Finding a mortgage lender is one of the many decisions you’ll face when buying a home. Friends or your realtors may give their recommendations, which can be helpful, but it’s always wise to make sure you consider your unique situation.
These six steps will help simplify finding a lender for your next mortgage.
1. How to improve your credit score
Credit is an essential factor that mortgage lenders consider when you apply for a mortgage. The higher your credit score, the less risky your application will seem to lenders. A better credit score could also lead to more flexible loan terms and a lower interest rate, saving you money over time.
Build a positive credit history before you begin shopping for a home. Pay down outstanding debts, make on-time credit card payments, and limit hard inquiries on your credit report. If you’re spending more than 30% of your total credit utilization, try to lower your spending.
2. How to figure out your budget for a home
Buying a home is a large purchase, but you can put your mind at ease by coming up with a budget. Research home prices in the area where you plan to live and calculate how much you’d need to save or put down on a home.
Figuring out your budget early on can also point you to the mortgage lender that offers the loan you need.
Additional costs like the appraisal, origination fee, and property taxes will also factor into your budget for a home.
Closing costs range from 2% to 7% of the price of the home. Add this to your down payment amount to estimate how much you’d need to borrow for a mortgage.
While factoring in closing costs and other expenses, figure out exactly how much you need saved to buy a house.
3. How to choose between the types of mortgage
Not all mortgages are created equally. Some have different benefits, terms, and limitations. Conventional mortgage loans are the most common but have more strict requirements, like putting a minimum of 5% down.
Meanwhile, FHA loans allow you to put down as little as 3% and have more lenient credit score requirements. Government-based loans like VA and USDA loans are available if you meet certain requirements.
Once you know which mortgage loans are available, decide the features that mean the most to you.
- Do you need a larger loan due to higher housing prices in your area?
- Does a shorter loan term sound appealing?
- How much are you able to put down?
No matter your needs, there is likely a mortgage lender who offers a loan that’s ideal for you. All you need to do is put your best foot forward financially to improve your credit and prepare enough savings.
Learn the details of all the main types of mortgage loans so you can shop around with confidence.
4. How to compare rates from multiple lenders
Once you know which type of mortgage you’re leaning toward, start comparing rates and terms from multiple lenders. Whether you choose a bank, online lender, or credit union, they may all offer different rates and terms. Why not search for the best possible deal by shopping around if you’re not partial to one specific lender?
A rate difference of 1%, or even 0.25%, could affect how much interest you pay over time. Use a mortgage marketplace like LendingTree to compare rates from other lenders.
Or, you can research banks and credit unions on your own to see what their rates are. If you can pre-qualify without a hard credit inquiry, the rates will be more realistic and tailored to your situation.
Mortgage brokers can also do the rate shopping for you if you tell them the type of mortgage and terms you want. Consider the interest and annual percentage rate (APR) when comparing rates. Interest rates are:
- Fixed or variable
- Based on the market
- Influenced by your credit score
An APR is based on the lender’s interest rate and borrowing fees. With APR, you can get a long-term estimate of how much your mortgage will cost, while the interest rate reveals what you might pay monthly at the start of the mortgage.
5. How to get pre-approved for a mortgage
It’s almost time to start looking at homes and attending open houses. First, you’ll want to get pre-approved for a mortgage. That way, if you see a home you like, you already have a lender and can move quickly to make an offer.
Getting pre-approved allows the lender to examine your financial fitness to see if you can realistically manage and repay the mortgage loan. It also allows you to uncover any credit or debt-to-income ratio issues you should resolve before moving forward with a home purchase.
Most pre-approvals are conducted online, but you may be able to share your information over the phone or in person at your local bank or credit union. You’ll need to submit details like:
- Employment and income
- Desired down payment
- Existing debt amounts
- Social security number (to check your credit score)
- Bank account information
- Existing assets
- Current monthly housing cost
- Previous addresses
Some lenders may ask for your two most recent check stubs or other proof of income. The pre-approval process doesn’t take long, and if you’re completing it online, you may receive an answer in minutes.
If you are pre-approved, the lender will give you an official letter showing the maximum amount you can borrow. This pre-approval letter will also include the type of mortgage loan, term, and estimated monthly payment. The letter is valid for 30, 60, or 90 days so you can use this time to shop for a home.
6. How to choose your final mortgage with loan estimates
You find a home you like, and the seller accepts your offer. It’s almost time for celebrating, but you still need to apply for a mortgage, even if you’re pre-approved.
For the application, your lender will still want to see additional documents like updated check stubs and bank statements. In addition, you’ll need to submit the purchase agreement and proof of your earnest money deposit. You’ll need to show at least two years of tax returns if you’re self-employed.
When your mortgage application is submitted, it goes into processing which can take a few weeks as the loan officer and underwriter verify all your information.
You’ll receive a loan estimate within three days of completing your mortgage application. This estimate shows the expected costs of your mortgage, including:
- Loan amount
- Interest rate
- Taxes and insurance
- Closing costs
- Fees
- Earnest money deposit
- Any seller and lender credits
Review your loan estimate in detail and present any mortgage questions to your lender if something doesn’t make sense. Now is the time to decide if you’re okay with the terms and compare estimates from other lenders.
Once your home inspection, appraisal, and underwriting are complete, the lender can confirm your closing date, and you’ll be issued a closing disclosure.
While the loan estimate showed you the expected costs of your mortgage, the closing disclosure confirms those costs so you can lock in everything.
