility bills, rent, and installment loan repayments. Review our guide to improving low credit scores for more information.
2. Understand the types of mortgages
Home buyers have a selection of home loans from which to choose. Having a general understanding of the benefits and requirements for each of these types of mortgage loans will help you find the most advantageous path to homeownership.
- Conventional loans: You can qualify for this popular type of loan with a 620 minimum FICO score and as little as 3% down. However, you will avoid paying mandatory private mortgage insurance (PMI) with down payments of 20% or more. Still, your lender will typically drop PMI when you reach a 78% loan-to-value ratio. And you can refinance PMI off your loan when you have at least 20% equity in the home
- FHA loans: These government-backed loans are popular with first time home buyers because they offer flexible requirements to qualify. Get an FHA loan with as little as 3.5% down with FICO scores of 580 or 10% down with scores of 500. However, this type of loan requires mortgage insurance premiums (MIP) for the life of the loan. But you can remove unwanted MIP by refinancing into a conventional loan down the road
- VA loans: This government-insured loan offers 0% down payment, but you’ll need to be an eligible veteran or service member to qualify. While the VA has not set a minimum credit score, lenders are allowed to set their own — typically between 580-620
- USDA loans: The U.S. Department of Agriculture offers this loan to low-income buyers in designated suburban and rural areas. This loan requires no money down, and, like the VA loan, the USDA has not set a minimum credit score — but most lenders will want to see your FICO around 640
3. Understand repayment terms
Lenders primarily offer two types of mortgages: adjustable and fixed-rate loans.
- Fixed-rate mortgages (FMR): Fixed-rate loans (have a set interest rate that doesn’t change during the loan’s term. Common loan terms are 15-year and 30-year mortgages, which means you’ll make monthly mortgage payments for 180 months and 360 months, respectively
- Adjustable-rate mortgages (AMR): Adjustable-rate loans have variable interest rates that change over the life of the loan. Your initial rate is often fixed for a period of time, but will reset periodically over your 15- or 30-year loan term
4. Gather your loan documents
Mortgage companies will need proof of your income, assets, and credit to give you an accurate rate quote. So start compiling the paperwork you’ll need on your application, like bank statements and recent pay stubs.
5. Get quotes from multiple lenders
Most experts recommend getting at least three rate quotes when you shop for a mortgage. But there’s no limit to the number of mortgage companies you can apply with. And research suggests that the more quotes you get, the more money you’ll save.
For example, Freddie Mac found that “borrowers could save an average of $1,500 over the life of the loan by getting one additional rate quote and an average of about $3,000 for five quotes.”
You should get at least 3-5 mortgage quotes when shopping for a home loan. The more quotes you get, the more you’re likely to save.
The good news is that most lenders have a similar application process. You’ll need to provide the same types of documents and answer the same types of questions every time you get a rate quote.
So after you’ve applied once, you’ll already have all the information you need on hand to apply with a few more lenders. And with most lenders offering online preapproval applications these days, the process can be pretty quick and painless.
“Keep in mind that a quote is just that, and nothing is guaranteed until you are locked in,” reminds Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “But quotes should help you gauge the market, lender to lender.”
6. Understand your mortgage rate
Mortgage rates are low right now — around % (% APR) for 30-year fixed rate loans. Interest rates and annual percentage rates are for sample purposes only. See our full loan rate assumptions here.
For perspective, the long-time average for 30-year fixed mortgage rates is about 8%. That’s the average since Freddie Mac’s records began in 1971.
But keep in mind that not everyone gets the same rates.
The best mortgage rates are reserved for “top-tier” borrowers. Those are people with:
- Stellar credit scores (740 or higher)
- Spotless credit reports
- Low debt-to-income ratio (DTI)
- Plenty of assets and savings
- A big down payment (20% or more)
Of course, few borrowers are “perfect.” Most of us fall somewhere on the spectrum between excellent and so/so personal finances.
Where you are on that spectrum will determine the mortgage rates you qualify for. But knowing how to shop for a mortgage will help you make sure your deal is at the better end of that range.
Experiment with a mortgage calendar to see how down payment, rate, and loan term affect your monthly mortgage payment and how much home you can afford.
7. Compare quotes and negotiate rates
At face value, comparing mortgage rates is fairly straightforward.
You can apply for preapproval with three or more lenders and simply compare the rates you’re offered. But remember — your interest rate isn’t the only thing that matters. You also need to look at factors like closing costs, origination fees, annual percentage rate (APR), and discount points.
Luckily, it’s easy to compare mortgage quotes and find the best deal.
All mortgage offers come in the same format, called a Loan Estimate, so you can quickly skim for rates, fees, and other important information to find the best offer.
How to read your Loan Estimates
You will find your loan terms, quoted interest rate, and monthly payment on the first page of your Loan Estimate.
Along with comparing interest rates, you can use this page to:
- Make sure all your loan offers are for the same loan type (conventional loan, FHA loan, USDA loan, etc.)
- Make sure they’re all quoting the same type of rate (fixed-rate mortgage or adjustable-rate mortgage)
- Compare monthly mortgage payments to see which loan is cheaper month to month
On the second page, you will see your closing costs and other upfront expenses, like prepaid taxes and homeowners insurance.
Note that loan costs are separated into two categories: (A) Origination Charges, and (B) Services You Cannot Shop For.
Origination charges represent the lender’s own fees. You’ll want to pay close attention to this section when shopping for a mortgage because these fees can vary a lot from one lender to the next. Shopping for a lower fee could save you serious cash at the closing table.
In addition, this section includes information on “Points.” Points — or discount points — are an additional fee paid upfront to get a lower interest rate.
You’ll want to pay attention to discount points when shopping for mortgage rates. If one mortgage lender has exceptionally low rates, but charges points, you know you have to pay extra upfront to actually get that rate.
Images: CFPB
Because these documents are uniform, it’s easy to compare Loan Estimates from different lenders side by side and find the very best deal on your rate and closing costs.
Use your mortgage quotes to negotiate
Keep in mind that the mortgage quotes you get are not set in stone. Mortgage lenders have the flexibility to adjust their fees and even their interest rates. That means you can often use competing offers as leverage to negotiate your costs.
Don’t hesitate to play one lender off against another:
“I like your company, but I’ve got a quote here with a lower rate or less expensive closing costs. Can you match it? Better yet, can you beat it?”
Chances are, these negotiations won’t lower your rate by much. But, when you’re borrowing huge amounts over decades, even a tiny drop in your rate can add up to hundreds or even thousands. And what do you have to lose?
What happens after you shop for a mortgage?
Once you’ve put in your applications, compared interest rates and fees, and chosen your preferred lender, there are a few final steps to take in order to finalize your mortgage loan.
Submit a final loan application
Once you’ve found your dream home and successfully negotiated the purchase price with the seller, it’s time to begin the formal mortgage application process.
Although you may have already been preapproved for a mortgage, you’ll need to go through a similar, but more rigorous, underwriting process in order to receive final approval.
The underwriter will verify all your financial information and documentation. It may request additional verifications or a letter of explanation, so stay on top of the process and respond to any queries as soon as possible. This will help keep your loan process and closing date on track.
Don’t make any big life changes
Try to avoid changing jobs or becoming unemployed, if at all possible. And don’t open or close any credit accounts. Any of the last three could reduce your credit score. “Also, don’t make any large purchases on open credit lines,” adds Meyer.
Keep in mind that lenders routinely recheck your credit history just before closing. So you don’t want to do anything that will jeopardize your savings, mortgage rate, or — worst case — your entire mortgage approval.
How to shop for a mortgage: FAQ
Aim to get at least three mortgage quotes. This will give you a good idea of the range of mortgage rates you qualify for. Ideally, get five or more quotes in order to find the very best rate and maximize your savings.
The biggest thing you should know is that lenders cannot tell you your mortgage rate until you’ve been preapproved for a mortgage loan. So in order to shop for a mortgage, you need to actually apply — and provide documents — with more than one lender. This takes some time, but it’s the only ‘real’ way to find your best deal. Looking at advertised rates online won’t help you.
Getting prequalified can be a helpful first step in the home buying process. Prequalification involves answering a few questions about your financial situation, after which a loan officer will tell you whether you might be mortgage-qualified and what your maximum loan amount is likely to be. Mortgage preapproval, on the other hand, is a more rigorous process that involves supplying financial documents and going through a credit check and underwriting. After this, you’ll have a verified approval and know your final loan amount and interest rate. Preapproval is often required to make an offer on a house.
Yes. You can have as many mortgage offers as you want. You are never obligated to work with a mortgage lender until you’ve signed final closing documents, so there’s no danger in applying with more than one company. The only thing to look out for is whether lenders have application fees. Ideally, you want to shop around with lenders that won’t charge you a fee to apply and check your rate.
You can narrow down your initial list of lenders based on recommendations, online reviews, advertised rates, and availability of the loan product you need. Once you’ve chosen 3-5 mortgage companies that look promising, you can apply for preapproval with each one. Then compare the Loan Estimates they give you to find the best combination of interest rates and upfront fees for your situation.
Lenders do a hard credit pull when you apply for preapproval, which typically hurts your FICO score by five points or less. But as long as you get all your mortgage quotes within 2-4 weeks of each other, any hard inquiries during that time will count as a single inquiry. So your score will not be dinged multiple times. Aim to get all your quotes on the same day, if possible, as this will give you the most accurate comparison between lenders.
From application to closing, the mortgage process typically takes around 30-45 days. This can vary depending on how complicated your loan application is, how fast you respond to your lender’s requests, and outside factors like how busy the lender is or how long it takes to get a home appraisal done.
Your mortgage rate is largely based on your personal finances. To get the best rate possible, start improving your credit and paying down debts six months to a year before you want to buy a house. Try to keep credit card balances below 30 percent of their limit. You can also lower your mortgage rate by making a bigger down payment. Finally, be sure to compare rates from at least 3-5 lenders. Interest rates vary a lot by company, so shopping around can help you find the best deal.
What are today’s mortgage rates?
To find out what your best deal on a mortgage today is, get multiple quotes. Then compare them carefully, making sure each loan has comparable terms and the same lock period. That’s easy to do online.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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