Shopping for a car: fun, freeing, and full of fresh new smells. Shopping for a puppy: heartwarming and full of suspicious smells. Shopping for a mortgage: not particularly thrilling or fragrant but one of the most important decisions many consumers will make in a lifetime.
From assessing what they can afford to nailing down a mortgage type, researching the best rates, and ultimately securing a loan, homebuyers must take many steps when shopping for a home loan.
Here are a few tips and tricks on how to shop for a mortgage loan and what to expect along the way.
Figuring Out What’s Financially Possible
Reviewing monthly spending and estimating how much they can afford is one way for mortgage shoppers to kick off the homebuying process.
A budget or worksheet can be particularly helpful in determining what’s possible, with line items for the mortgage payment, property taxes, insurance, utilities, maintenance, and funds set aside for emergencies.
A mortgage calculator is useful for estimating the real cost of a home purchase, allowing consumers to plug and play with the components that comprise a monthly mortgage payment:
• Loan type
• Mortgage principal
• Mortgage interest rate
• Down payment amount
• Loan term
• Estimated property tax
• Private mortgage insurance, or PMI
• Homeowners insurance
• Homeowners association fees
Most mortgage calculators allow homebuyers to enter their credit score for a more accurate estimate. Checking your current credit score can help you determine what type of loan you qualify for.
In many cases, a higher credit score can help buyers get a lower interest rate, while a lower credit score could mean higher interest rates or the need for a larger down payment.
Knowing this information can help consumers estimate what range of quotes to expect from mortgage lenders or brokers before they start shopping for a mortgage loan.
Determining the Best Type of Mortgage
One of the first steps a homebuyer might take when shopping for a mortgage is deciding which type of mortgage loan to apply for.
This process could require some diligent comparison shopping to consider the pros and cons of each option alongside financial and personal needs.
A conventional fixed-rate mortgage offers the same interest rate and monthly payment for the entire term of the loan—typically 15 or 30 years.
ARMs generally offer lower interest rates than fixed-rate mortgages, but only for a certain time, such as five or 10 years. After that, the monthly payments will adjust to current interest rates.
No Down Payment Loans
A no down payment loan allows buyers to purchase a house with zero money down at closing, except for the standard closing costs.
Federal Housing Administration Loan
An FHA loan is a government-backed loan that allows qualified buyers to put down as little as 3.5% if they meet several requirements, including the payment of mortgage insurance and a limit to the amount of the FHA loan .
Veterans Affairs Loan
A VA loan is a government-backed loan that allows no down payment and no mortgage insurance for veterans who have served 90 consecutive days during wartime, 180 consecutive days during peacetime, or six years in the reserves.
USDA Rural Development Loan
A USDA Rural Development loan is a government-backed loan for families in rural areas who are trying to put homeownership within reach. As long as buyers’ debt loads don’t exceed their income by more than 41%, they can enjoy a discounted mortgage interest rate and no down payment.
Researching Rates and Deals
Once mortgage shoppers have a better idea of their financial bandwidth and preferred mortgage type, they can begin researching the optimum rates and deals they can get on a home loan.
Mortgage lenders and brokers might offer different interest rates and fees to different consumers depending on the day, even when they have the same exact qualifications. That’s why it can be important not only to understand mortgage basics but to compare what an array of mortgage lenders and brokers are able to quote in the loan estimate.
It can be prudent to bear in mind that mortgage lenders and brokers receive a profit from the loan issuance, so they might be motivated to get consumers to agree to loans with higher fees, interest rates, or origination points.
Shopping around for the best interest rates and deals is a proactive way for homebuyers to avoid more expensive loans and ensure they can strike a deal they’re comfortable with.
Mortgage Lender or Broker?
When wondering how to shop for a mortgage lender, it can be useful to start by distinguishing between a direct lender and a mortgage broker:
• A direct lender is a financial institution that assesses whether a buyer qualifies for a loan and offers them the funds directly.
• A mortgage broker is an intermediary between the buyer and financial institution who helps the buyer identify the best direct lender and compiles the information for the mortgage application.
Long story short, mortgage brokers help homebuyers comparison-shop by culling together multiple lender quotes and presenting them all at once. This can be helpful for buyers who don’t want to deal with contacting multiple lenders. That said, the broker typically takes a commission, covered by the buyer, based on the mortgage amount.
In the case of working with a direct lender, it can be a good idea for buyers to deal with a financial institution they already have a relationship with.
Questions to Ask When Considering a Lender or Broker
Sometimes a list of questions can be useful when considering whether a mortgage lender or broker is the right fit.
A few constructive questions could be:
• How is the lender getting paid? It’s fairly common for a mortgage broker to get paid a commission on closed transactions. Asking them whether the fee is embedded in the loan origination fee or how their compensation will be facilitated can help make these costs more transparent to the buyer.
• Can they offer competitive interest rates? If so, how long can they lock them in? While mortgage rates tend to be standard across the industry, lender rates can fluctuate based on the buyer’s credit score and financial history. Once the rate is locked in, there’s a guarantee from the lender that they’ll stay the same for a specific period of time, regardless of industry wide fluctuations. Finding out if the lender is willing to offer the best rate and lock it in for 30 to 60 days can help buyers know that they’re covered until closing time.
• What are the typical business hours? Whether it’s a broker or a lender, finding out their availability can be good to determine in advance, especially since many home showings and offers happen on weekends and could require a tight turnaround time.
• Can they provide a breakdown based on different down payment amounts? It can be useful for buyers to see a wide range of cost comparisons when shopping for a loan. Can the lender provide multiple scenarios with different down payment amounts, interest rates, and fees so the buyer can have a knowledgeable conversation about their budget and what’s possible?
• What’s the loan processing time? Asking about the anticipated turnaround time for processing the loan (usually around 43 days) can help determine whether the lender will be able to execute the purchase and sale agreement in time for closing.
• What fees and closing costs can be expected? Inquiring about expected charges is an important way for buyers to ensure no surprises or hidden transaction fees down the line. From origination fees charged by the lender to cover the loan processing to closing costs such as home inspection and appraisal fees, HOA fees or title service fees, a loan estimate can help lay out which charges can be negotiated and which ones are fixed.
Understanding Risks, Benefits of Loan Options
Depending on the loan type, APR rate, whether the interest rate is adjustable or fixed, the down payment option, and potential prepayment penalties or balloon payments, mortgages have many different benefits and risks associated with their purchase.
Working with a lender to calculate how much monthly payments are estimated at currently, five years from now, 10 years from now, etc., can help mitigate potential risks and outline the benefits of certain terms and conditions.
A mortgage worksheet is one way to help illuminate the potential upsides and downsides of a particular mortgage loan alongside the lender.
Negotiating the Best Mortgage Deals
After a suitable sampling of lenders have provided detailed mortgage loan quotes, consumers can compare costs and terms and negotiate the best deal. The mortgage worksheet can be helpful in this part of the process as well.
By being transparent about the fact that they’re shopping around for the best quote, can incite lenders and brokers to compete with one another in offering the most favorable option.
Checking With Trusted Sources Before Signing
Once comparisons and negotiations whittle the list of quotes to a few, consumers might wish to consult with reliable sources like family members, housing counselors, or real estate attorneys to weigh in on the impending agreement.
Since getting a mortgage loan is often considered one of the most expensive commitments many consumers will make in their lifetime, there’s no harm in asking for a little help when making the decision.
Whether it’s a friend who already knows how to shop around for a mortgage or an opinion leader in the buyer’s close personal network, mortgage shoppers might want to review their loan documents with a trusted, well-informed source before they sign anything.
Getting Mortgage Preapproval
While getting prequalified for a loan involves consumers submitting their financial information and receiving an estimate of what the lender could potentially offer, preapproval means the lender has conducted a full review of the consumer’s income and credit history and approved a specific loan amount for, typically, 60 to 90 days. This approval usually comes in the form of a letter.
Homebuyers can benefit from getting preapproved for a mortgage in many ways. Not only does it offer them the opportunity to discuss loan options with the lender, but it also helps them understand their budget and the maximum amount they could borrow.
In some cases, a preapproval letter also indicates serious intention to purchase a property. This can prove particularly helpful in competitive markets and bidding wars. Sellers will often go with a preapproved buyer over a prequalified buyer, since the loan will need to be approved for the final purchase regardless.
How to shop for a mortgage? First, figure out how much you can comfortably afford, and then choose a loan type, research interest rates, and compare what lenders offer. Finding the right loan is as important as choosing the right home.
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