7 Tips on How to Shop for a Mortgage and Compare Rates 

When shopping for a mortgage, taking time to compare mortgage options can save you thousands of dollars. However, to accomplish this, you must request several quotes from various lenders. This typically involves providing the lenders you are considering information about the home you wish to buy and your finances. Once you’ve received some quotes, the next thing you need to do is compare their offers. 

And while shopping for a home loan requires some leg work, it often is worth the trouble. According to the CFPB (Consumer Financial Protection Bureau), comparing rates from three different lenders can save borrowers about $300 annually on average. Furthermore, negotiating rates could potentially help you save even more. 

If you are currently shopping for a mortgage, taking the time to compare rates could save you thousands – even tens of thousands. If that’s what you are looking to achieve, then here are a couple of tips for you to consider. 

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What You Need to Know When Shopping for a Mortgage 

Comparing mortgage options will almost certainly save you cash since all the companies that offer home loans typically offer different mortgage rates to different customers. As such, if you know what you are doing, the process does not have to be time-consuming or difficult. 

When shopping for a mortgage, make sure you: 

  • Get quotes from at least three to five lenders
  • Compare lender fees and interest rates
  • Keep an eye out for discount points
  • Get preapproved so you know your rate 
  • Use competing offers to negotiate your fees or rate
  • Fill out the necessary applications and provide all the required supporting documents

The process of shopping for a mortgage involves more than just comparing advertised online rates. It is a process that needs some knowledge, skill, and effort, and which, if done right, could save you thousands of dollars in the long run. 

Shopping for a Mortgage in 7 Easy Steps

Shopping for a home loan doesn’t necessarily have to be hard. With the right information and a bit of preparation, getting a mortgage that suits your needs should be a lot easier than you think. Here is a look at how the process unfolds: 

  • Check your credit report and credit scores. If you see any errors, make sure you file a dispute. 
  • Understand the different types of mortgages available. Explore government-insured loans such as the USDA mortgage, FHA loan, VA loan, and conventional loans (backed by Freddie Mac or Fannie Mae)
  • Understand different mortgage repayment terms. Adjustable-rate and fixed-rate loans offer borrowers options in the interest rates they will pay over a fifteen- or thirty-year loan term
  • Prepare your documents as you will need them to verify financial information such as tax returns, employment, income, and debt obligations.  
  • Check out what different lenders have to offer. Request quotes from 3 to 5 lenders plus your existing mortgage broker, lender, credit union, or bank. 
  • Find out what your mortgage rates are! Understanding what affects your rates can help make it easier for you to find the best mortgage deals. 
  • Compare received quotes and negotiate interest rates. Most mortgage lenders are flexible with their fees and rates, but that’s only if you ask.

While we are going to cover more on these points below, these are some of the rudimentary steps to shopping for a home loan and finding the best or lowest rate. 

1. Check Your Credit Score

Companies that offer mortgages typically use credit scores to determine who they approve for a mortgage and what interest rates they will pay. In most cases, the higher a person’s credit score is, the lower their rate will be. 

Annualcreditreports.com offers users free copies of their credit reports from America’s top three credit bureaus – Experian, Equifax, and TransUnion. If you have a low credit score, then consider spending time in the first few months of your home purchasing journey improving your scores. Apart from improving your chances of getting approved for a home loan, a good credit score could also save you thousands throughout your mortgage. 

Paying down some of your student loans, personal loans, and high-interest credit card debts should go a long way to helping increase your credit score. As will paying rent, utility bills, and installment loan repayments on time. For more on how to improve a low credit score, click here to review our guide.

2. Understand the Different Types of Mortgages Available

As a home buyer, you have a wide selection of mortgage options to choose from. As such, having a good understanding of the requirements and benefits of each of the mortgage options available should make it a lot easier for you to find a solution that best suits your needs.

Conventional loans: If your FICO score is above 620 and can put down at least 3% of your loan’s down payment, then you qualify for this loan option. However, if you can pay 20% or more of the down payment, then go right ahead as doing so will mean that you don’t have to pay for private mortgage insurance (PMI), which is mandatory for down payments less than 20 percent. Nevertheless, most mortgage lenders will still drop the mortgage insurance once you reach a 78 percent loan-to-value ratio. It’s worth noting that you can refinance your private mortgage insurance off your loan if you’ve at least 20 percent equity in the property.

FHA Loans: Federal Housing Administration loans, which are government-backed, are quite popular amongst first-time home buyers as the requirements needed to qualify are a bit more flexible. You should qualify for an FHA loan with a FICO score of 580 with as little as 3.5 percent down or 10 percent down with a FICO score of 500. However, it’s worth noting that this loan option attracts MIP or mortgage insurance premiums for the life of the loan. Nevertheless, you still can remove any unwanted premiums by refinancing the loan into a conventional one later on. 

VA Loans: While these government-insured loans offer 0 percent down payment, they are only available to eligible service members and veterans. Something worth noting about these loans is that the VA hasn’t set a minimum score. As a result, mortgage companies are allowed to set their limits – typically 580 and 620. 

USDA Loans: These loans, offered by the United States Depart of Agriculture, are generally offered to low-income home buyers in designated rural and suburban areas. Just like VA loans, this loan option requires no down payment and doesn’t have a USDA-set minimum credit score. And while that’s the case, most lenders will typically offer the loan to borrowers with a FICO score of about 640. 

3. Understand the Different Repayment Terms

There are two types of mortgages that lenders generally offer: fixed-rate loans and adjustable-rate mortgages. 

Adjustable-Rate Mortgages (AMR): The interest rates of an adjustable-rate mortgage are variable, meaning that they change over the loan’s lifespan. While the initial rate will, in most cases, be fixed for some time, it still will occasionally reset over your loan term.

Fixed-Rate Mortgages (FMR): These loans have a fixed interest rate that does not change throughout the loan’s life. These loans often come in mortgage terms of either 15 or 30 years, meaning you will only be required to make payments every month for 180 and 360 months, respectively. 

4. Prepare Your Loan Documents

Companies that offer mortgages always require that you show proof of your credit, assets, and income for them to provide you with an accurate rate quote. As such, before approaching any lenders, make sure you’ve compiled all the paperwork needed on your applications, like recent pay stubs and bank statements.

5. Request Rate Quotes from Several Lenders

A majority of mortgage experts recommend that borrowers get at least three quotes from different lenders when shopping for a mortgage. And while that’s the case, there are no restrictions on the number of lenders you can approach for a mortgage. Furthermore, according to research, the more rate quotes you can get, the more cash you will save.

For instance, a study conducted by Freddie Mac shows that mortgage borrowers could save about $1500 over their loan’s term by getting an additional quote and about $3,000 for 5 quotes.

As such, when shopping for a mortgage, make sure you get at least 3 to 5 quotes – the more you get, the more you are likely to save. 

The good thing, however, is that most mortgage lenders use a very similar application process. Chances are you will find yourself answering similar questions and providing the same documents each time you get a quote.

As such, after you have applied once, you will have all the information needed to apply for a mortgage with a few other lenders. And since most lenders now offer preapproval applications online, the process should be pretty straightforward and quick. 

However, according to Al Moreira, a loan expert, it’s important to keep in mind that quotes are just quotes, and nothing’s guaranteed until you’ve been locked in. Nevertheless, they are important as they help borrowers gauge the market from one lender to the other. 

6. Know Your Mortgage Rate

Mortgage rates are currently low – as of writing this, around 4.75% for 30-year fixed-rate loans. Annual percentage rates and interest rates are for illustrative purposes only. For our comprehensive loan rate assumptions take a look at our custom rate and closing cost tool.

For a better context, the long-term average for a 30-year fixed mortgage rate is about 8 percent – that has been the average since Freddie Mac’s records started in 1971. However, it is worth noting that not different people get different rates depending on their credit scores. 

Top mortgage rates are generally reserved for the “highest-level” borrowers; i.e., people with:

  • Spotless credit reports
  • Exemplary credit scores (740 or higher)
  • Plenty of savings and assets 
  • Low DTI (debt-to-income) ratio 
  • A big down payment (20 percent or more)

Of course, very few people fit this bill – most people fall somewhere between so/so and excellent personal finances. Where you fall between these two points is what will determine the rates you get quoted. Nevertheless, having an idea of how to shop for a home loan could help ensure that you get the best mortgage deal possible. 

Consider experimenting with a mortgage calendar to get an idea of how your loan term, down payment, and rate could affect your monthly payments and how much you can afford to spend on buying a new home.

7. Compare Received Quotes and Negotiate Interest Rates

Generally speaking, comparing mortgage rates is pretty straightforward. In most cases, all you have to do is seek preapproval from three or more mortgage lenders and compare their rates. However, it’s important to keep in mind that your interest rate is not the only thing that you need to think about. There are many more factors that you still need to consider such as annual percentage rate, origination fees, discount points, and closing costs. 

Fortunately, comparing mortgage rate quotes to find the best or most conducive deal is easy. 

All home loan offers come in a similar format known as a Loan Estimate which makes it easier for borrowers to quickly skim for fees, rates, and other essential information. 

How to Read Your Loan Estimates

You’ll find your quoted interest rate, monthly payments, and loan terms on the page of the Loan Estimate. Apart from comparing rates, you can also use this page to: 

  • Ensure all mortgage offers are for the same type of loan (USDA loan, FHA loan, Conventional loan, etc.)
  • Ensure all quotes are for the same type of mortgage rate (adjustable-rate or fixed-rate mortgage)
  • Compare scheduled mortgage payments to determine which loan is cheaper to pay month to month

On the second page of the document, you’ll find details related to closing costs and other expenses such as homeowner’s insurance and prepaid taxes. 

It is worth noting that loan costs here are split into two separate categories: A) Origination Charges & B) Services You Can’t Shop For. 

Origination charges refer to the mortgage lender’s fees and this is one area you will need to pay very close attention to when shopping for a home loan. That is because these fees typically vary from one lender to another. Picking a lender with lower origination charges could save you a lot of money during closing.

Furthermore, this section includes vital information related to “Points.” Also referred to as discount points, “Points” are additional fees paid upfront to get a much lower interest rate.

This is another area you need to pay close attention to when comparing mortgage rates from different lenders. If one home loan lender offers exceptionally low-interest rates but charges points, then just know that you’ll have to pay more upfront to get the rate quoted. 

Since these documents are pretty much similar, it is much easier to compare Loan Estimates from various lenders to find the best deal when it comes to closing costs and rates. 

Use Your Mortgage Rate Quotes to Negotiate 

When shopping for a mortgage, bear in mind that the quotes you receive aren’t set in stone. Home loan lenders are typically flexible enough to adjust their fees and interest rates. This gives you the freedom to use competing offers from different lenders as leverage to drive costs down.

Do not hesitate to play lenders off against others: 
“I like your organization, but I have a quote here that’s offering me less expensive closing costs/lower rates. Question is, can you match it? Or better yet, can you offer a better deal?”

While these negotiations will not lower the rate by a lot, even the slightest drop in interest rates could add up to thousands of dollars in savings when you are borrowing substantial amounts over several decades. 

What’s Next After You are Done Shopping for a Mortgage? 

Once you have put in your mortgage applications, compared fees, and interest rates, and chosen a mortgage lender, there are several final steps you’ll need to take to finalize your home loan. 

Submit a Final Application 

Once you have identified your dream home and managed to negotiate the purchase price with the person or entity selling the property, then the next step is to start the mortgage application process. 

While you may already have been preapproved for a home loan, you will still have to undergo a similar, but more stringent, underwriting process for your application to receive final approval. 

The person or entity underwriting your application will verify all your financial documentation and information – a process that may require a letter of explanation or additional verifications. As such, you need to stay on top of things and respond to any questions and queries that may crop up as soon as they crop up. Staying on top of the process will help ensure things sail along smoothly. 

Avoid Making Big Lifestyle Changes 

During this period, try and avoid making sudden yet substantial lifestyle changes like changing jobs or spending money on unnecessary luxuries. Also, avoid closing or opening any credit accounts as doing such things could negatively affect your credit score. 

Since lenders will often recheck a borrower’s credit history right before closing, avoid doing things that could jeopardize your mortgage rate, savings, or – worse – the approval of your home loan.

How to Shop for a Home Loan: Frequently Asked Questions

Is there a limit to the number of mortgage quotes I should get?  
Not really. According to mortgage experts, the least number of quotes you should get is three as those will give you a relatively good inkling of the mortgage rates range you qualify for. However, if you are searching for the best rates and want to maximize your savings, then go for five or more quotes. 

What’s the most important thing to keep in mind when shopping for a mortgage?
The most important thing to keep in mind is that mortgage lenders can’t give you a rate until you have been preapproved for a home loan. So, to find a mortgage that suits your needs, you will have to apply for a loan – and provide all the necessary documents – with several lenders. While this usually takes time, it is the only “true” way to get a mortgage deal that best suits your needs. 

What is the difference between preapproved and prequalified? 
Prequalification can be a very useful first step in the property buying process. It involves answering several questions about your financial status, after which a mortgage officer determines whether you qualify for a mortgage and what your max loan amount could be. On the other hand, preapproval is more rigorous and involves underwriting, providing financial documents, and going through credit checks. Once all that has been done, you will receive a verified approval that highlights the interest rates and final loan amount. In most cases, you will need a preapproval to make an offer on a property. 

Can I have two home loan offers? 
Yes. There’s no limit to the number of offers you can get. Remember, you aren’t obligated to work with a lender until you have signed the closing document, as such, there is no danger in applying for multiple quotes from multiple lenders. The only thing you need to keep an eye out for is lenders who charge application fees. 

What factors should I consider when choosing a mortgage lender?
When choosing mortgage lenders to borrow from, one way to narrow down your list is by considering things like the availability of the loan product you require, advertised rates, online reviews, and recommendations. Once you have pinpointed 3 to 5 companies, send preapproval applications to each and compare the quotes you receive to find a combination of upfront fees and interest fees that best suit your needs.

Does mortgage shopping hurt your credit? 
When a borrower applies for preapproval, mortgage lenders do what’s known as a hard credit pull, which typically hurts the borrower’s FICO score by 5 points or less. However, as long as you receive all your quotes within two to four weeks, any hard inquiries performed during this period are counted as one inquiry. As such, your score won’t be dinged that much. If possible, do your best to ensure you receive all quotes on the same day for the most accurate comparison between different lenders.

How long will it take to get approved for a home loan? 
The process generally takes about 30 to 45 days – from application to closing – to complete. However, this may vary depending on how fast you respond to your mortgage lender’s requests, how complicated your application is, and other factors like how long the home appraisal process takes.

What do I need to do to get the best mortgage rate? 
The rate you are offered will largely be determined by your finances. To increase your chances of receiving the best rates possible, do your best to improve your credit and make sure you pay down most of your debts 6-months to 1-year before you start the process of buying a house. Apart from all that, make sure your credit card balances stay below 30% of their limit. Furthermore, you could lower your rate by making a larger down payment. Lastly, ensure you compare rates from, at the very least, 3 to 5 mortgage lenders. Since interest rates vary from one lender to another, shopping around could help make it easier for you to find the best deals possible.