You might feel like you’re ready to buy a home, but in addition to hunting for the perfect property, you’ll likely need to shop for the right mortgage loan before you commit to that purchase.
Knowing how to shop for a mortgage and compare offers can help you find the home loan that fits your situation and potentially save you thousands of dollars.
1. Consider mortgage types
A mortgage loan allows you to borrow the funds needed to buy a home. Understanding the features and requirements of each major mortgage program can help you figure out which one is right for your situation.
Most mortgages require a minimum down payment, usually around 3% to 5% of the sale price, and a minimum credit score.
Conventional loan
Conventional loans are mortgages offered by private banks, credit unions, and mortgage lenders but aren’t backed by government institutions. Instead, conventional loans are typically backed by Fannie Mae and Freddie Mac, two agencies that purchase mortgages and set borrower qualification requirements.
To get a conventional loan, you usually must pay at least 3% to 5% of the home’s purchase price as a down payment. You’ll also need a credit score of around 620 or higher, and the loan amount must follow conforming loan limits.
FHA loan
An FHA loan is a mortgage that’s funded by a bank, credit union, or other mortgage lender but insured by the Federal Housing Administration (FHA).
The government guarantee allows mortgage lenders more flexibility here, so you might qualify with a credit score of 580 if you can put down at least 3.5%. With a credit score in the 500 to 579 range, you’d need a down payment of 10% or more.
VA loan
VA loans are funded by private lending institutions and backed by the U.S. Department of Veterans Affairs. These mortgages are available to eligible members of the armed forces, veterans, and surviving spouses.
If you qualify, you could get approved for a mortgage with a 0% down payment and no mortgage insurance, though you’ll typically need to pay a funding fee. The VA doesn’t set minimum credit score requirements, but your lender may have its own limit.
USDA loan
USDA loans are guaranteed by the U.S. Department of Agriculture. These loans are designed for low-income borrowers who plan to purchase a home in a USDA-designated rural area.
You won’t have to make a down payment on a USDA loan, but you’ll be responsible for paying an upfront fee and an annual fee.
Keep Reading: What Is a Mortgage? Everything to Know About Home Loans
2. Check your credit score
When you apply for a mortgage, lenders typically pull your credit scores from all three major credit bureaus: TransUnion, Equifax, and Experian. Your credit scores help lenders predict how likely you are to repay a loan. As such, it factors into whether you’ll qualify for a mortgage and the loan terms you’ll receive.
All three of your credit scores may differ, so the lender will order the scores from lowest to highest and use the middle score to determine loan qualification. So, for example, if your scores are 620, 630, and 640, the lender may use 630 to make a lending decision.
A higher credit score — usually in the mid-700s and above — can help you get a good mortgage rate and potentially save you thousands of dollars in interest over the life of the loan. It may also help you qualify for more mortgage programs and a lower down payment requirement.
Tip:
If your credit needs work, you may want to pause your mortgage search for a few months and focus on improving your credit score.
3. Review your credit report
Lenders will also review your credit reports, which are documents that capture the details of your credit history. Many consumers have a credit report with each of the three major credit bureaus.
Your credit report includes a list of credit accounts opened in your name, such as credit cards and student loans, plus the following:
- Payment history
- Monthly minimum payment
- Balance information
- Whether the account is in good standing
Lenders use the information in your credit report to:
- Find your monthly financial obligations, which impact your debt-to-income ratio
- Look for signs of loan delinquency, such as missed payments
- Check for red flags, such as bankruptcy or foreclosure
Tip: Credit scoring companies, such as FICO and VantageScore, use the information in your credit reports to calculate your credit scores. Unfortunately, mistakes on credit reports are common — and these errors may affect your credit score and your ability to qualify for a mortgage.
So, before applying for a mortgage, check your credit reports and dispute any mistakes. You can pull your credit reports for free once a year at AnnualCreditReport.com.
4. Explore different financing options
A mortgage lender — such as a bank or credit union — is the company that funds your home loan. Each lender offers different loan programs and sets different borrower requirements. It’s important that you get quotes from several types of mortgage lenders to find one that offers the best loan program for you.
Banks
Banks are for-profit financial institutions that typically offer a number of different products such as mortgages, credit cards, checking and savings accounts, and more. Many large banks have branches nationwide or throughout a specific region where you can get in-person support, and they also might offer a wider selection of mortgage products.
One downside to banks is that they tend to charge slightly higher interest rates on home loans compared to credit unions, according to a side-by-side comparison by the National Credit Union Administration.
Credit unions
Credit unions are nonprofit organizations that offer banking services to their members. In addition to offering lower interest rates on mortgages and other financial products, credit unions have historically earned the highest customer satisfaction ratings.
However, you’ll need to join a credit union to get a mortgage. Some credit unions are open to anyone, but others may require you to work in a certain industry or live in a certain area.
Other mortgage lenders
You might also find a home loan with another type of lender. For instance, online lenders, such as Rocket Mortgage, offer an end-to-end digital process. You may be able to get pre-approved, upload loan documents, and close the loan online. By saving money on overhead costs, online lenders may also be able to offer lower rates or special discounts.
5. Shop around for the best rates
Getting rate quotes from multiple lenders and comparing offers is one of the easiest ways to save money on your mortgage. That’s because the interest rate is one of the key components of the mortgage’s total cost, and rates can vary considerably with each lender. Despite this, about half of homebuyers skip shopping for the best rate.
According to the Consumer Financial Protection Bureau, borrowers could save $300 a year on average by shopping for more than one rate quote. You might save even more, depending on what you qualify for.
Example: Let’s say you get rate quotes from two different lenders on a $200,000 home loan, and you compare the monthly principal and interest payments on each. With a 3% interest rate, you save $44 per month compared to the same loan with a 3.5% rate. That might not sound like much, but it adds up to $528 in savings per year or $15,840 over a 30-year term.
Get Started: Find Your Mortgage Rate Today
6. Get pre-approved
A pre-approval is a letter from a mortgage lender that shows how much you’re qualified to borrow. This can help you set a homebuying budget and strengthen your purchase offer when you find a home you want to buy.
To start the process, you can contact a lender and ask for a pre-approval. They’ll pull your credit, look over your financial documents, and gauge how much money you have for a down payment. If you fit the qualification requirements, the lender will hand you a mortgage pre-approval letter.
