How do I shop around for a mortgage lender?

Shopping for a mortgage lender might seem challenging. Securing a mortgage loan is one of the most significant financial decisions in a person’s life. Half a percent in interest can cost you tens of thousands of dollars over the term of the loan.

When it comes to securing a mortgage loan, it’s crucial to do your homework and understand all of the options available. Mortgage rates vary between mortgage lenders. Receiving one additional rate quote can save an average of $1,500 and an average of about $3,000 for five quotes, according to Freddie Mac.

However, less than 50% of homebuyers talk to more than one lender, often because it’s a difficult and time-consuming process to receive multiple, personalized loan offers. Most mortgage lenders require a lengthy loan application process in addition to running a full credit check to get you a firm offer.

On the other hand, when you shop for a mortgage lender online, it’s important to keep in mind that advertised rate quotes are rough estimates that, too often, represent an idealized scenario. Advertised rates are different from the loan terms you’ll actually be offered.

Arming yourself with accurate, personalized data is crucial to effectively shop for a mortgage. Here’s how to do it.

Step 1: Know Your Credit Score & Financial History

Credit scores are used to help mortgage lenders determine who qualifies for loans and the interest rates they’ll pay. Financial experts recommend that borrowers should begin inspecting their credit reports at least six months prior to applying for a mortgage loan. This will allow time to spot any inaccuracies, pay off any high-interest debts, and improve your debt-to-income ratio.

Improving your credit score will drastically improve the loan terms of your mortgage. There are a few ways you can improve your credit score and reduce your debt-to-income ratio. First, make sure that you are paying all of your bills on time or before they are due. Late payments hurt your credit score and make you appear untrustworthy in the eyes of many mortgage lenders.

Second, before you shop for a mortgage, try to pay down as much of your debt as possible. Try not to carry balances on your credit cards, make sure you are making any car payments or other debt repayment on time, and remember, the less debt you hold, the better your credit score will be.

You can check your credit report from the three major credit bureaus for free by using online tools and other government-mandated resources. You can’t begin shopping for a mortgage until you understand your credit history and the impact it has on your credit report. Armed with the knowledge of your financial standing, you will be in a better position to shop for a mortgage and find the best mortgage lender.

Step 2: Consider Which Type of Mortgage is Right for You

When shopping around for a mortgage, it’s important to understand which type of home loan is the best fit for you.

Conventional loans are offered by direct mortgage lenders, like savings and mortgage companies. Some conventional loans require down payments as low as 3%, but if you put less than 20%, you will likely be required to pay Private Mortgage Insurance (PMI). There are two types of conventional loans: “conforming” and “non-conforming.” Conforming loans meet the underwriting requirements of government-sponsored agencies Fannie Mae and Freddie Mac. The most notable requirement is the loan size, which is set at the county level. Conventional loans that do not meet the loan limit are non-conforming loans, also referred to as “jumbo loans.”

Government-insured loans are designed to support low-income housing, help veterans become homeowners, and increase rural development. These loans have special features that make it easier for certain borrowers to secure financing. Specifically, loans insured by the Federal Housing Association (FHA) allow low-income borrowers with lower credit scores to secure financing with down payments as low as 3.5%. US Department of Veteran Affairs loans (VA) loans allow veterans and active-duty military to secure financing with 0% down and avoid private mortgage insurance (PMI). And US Department of Agriculture loans (USDA) allows low to moderate-income borrowers to secure financing for properties in rural areas.

In addition to choosing which type of mortgage best suits your needs, you’ll need to review the following two mortgage payment options:

• Fixed-rate mortgages: lock in the same interest rate and monthly payment for the life of the loan, whether it’s 15 years, 30 years, or another period of time.
• Adjustable-rate mortgages: the interest rate (and therefore, the monthly payment) adjusts automatically under terms set when the loan documents are signed.

There are pros and cons to both types of mortgage loans. However, many people choose fixed-rate mortgages over adjustable-rate mortgages because you always have the ability to refinance your loan when rates drop. For example, in the earliest days of 2022, interest rates were low at 3% or less. However, as inflation increased, rates have recently jumped over 5%.

If you purchased a home today, you likely would not want to have an adjustable-rate that keeps going up every month as interest rates rise. However, locking in 5% or more for the life of your loan is also not a great option for many home buyers. Therefore, most people choose a fixed rate and then refinance as interest rates improve to lock in the lowest possible interest rate.

Before borrowing money, it is important to think about your future needs as well as your current financial situation. If you can qualify for a loan with low down payment options, like an FHA loan or a VA loan, you should strongly consider it.

The best mortgage lenders will offer a wide variety of different home loans, but not every mortgage company may be able to offer the loan type best suited to your needs. Shopping for a mortgage will give you a chance to view the offerings from other mortgage lenders and find the home loan that best meets your financial situation.

Step 3: Prepare the Required Documentation

Before you begin reaching out to lenders, be sure to have all of the necessary documentation in order. This includes:

• Income Verification: pay stubs from the last 30 days, W-2 forms from all employees from the past two years, and contact information of each employer for the past two years.
• Asset Verification: most recent two months' bank statements (to prove you have money for a down payment).
• Transaction Type: details on the transaction, such as if it’s a refinance or a purchase.
• Identity Verification: a copy of your current Driver’s License and Social Security Card.

While it is good to have your documents prepared ahead of time, your loan officer will also help you through all of the required documentation. Every mortgage company will handle documentation and asset verification a little differently, but most lenders offer online portals that make uploading and managing documents easy.

When evaluating which lender is best suited to meet your needs, it is a good idea to ask about their loan process. Will you be able to complete your loan online? Can you digitally upload and sign documents, or will you need to procure hard copies of everything? These are some important things to take into consideration as they can make the loan process simpler or more difficult.

Step 4: Reach Out To and Compare Mortgage Lenders

Various types of lending institutions are available to finance your home. These include local banks, credit unions, and large banks, or you can also choose to go through a mortgage broker. In certain cases, different lenders will serve your needs best, so it’s important to weigh your options to determine which is the best fit for you.

Start off by reaching out to get at least three personalized Loan Estimates (LEs) and compare the full loan scenario, including information about monthly expenses, estimated interest rates, points, lender credits, lender fees, and closing costs. Your loan officer should be able to provide a detailed financial breakdown of your loan, from how much the principal and interest are every months to taxes and insurance.

Armed with multiple rates, you have the ability to negotiate to receive the best mortgage offer for you. For example, if one lender is offering a lower interest rate, but another has better closing costs, you can use the rate from the first lender to bring down the second and ultimately lower your overall costs. Remember, lenders have leeway with the rates and fees they offer, and they’re often willing to negotiate to get your business.

Once you have been offered a mortgage rate that fits your budget and you’re happy with the proposed terms, be sure to confirm your loan is “locked” with a formal LE to ensure you avoid a lender changing the terms.

In order to process your financials and offer you loan terms, lenders must run a hard credit pull. A hard credit pull will temporarily lower your credit score. After a hard credit pull for a mortgage, you have about 14 business days to compare rates from other lenders without having another hard credit pull lower your score further. If you want to compare interest rates and loan terms, make sure you don’t wait too long. Multiple hard credit pulls can hurt your credit score and affect the mortgage you qualify for.

Own Up: Mortgage Shopping Made Easy

Here at Own Up, we understand that the home buying process can be hard. That’s why we are dedicated to empowering consumers through education and easy access to personalized data and advice. If you’re looking to start your home buying journey on the right foot, build your profile and connect with a Home Advisor today.

Most people are intimidated by the perceived complexity of mortgage shopping. We strive to make this process easier for everyone. We believe in empowering our users by delivering detailed information and data and helpful resources. Together we can uncomplicate this essential process and help empower people to shop for a mortgage that meets their needs.