Guide to Shopping for Home Loans
Buying a home is one of the best long-term financial investments you can make. By securing a good deal on your mortgage from the start, you can increase your earning potential.
It’s simple: The better your mortgage, the less interest you’ll pay over time, which means more money in your pockets.
Not all home loans are created equal. Getting the best deal can be daunting, especially if you are in the market to buy your first home. To help you wade your way through the murky waters of mortgages and lenders, we’ve compiled this guide to shopping for home loans.
Do your prep work
Before you apply for a home loan, have a complete understanding of your finances. You'll save time, effort, and heartbreak by knowing what you can afford.
Start by checking your credit score and history. Although this isn’t the only indicator lenders consider, most lenders require a minimum score of 620. The better your credit score, the more likely you are to get a good rate.
In addition to your credit score, assemble all of your financial documents, including bank accounts, investments, and a complete report of your outstanding debts, including credit cards, auto loans, and so on.
Most lenders also require a down payment, which is typically about 20% of the home’s sale price. If you plan to sell your current home and use some of the profit for the down payment, do some market research to find out what you can expect to earn when you sell.
Pre-qualified vs. pre-approved
As you shop around for the best mortgage, remember that there is a difference between being pre-qualified for a home loan and being pre-approved.
Pre-qualification provides an estimate of how much of a loan you can receive — and the interest rate you might expect — based on a quick review of your credit history and financial records. Pre-qualification can be done quickly, usually by answering a few questions on a lender’s website or by phone.
Pre-approval for a mortgage is a more in-depth process that requires you to formally apply for a home loan. You will provide the necessary documentation and consent to a credit check, and some lenders may require a fee with your application. They may also look into details about your past living or rental history, such as how well you’ve maintained the property and if there are any marks against your credit.
It’s important to note that pre-qualification is not an official offer or guarantee for a loan, so your actual rate is subject to change. In comparison, once you receive a pre-approval letter, you can make an offer for a home based on the amount of loan you’re offered.
Having pre-approval for a mortgage can make you stand out from the pack when you’re placing a bid on your dream home. It lets the seller know you’re not only serious about buying, but you also have the means to do so.
Research multiple lenders
Just like when you’re searching for the perfect home, it’s important to look around and do your research before selecting a mortgage broker. Different brokerages have different requirements and policies when it comes to making their offers, and you want to find the one that works best for you.
Doing the legwork on finding the lender that works best for you can be time-consuming. If you are already working with a real estate agent, you can ask them for recommendations on lenders who might give you the best deal.
If you don’t yet have a realtor who can point you in the right direction, it might be time to find one. Learn how to find a top-rated local real estate agent who can guide you through home loan options.
Get multiple quotes
The adage of never accepting the first offer holds for getting a mortgage pre-approval letter. To secure the best offer for a home loan, you should get quotes from three to five lenders.
Good news: Most lenders use a similar application process. Once you complete one application, the second (or fifth) application will take you much less time to complete.
Compare your offers
After you receive multiple letters of pre-approval from lenders, compare your offers to find which one best suits you. Every lender is different, and so are their offers. Consider all of the factors involved with each offer before making a decision.
Some considerations to keep in mind include if the loan is a fixed interest rate or adjustable and if it runs 15 years or 30 years. Consider if you will end up paying interest only upfront before paying principal. It’s also important to note if any additional fees may come up, such as a penalty for paying off your loan too early.
Consult a local real estate professional if you need help determining which offer will give you the best deal. Contact a top-rated local real estate agent to learn about how you can get the best deal on your home loan.
Impact on your credit score
Although your credit score plays a significant part in your ability to get a mortgage — and your interest rate — applying for a home loan also leaves an impression on your credit score. Your credit score consists of several factors, including the amount of credit you’re using, how timely you pay bills, and the age of your oldest line of credit. Hard credit inquiries, such as the kind used to estimate your mortgage rate, impact your credit rating.
Don’t worry too much about the impact applying for multiple mortgages will have on your credit. Most credit scoring models combine all hard inquiries made within a couple of weeks. So don’t let a fear of tanking your credit score keep you from searching for the best deal.