Home Loan Shopping Shortcuts to Know

Searching for a mortgage involves planning, comparison, and understanding of the different loan programs available. It may feel exhausting, but the time investment is worth it. Here are the best tips to follow when shopping for a mortgage loan:

1. Know Your Credit Score

• Before applying, check your credit score. A higher score usually qualifies you for better interest rates.

• A score of 620 or higher is best, though some lenders offer options for lower scores (with higher interest rates). 

2. Determine Your Budget

• Decide how much you can afford for a mortgage. This includes understanding your debt-to-income (DTI) ratio (lenders often prefer a DTI of 36% or lower). This means how much of your income goes out to pay your bills.

• Factor in the down payment, monthly payments, taxes, insurance, home association fees, and closing costs when setting a budget.

3. Get Pre-approved

• Pre-approval gives you a clear idea of how much a lender is willing to loan you, as well as the interest rate and loan terms. This strengthens your negotiating position when house shopping for a home. It’s a time saver as well.

• Be ready to submit financial documents such as tax returns, pay stubs, and bank statements - this is non-disclosable. 

4. Compare Mortgage Rates

• Shop around by comparing rates from different lenders, including banks, credit unions, and online mortgage lenders.

• Use online rate comparison tools to check current interest rates for different loan types (fixed vs. adjustable-rate mortgages).

• Get a trusted lender referral that’s local in your market.

5. Understand Loan Types

Familiarize yourself with the various types of loans, such as:

• Fixed-rate mortgages: These offer stable payments over the life of the loan.

• Adjustable-rate mortgages (ARMs): ARMs start with lower interest rates that can adjust over time. Read the fine print.

• FHA, VA, or USDA loans: These are government-backed loans with specific eligibility requirements, usually for first-time buyers or those with lower credit scores. They are outstanding loan options that will need review for your individual needs.

6. Check for Fees and Closing Costs

• When comparing loans, don't just focus on interest rates—factor in closing costs, which can range from 2% to 6% of the home loan amount. These include application fees, appraisal fees, title insurance, and more.

• Ask for a Loan Estimate from each lender to see the breakdown of all fees. Laws require lenders to provide this.

7. Terms are negotiable

Some fees, not all, are negotiable, like origination fees or points, and you may be able to get a lower interest rate by negotiating or by paying points up front (called "buying down the rate"). 

8. Consider Different Lenders Very Carefully

Explore options from multiple lenders such as:

• Traditional banks: Often offer competitive rates but may have stricter requirements.

• Credit unions: May offer lower rates and fees for members.

• Mortgage brokers: Can shop around for you, finding the best deal from multiple lenders.

• Online lenders: Often have lower overhead and may offer lower rates or more flexible options.

• Local lenders: You can meet them in person.

9. Lock in Your Rate

Once you find a rate you're happy with, lock it in to prevent it from increasing before closing. Rate locks typically last from 30 to 60 days. Caution: Rates do move up or down over time.

10. Read the Fine Print and Ask Questions

Carefully read all terms and conditions of your loan offer, paying close attention to prepayment penalties, balloon payments, and other conditions.

By taking the time to compare different lenders, rates, and loan options, you can find the best mortgage that fits your financial situation and long-term goals. It’s essential to understand not only the interest rate but also the total cost of the loan, including fees and terms.