No one wants to throw away money, but that’s just what many are doing when they don’t shop around for a mortgage. In fact, one study conducted by the Consumer Financial Protection Bureau found that the average borrower could have saved $9,000 over a 30-year mortgage had that gotten the best available interest rate.
Before you start shopping around, comparing offers and rates, you’ll want to think about the types of mortgages you can qualify for and what you prefer. The most common types include FHA, VA, Conventional, and USDA loans. The loan term, or the period in which the loan needs to be paid off, should also be considered, with most available in 15- or 30-year terms, but there are others that may be options too.
While the lender will ultimately decide the amount of the loan you can qualify for, you can also use a house payment calculator to get an idea of what you should be aiming for. Then, once you’ve made the decision as to the kind of mortgage and term you want, you’ll need to gather some documents to get an accurate quote and, ideally, a preapproval.
Typically, you’ll have to provide the following:
- W-2s and other documents showing your income
- Tax returns
- Bank statements
- Any investment statements such as retirement and brokerage accounts
You may also need:
- Your rental history
- Records of all debt like car loans and student loans
- Utility payments
- Child support and/or alimony
- Bankruptcy and/or foreclosure records
- Letter indicating that any money gifted to you to purchase a home isn’t a loan
Obtain Quotes from Multiple Lenders
To find the best lender, you’ll want to compare as many offers as possible, looking at all of the details closely. That includes closing costs and other fees such as the application and credit report fees, appraisal fee, underwriting fee, points, property taxes, and any government fees.
In addition to well-known online lenders and big banks, research smaller lenders like community banks and credit unions and compare. They often provide better rates and terms, especially for those with varied income streams, such as the self-employed.
You might want to contact a mortgage broker as they work with wholesale lenders which don’t provide loans to consumers directly, which means they can sometimes find offers you can’t find on your own.
As it requires a lot of leg work to score the best deal, once you’ve chosen an offer, it can be a good idea to lock in the rate to guarantee it won’t change before closing.
The Loan Estimate
The loan estimate can be an important tool for comparing offers. Every lender is legally required to provide you with one within three days of submitting your application and pulling your credit report. As the form used is the same for every lender, it is easier to make side-by-side comparisons.
When reviewing loan estimates, keep watch for fees like prepayment penalties, which means you’ll be charged for paying your mortgage off early. Balloon payments may sound enticing initially as you’ll pay a lower amount over the life of the loan, but at the end of the term, you’ll have to pay the entire balance or refinance. In addition, if you make less than a 20 percent down payment, you’ll probably have to pay for private mortgage insurance, called PMI.
Be aware that some lenders may promise low-interest rates but make up for it with excessive fees and high closing costs. That’s why it’s vital to pay attention to all loan terms and not just the rate.