Before picking a mortgage lender, it’s smart to check out a few options. Research suggests that comparing offers from at least three lenders can save you a lot of money compared to choosing the first one you find. Here are some tips to help you find the best mortgage lender.
Step 1: Strengthen your credit score
Before you start looking for a home to buy, it’s important to check your credit score. Make sure there are no mistakes in your credit history that could hurt your score. If your score needs improvement, focus on boosting it before you apply for a mortgage. Paying your bills on time is a great way to improve your credit history, which is a big factor in your overall score.
You can also improve your score by reducing your credit card balances, aiming for less than 30 percent of your credit limit. Avoid opening new accounts or closing old ones right before applying for a mortgage, as this can lower your score. These steps can help you get a better credit score, which will make it easier to get a mortgage with lower interest rates and better terms.
Remember, you can get a free credit report from each of the three main credit bureaus (Experian, Equifax, and TransUnion) every week.
Learn more here on what credit score is needed to buy a house.
Step 2: Determine your budget
Lenders decide how much to preapprove you for based on your income, loans, and debts that you owe every month. But they don’t include other bills like utilities, gas, or health insurance in their calculations. So, they might approve you for a loan that uses up all your money, leaving nothing for unexpected costs or even basics like food. That’s not a good financial move.
Instead, figure out your budget by looking at how much you can afford based on your income. Remember the 28/36 rule: Your housing costs shouldn’t be more than 28 percent of your monthly income. Add up your income, debts, savings, and possible property taxes and insurance costs. Also, think about lender fees, closing costs, and how much you can put down as a down payment. Make a detailed budget to ensure that your mortgage and other debts don’t go over 36 percent of your monthly income (the other part of the 28/36 rule).
Step 3: Know your mortgage options
Mortgages come in different types, offering choices on the loan duration, interest rate, and loan category. The most common terms are 15 or 30 years, where longer terms mean lower monthly payments but higher overall interest costs. Interest rates can either stay fixed throughout the loan (keeping payments consistent) or change with the market if it’s adjustable.
The types of loans available include:
- Conventional loans
- Jumbo loans
- Government-backed loans like FHA, VA, and USDA loans
You can get a conventional loan with as little as 3 percent down, but if your down payment is less than 20 percent, you’ll need to pay for private mortgage insurance (PMI). USDA and VA loans may require no down payment if you qualify. FHA loans are more flexible with credit scores, while jumbo loans are useful for buying homes in pricier areas.
Each loan option affects your down payment, total loan cost, monthly payment, and risk level. So, it’s important to carefully consider your needs and financial situation when choosing a mortgage.
Step 4: Compare rates and terms from multiple lenders
Comparing rates and terms from different mortgage lenders—banks, credit unions, and online lenders—is crucial for finding the best deal. When you’re shopping around, it’s best to check with at least three lenders and compare:
- Loan terms (like the loan amount, interest rate, and annual percentage rate)
- Down payment requirements
- Mortgage points
- Mortgage insurance
- Closing costs
- Any other lending fees
As you compare loan estimates from each lender, don’t just focus on the interest rate. Look at differences in expenses and fees, such as closing costs and mortgage points, because they affect the total cost of the loan. If anything isn’t clear, don’t hesitate to ask your loan officer or broker for clarification.
Keep in mind that shopping around for the best loan won’t harm your credit score much. Multiple mortgage inquiries within a 45-day period count as just one inquiry on your credit report.
Step 5: Get preapproved for a mortgage
The best way to know how much mortgage you qualify for is to get preapproved by three or four lenders. With preapproval, lenders carefully check your credit and finances.
The preapproval process involves a detailed application. Though the documents needed may vary, you’ll typically have to provide:
- IDs and Social Security numbers for all borrowers
- Pay stubs from the last month
- Two years of federal tax returns, 1099s, and W-2s
- Recent statements for all your financial accounts (like checking, savings, and retirement accounts) from the past two months
- A list of all your debts, including credit cards, loans, and support payments
- Your employment and income history, along with your current employer’s contact details
- Details about your down payment, including the amount, source of funds, and any gift letters if someone is helping you
Remember: A mortgage preapproval doesn’t guarantee you’ll get the money, or that exact amount. That only happens when you formally apply for a mortgage for a specific property, and lenders do a deeper check into your finances, known as underwriting. They may recheck your credit, employment, income, and assets at that time.
Step 6: Read the fine print on your loan estimate
Once you apply for a mortgage, your lender has to give you a loan estimate within three days. It’s important to carefully read this document to know all the terms of your loan, like the interest rate, how long you have to repay, and any fees, including if there’s a big final payment. Understanding these details helps you avoid surprises that could mess up your budget, hurt your credit, or even make you lose your home if you can’t keep up with payments.
When you compare loan estimates from different lenders, you’ll see lots of extra costs like title insurance, appraisal fees, and taxes. You might be able to talk down some of these fees, but remember, lenders can’t control what third-party services charge, only what they charge.
Quick money tip: Sometimes banks give you credits to lower your closing costs. But watch out—these credits can mean a higher interest rate, which means you’ll pay more in the end.
If you don’t understand a fee or see a mistake in the paperwork (like a wrong name or bank number), ask questions right away. Fixing problems early can save you a lot of trouble later.
Before you sign anything, read your mortgage agreement really carefully, just like any other important contract, so you don’t regret it later.
Understanding the basics of mortgages early on can help you succeed and get to know the different kinds of mortgage lenders. Mortgages aren’t all the same, so it’s important to learn how different lenders operate and what makes their loans different.
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