When you decide it’s time to buy a home, you have one major step to take before you find your dream home. You have to find a mortgage. Unless, of course, you have enough cash to pay for the home, but if you are like most people, you need a mortgage. Knowing how to shop for that mortgage is crucial.
A mortgage is not a one-size-fits-all approach. There are mortgages for different types of situations. Even the same mortgage program can have different terms and rates. They key is to shop around. You want to talk to different lenders to see what they have to offer. When you have several quotes available, you can then compare the loans side-by-side to see which one is right for you.
Perfect Your Application
Your first step even before you shop for a mortgage is to make yourself the best borrower you can be. This process starts long before you want to apply for the loan. If you can, start preparing yourself at least a year in advance. This gives you enough time to make sure everything is perfect so that lenders will want to lend you money.
So what do you have to do? Try the following:
- Improve your credit score – Make sure you have no late payments, collections, or other negative items on your credit report. Also, try to minimize your revolving debt and avoid any new inquiries on your credit report.
- Keep your debt ratio down – Keeping your revolving debt and even installment debt to a minimum can help your debt ratio stay low.
- Keep your job – Lenders want to see stable income and employment. Try staying at the same job for at least 2 years. This shows lenders consistency and reliability, two of the things they want to see in a borrower.
Once you think you are an ‘attractive applicant,’ you can start shopping around for a lender.
Know the Type of Loan You Want
You can’t compare mortgages if you have different program options with each lender. Take the time to familiarize yourself with conventional, FHA, VA, and USDA loan guidelines. You can then narrow down your choices. Hopefully, you can choose just one loan program, but if you meet the requirements for two programs, go ahead and find lenders for each program to help you choose the right mortgage.
Shop for Lenders
Once you know the type of loan you want/qualify for, it’s time to shop for a lender. You can shop at the banks in your area, online, or with a mortgage broker. In fact, you may want to try all three to get several mortgage quotes.
Don’t worry; it doesn’t hurt your credit score to shop around for a mortgage. The key is to shop around in a short amount of time. Typically, you should get quotes from different lenders within 4 weeks of one another. If you spread it out much more than that, your credit report may get hit with more than one inquiry, which can damage your credit score. If you shop within a short amount of time, though, the credit bureaus recognize that you are shopping around for the best rate and only hit you for one inquiry.
Compare Your Offers
Once you have your offers, it’s time to compare them. First, though, you must sort them by mortgage type and term. For example, it doesn’t make sense to compare a fixed rate loan to an adjustable rate loan.
Once you short your quotes by loan program and term, you can decide which one suits your needs the most. We encourage you not to focus on the interest rate alone. Instead, look at the big picture. How much are the closing costs? What is the lender charging? Do you have to pay points? What is the APR? This is a snapshot of the interest over the life of the loan that includes the closing costs.
As you can see, focusing on the interest rate alone could leave you with a mortgage payment you don’t want. You may end up paying thousands of dollars more for the loan over its lifetime than is necessary. Looking at the big picture and determine how long you plan to stay in the home can help you make the right choice.
Finalize the Loan
Once you choose a lender, make sure you ask as many questions as you have. Take the time to read the fine print on the loan too. In particular, you should look for prepayment penalties, late charge fees, and other miscellaneous fees that you wouldn’t know were there unless you asked.
Once you are certain the loan is right for you, it’s time to move forward by finding a home and closing on the loan.
Shopping for a mortgage is almost as hard as shopping for a home. Take your time with this decision as it could affect you for the next 30 years.