When you’re ready to apply for a mortgage, you’ll probably hear that you should shop around for several mortgage offers.
It is often left unanswered how exactly you should do this. Buying a mortgage is not like comparing a new appliance or a new car. You will evaluate offers from lenders who might not make it easier to sort comparisons over a short period of time.
Here’s why it’s important to get multiple mortgage deals, and how to pick the best one without spending too much time and money.
Why should you get multiple mortgage offers?
You’ll want to get the best mortgage deal possible because you can save thousands of dollars over the life of a loan with fewer fees or a lower interest rate.
“For most people, this is the biggest investment they will ever have in their life,” says Bryan Owen, executive vice president at AmeriSave Mortgage Corp. “This can also be your most expensive bill each month. That’s why you should shop.”
The first lender you contact may offer the lowest interest rate and the best fee structure. But if you have the time, it often pays to look around.
- Fees often vary by lender, with different titles and fees.
- Some lenders allow you to negotiate a fee, for example when you present offers from other lenders.
- There are other aspects of the mortgage offering – such as whether you have to pay an application fee for a pre-approval and whether it will cost you money to lock in an interest rate – that you will want to consider. .
Prepare to shop for a mortgage
Make sure to include costs related to the house such as:
- Property taxes.
- Private mortgage insurance.
- Owners association fees.
- Moving, furnishing your new home and associated expenses.
Also find out about your credit report, your credit score, and how much you can pay, which will all affect the interest rate a lender offers you.
“The price of your mortgage depends on your qualifications as a borrower,” says Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America. “How much money are you saving?” What is your credit score and income like? “
How to buy a mortgage
Now is the time to engage with lenders. You can do one of three things: get a prequalification letter, request pre-approval, or do both.
Lender prequalification is quick, easy, and free because it’s based on the information you provide to the lender, not a credit check or document review. A lender will just take your stated income, your estimated down payment, and other information, and match it up to an interest rate and give you an idea of what you can afford. You could get results the same day you apply, depending on the lender. The prequalification letter is valid for 30 to 60 days and will usually include an expiration date.
However, there are limits to this approach. Since lenders do not do a full review of your financial information, they will not commit to granting you a loan for a particular amount. It also puts you at a disadvantage when making an offer for a house, as someone who is already pre-approved for a loan large enough to cover the price of the house will be seen as a more serious buyer than someone who only has a prequalification letter. You also might not have a complete view of all the costs, such as fees, that would be part of a mortgage.
“They don’t check your income, don’t check your assets, and don’t know where you’re getting the money to close,” Haynie said. Plus, no rates are locked in – everything is based on the information the lender has so far. “It doesn’t tie the lender to anything – it gives you an idea,” he adds.
A pre-approval from the lender, on the other hand, is more thorough. During a pre-approval, the lender extracts your credit report and reviews documents such as pay stubs and tax returns to verify your income and assets. The loan offer will include an estimated interest rate and fees, which can give you a full view of the costs at closing and each month thereafter. A pre-approval can take one to three days, depending on how quickly you can deliver the required documents and how busy the lender is with other requests.
“You want to be organized,” says Haynie. “The lender is going to want information from you. The sooner you can provide them with that information, the faster the process will go.”
You can start your search by obtaining multiple prequalification letters to get as much information as possible from lenders without fully committing to a pre-approval. Then you can choose two or three and request pre-approval. Pre-approvals will likely be good for around 90 days.
If you are applying for a mortgage and are pre-approved, you are not required to get a mortgage from this lender. But you might need to pay the lender to process your request like a credit check fee which is around $ 30 and would be paid at closing if you get the loan with that lender. However, some lenders may charge an application fee that can cost hundreds of dollars, which means you will pay even if your application is rejected or you choose not to take a loan from that lender.
If the lenders you’re looking at don’t charge a mortgage application fee, you might want to submit three or more applications to potential applicants. If there are costs associated with one or more of the applications, you can apply to these lenders and pay the fees, while adding a no application fee. Apply to at least two or three mortgage lenders to find the best mortgage for your situation.
What to look for in mortgage offers
When getting mortgage pre-approvals from a few lenders, you need to consider several factors to determine which offer is the best:
- Registration fees. You may need to pay this to cover the credit report costs and maybe more.
- Expertise fees. The lender will choose the appraiser and the buyer will have to pay for the appraisal report.
- Original or subscription fees. This is about paying for the work the mortgage team does to prepare the loan, although some lenders don’t charge for this.
- Rate Lock Fee. Not all lenders charge to lock in your interest rate. Check how long the rate foreclosure lasts and whether you may need to pay for an extension if necessary.
- Fees related to the title. A lender typically selects the title company they will work with on the transaction, but you may be able to recommend a company that costs less than the lender’s choice.
- Mortgage points. These should be discussed with a lender, as they can help you get a lower interest rate and / or build a portion of the fees into the loan.
If a lender doesn’t let you know the fees when you’re pre-approved, “don’t do business with them,” advises Haynie.
Interest rate. Low interest rates are a good eye-catcher, but you won’t know your real rate until you get approved beforehand. Sometimes a lender will need to adjust the fees to get you the lowest rate possible.
“You have to shop and not just for the price,” says Owen. “Most companies can offer similar interest rates. The question is: how much does it cost to get that interest rate?
Annual rate as a percentage. The APR is the combination of the interest rate and fees, which makes it a more accurate barometer of what your current mortgage costs will be. The closer the APR is to the indicated interest rate, the less costs there are in the application.
“What the APR tries to do is capture the total cost and express it in terms of the interest rate,” says Haynie. “You can use it to compare one lender to another.”
If you plan to stay in a house for less than seven years, however, the interest rate comparison is more important than the APR because you might not be paying all the fees and charges if you sell your house in just a few years. The APR takes into account the costs over the life of the loan.
A service. Another consideration is the service provided by the lender, such as how quickly you get your questions answered and whether the lender understands your needs. For example, a lender may specialize in a certain type of mortgage product (like Federal Housing Administration loans) and try to steer you towards that type of loan and steer you away from other loans that might actually be more suitable for you.
“The best thing to do is ask,” says Owen. “Be very curious. If the answers don’t seem right, you haven’t found the right institution.”
What’s a good timeline for buying a mortgage?
You can choose one of two approaches: finish looking for a mortgage lender before you bid on a home, or wait until you have a sales contract in hand, then start looking for a lender.
While waiting for a genuine sales agreement would give you a loan offer that exactly matches the cost of the house, it can be difficult to choose a lender and close your mortgage on time to meet the terms of the contract. Contract.
This is why it may be advisable to follow a schedule like this:
- Year before the home search. Review your credit history with the three credit bureaus and make any necessary corrections. Also, continue to pay off your credit card debt, increase your down payment amount, and arrange for any freebies or grants you may need, such as down payment help.
- Three to six months before. Review lenders, looking at interest rates and other factors. Look for prequalification information – if needed – and learn as much as you can about the fees, schedule, and process.
- Month before. Get pre-approval from two or three lenders and review their rates, fees, and APRs.
- Just before or after the start of the home search. Commit to a single lender by setting an interest rate and giving the lender everything they need before a possible real estate contract.
- After accepting the offer to sell. Work with the lender to complete the loan underwriting process and set a closing date as quickly as possible to meet the terms of the contract.
It’s best to start your mortgage research early so you have time to prepare your finances and paperwork and compare offers. By taking the time to find and engage with the lender of your choice, you can avoid a last-minute mess and be happy that you made the right choice.
“When you find the right lender, you can close with confidence,” says Owen.