How To Shop For A Mortgage And Get The Right Loan For You

The ancient roots of the word “mortgage” give its meaning as “death pledge.” This is because it’s a type of loan that “dies” when it is fully paid off or the borrower defaults. Sounds scary, but a mortgage is actually a wonderful tool of modern finance – it helps you live in your house while you pay for it over many years.

There are many financial institutions that want to sell you a mortgage, but what do you need to know when shopping for one? Here’s how to shop for a mortgage so you can get the right loan for you:

Why Is Shopping For A Mortgage Important?

First, let’s quickly review what a mortgage is. For most people, a mortgage is the largest and most important loan they’ll ever make. You are borrowing a LOT of money, in many cases hundreds of thousands of dollars, so you can purchase your most important asset – your home.

More simply put, a mortgage is a “secured” loan that is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you've borrowed plus interest.

So, why is it important to shop for a mortgage? Banks, credit unions and other financial institutions that do home loans have different terms and conditions for them. Depending on your credit score and borrowing history, each lender will have different interest rates, down payment requirements and other conditions on a loan particular to you.

These terms can vary from lender to lender. It pays to do your research before picking a lender and applying for a loan product. This ensures you’re getting the best mortgage rate (and saving money on interest) as well as the most suitable loan terms for your circumstances and budget.

How Different Interest Rates Affect Your Payment: A Calculation

Different lenders offer different interest rates. In the graph below, you can see just how much the monthly payment can change based on the interest rate a borrower qualifies for.

For example, our friend Chris would like to buy a $300,000 home. They have saved 20% of the purchase price for their down payment. In the graph below, you can see just how much the monthly payment can change based on the interest rate a borrower qualifies for. 

Mortgage calculations are estimates and do not include taxes and insurance.

If a buyer is still unsatisfied with their interest rate and average monthly payment, they can ask their lender if they qualify for a buydown. A buydown is a way for a borrower to obtain a lower interest rate by paying for discount points at closing. Discount points, also referred to as mortgage points or prepaid interest points, are a one-time fee paid upfront. Each point lowers your interest rate a certain percentage for the loan term.

How To Shop Around For A Mortgage

If you are shopping for your first mortgage, or if it has been many years since you last did so, the process of getting a home loan can be confusing and intimidating. It doesn’t have to be if you’re prepared. Take these important steps before you sit down with a lender. This helps speed the process along and allows you to consider important decisions before they even come up.

1. Review Your Credit

Before applying for a mortgage, the first thing you should do is review your credit report. You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax^®, Experian^TM and TransUnion^® – once each year at AnnualCreditReport.com or call toll-free (877) 322-8228.

You may think that your credit report and credit score are the same thing – they are not. Your credit report is a detailed account of your credit history, while your credit score is a three-digit number signifying your creditworthiness.

When applying for mortgage preapproval, your mortgage lender will consider your income, assets, debts and credit history. The better your credit score and credit history, the more favorable mortgage terms you’ll likely be offered by lenders.

The minimum required credit score to buy a house with a conventional loan is 620 – though you may qualify with a lower score if you’re seeking a loan insured by the Federal Housing Administration (FHA), the Veterans Administration (VA) or the U.S. Department of Agriculture (USDA). Home buyers with a credit score of 760 and above are more likely to qualify for the best interest rates on a mortgage.

If your credit score is a little low, there are ways to improve it before applying for a mortgage loan.

2. Choose A Mortgage Type

The first thing to consider when shopping for a mortgage is whether you want a fixed rate or adjustable rate mortgage.

A fixed-rate mortgage offers a stable interest rate for the life of the loan. That steady interest rate translates into more predictable monthly payments. While the rate is “fixed,” the actual rate of your particular loan is based on your credit score, the type of loan you’re taking out and the amount of your down payment. But fixed-rate mortgages are mostly tied to the current market rate and will be similar from lender to lender.

Unlike a fixed-rate mortgage, an ARM’s rate is set below the market rate and adjusts accordingly after the initial period is up. While you save money in the first period of months/years, you risk paying more if the fixed rate is higher when the ARM adjusts.

Depending on your long-term financial plan and how long you plan to live in the house, you might choose the ARM’s savings over the certainty of a fixed rate. If, however, you plan to live in the home for many years and the fixed rate is relatively low, you might choose the certainty of the fixed rate over the savings of the ARM.

Once you’ve decided between a fixed-rate and adjustable-rate mortgage, you can choose between the types of home loans available to you:

*Can be somewhat higher or lower depending on the lender and the amount of the down payment.

**Can be somewhat higher or lower depending on the lender and your credit score.

3. Gather Documents Needed For Mortgage Approval

Now that you have a basic understanding of what kinds of mortgages are out there, you should take a little time to gather the documents needed for mortgage preapproval:

• Valid personal identification: Proof that you are who say you are with a valid form of government-issued ID. This can be a driver’s license, Social Security card, passport or any other state or federally issued ID card.
• Proof of income and employment: For this and other reasons, you should have copies of several recent W-2s, pay statements and bank statements, as well as copies of your annual tax returns for the past 2 years minimum.
• Proof of assets and debts: If you have a retirement or investment account, those companies can provide a copy of your statement or you can print one online. Likewise, you can provide proof of loan payments to lenders for things like a car or student loan. 
• Credit validation: Any prospective lender will conduct its own review of your credit information, but showing them a copy of your credit report in advance provides testament to your financial literacy.
• Rental payment history: If you’re currently renting your home, you can ask your landlord for a statement showing your on-time rent payments for the last several months. You can also show proof of on time payments to utility companies.
• Gift letter: If the money from your down payment is coming from someone else, such as a parent, you might need to have them put it in writing. This assures the lender you will have the cash at closing, particularly if your assets do not show you have sufficient funds, and that you’re not required to pay back the gift.

4. Get Estimates From Multiple Mortgage Lenders

The time you spend shopping for the right mortgage lender will be time well spent. Mortgage interest rates vary from lender to lender and finding the best rate available to you can save you money over the life of the loan.

Banks, credit unions and mortgage lenders like Rocket Mortgage^® are traditional sources for mortgages. If you currently have an account with a financial institution, inquire about their mortgage options. They may have special offers for existing customers.

It’s important to note, if you apply for a mortgage loan with several lenders in a short period of time, your score won’t drop with each credit check. Because you’re searching for one loan, each of the credit pulls from different lenders will count as one hard inquiry. However, you should probably hold off on applying for other forms of credit, such as a credit card, during this time.

Since it might get confusing if you’re shopping multiple lenders, you should ask for a loan estimate from each one. A loan estimate is a short summary document that details the loan being offered, including estimated interest rates, closing costs and monthly payments. Being able to compare these proposals side-by-side makes choosing the best one easier.

5. Apply For Mortgage Preapproval

A mortgage preapproval is a determination by a lender of the amount you’ll be able to afford when you start shopping for a home. Having a mortgage preapproval from a lender can help in two important ways. First, it helps you narrow your home search to properties you can afford, saving you time and heartache. And second, it shows sellers that you’re a serious buyer and have the financial resources to close the sale.

Just understand that a mortgage preapproval isn’t a commitment to lend. When you do buy a house, it will still need to pass the lender’s appraisal. And since your interest rate can’t be set until you buy, the final loan amount and monthly payment can’t be locked in until there is an actual property.

Tips To Consider When Shopping For A Mortgage

• Scan your credit report for any errors: An error on your credit report can adversely affect your ability to get a loan. If you see an error, contact both the credit bureau and organization that provided the information to the bureau. Both these parties are responsible for correcting inaccurate or incomplete information.
• Avoid applying for new credit: You should avoid applying for other loans while seeking a mortgage. Opening other lines of credit, such as a credit card, can increase your debt-to-income ratio and lower your credit score. However, your credit score is safe if you are shopping multiple mortgage lenders as long as it’s for the same loan.
• Prepare to explain any financial missteps: Having a missed payment or two in your past should not sink your mortgage application, but you should anticipate being asked about it and have a clear explanation of the incident. This is where having recent statements showing good financial responsibility can be helpful.
• Ask about discount points or lender credits: When you close on your mortgage, you have the option to buy mortgage points in exchange for a lower interest rate. Each point costs 1% of your total home loan and reduces your interest rate by a certain amount. For instance, some lenders offer a 0.25% interest rate reduction for each point purchased. So, if your original interest rate is 5.25%, buying one mortgage point will lower your rate to 5%. Though you must purchase the points at closing, the lower interest rate might save you significantly more money over the life of the loan.

Mortgage Shopping FAQs

How do I shop for a mortgage without hurting my credit score?

You can apply for a mortgage with several lenders at the same time without it hurting your credit score. As long as it’s for the same loan, you can actually have multiple lenders run your credit in a 30-day period without it adversely affecting your credit score at all. It’s only if you’re seeking other lines of credit, such as a credit card, auto loan, etc., at the same time that the credit bureaus might raise a red flag.

When should I start shopping for a mortgage?

It can never hurt to keep an eye on the mortgage market to know what credit unions, banks and mortgage companies are offering in terms of rates and incentives. However, the time to formally apply for a mortgage is when you’re ready to buy a home because your application will prompt inquiries into your credit report. Also, be sure you have all the documents needed to apply for preapproval before approaching lenders.

How much time should I spend shopping for a mortgage?

It’s in your best interest to get a loan estimate from multiple lenders before deciding on the best one. You should receive a loan estimate from a lender within 3 business days after applying for a mortgage. Remember that mortgage brokers are sales professionals and want to earn your business – make sure they know you are shopping around. It can save you thousands over the course of the loan.

How many loan estimates should I get while mortgage shopping?

To be certain you are getting a competitive rate and good terms, you should get more than one loan estimate before choosing. In fact, the U.S. Consumer Financial Protection Bureau recommends you get estimates from at least three different mortgage lenders.

How long are loan estimates good for?

A loan estimate will have an expiration date at the top of the first page that shows how long the estimate is good for. Typically, loan estimates are good for 10 business days from the date it was issued.

The Bottom Line: Knowing How To Shop For Mortgages Can Save You Money

With very little effort and a bit of know-how, you can make sure you get the best deal for you – and save big money – by taking the time to shop and get multiple loan estimates on your mortgage. Because mortgage loans often cover well into the hundreds of thousands of dollars, even lowering your interest rate by .25% can lower your payment significantly. Over the course of the loan, this will save you thousands of dollars in interest.

Once you’ve gathered the financial documents you need and are ready to go house shopping, you’re ready to apply for mortgage approval with Rocket Mortgage.