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How to shop for and compare mortgage offers in 2023

14 min.

There are many people for whom their mortgage is the single largest and longest debt they will ever incur. You may have found a property and are considering which mortgage lender would offer the best deal. Shopping around for a mortgage can help you find the best rate, the least expensive closing costs, the shortest monthly mortgage payment, or the most significant loan estimate you can borrow. That's why it's crucial to get the detailed information on how to choose a mortgage lender.

How to shop for and compare mortgage offers in 2023

Why you should shop for a mortgage

Lenders' interest rates, points, and other costs vary when you purchase and refinance loans. A mortgage application necessitates a lot of paperwork and interaction. Although you might not get a response from lenders, you can save money by comparing mortgage rates from multiple institutions. Finding the best mortgage lender is essential since you will make monthly mortgage payments for 15, 20, or 30 years.

You can learn more about a product's features and prices by shopping around, which saves you both time and money. You may save much money on your mortgage by comparing interest rates. Freddie Mac's research shows that borrowers who don't compare loan offers may leave money on the table. Freddie Mac says people who shop around for mortgage rates and get more than one quote can save an average of $1,435 over the life of a 30-year loan for a $250,000 home. Eighty percent of those borrowers also saved between $966 and $2,086 by looking at offers from a second lender. More comparison shopping equals more savings. On average, borrowers who shopped around for five quotes saved $2,914, with 80% of those consumers saving between $2,089 and $3,904 in 2019.

How to shop for a mortgage: a step-by-step guide

With comparison shopping for prices, you have two options: hire a mortgage broker or shop at different banks and credit unions. You may get free rate estimates from more than one lender by providing basic information about yourself, such as your credit score range, the loan amount you want to borrow, the loan term, and the sort of mortgage you want online or over the phone. If you're going to shop for a mortgage loan, take these steps first.

Check your credit report

Lenders use credit scores to establish who is eligible for mortgages and the interest rates they will be charged. The higher your credit score, the more favorable the loan terms will be. It is why, at least six months before applying for a home loan, you should review your credit history at the three major credit bureaus and fix any errors that may lower your score.

Getting a head start allows you more time to establish positive credit behaviors, including paying bills on time if that is an issue. Your three-digit credit score is available for free from organizations dealing with credit. Knowing your credit score, you can use an online mortgage calculator to determine your current interest rate.

It's important to remember that applying for multiple credit cards at once can hurt your credit score, but most of the time, applying for various mortgages won't. Credit reporting companies can tell if a potential borrower is looking for a mortgage and know that most mortgage-related inquiries only lead to one loan being approved. Because of this, they are lenient with homebuyers and don't count many loan inquiries if they are made within a short time. For example, if a person makes several inquiries within 30 days, the FICO credit rating algorithm will not count them.

Compare loan types

You should consider the type of mortgage you want and what you qualify for before comparing mortgage offers and rates.

  1. Conventional loans. Numerous homebuyers prefer a conventional loan type. They are not backed by the government, and each year there are new limits on how much you can borrow. Fannie Mae and Freddie Mac, two government-sponsored organizations, establish the standards for conventional mortgage preapproval, which are usually stricter than those for government-backed loans.
  2. Fixed-rate mortgage and adjustable-rate mortgage (ARM). Fixed-rate mortgages have an interest rate that is locked in at the time of the loan's origination and does not alter for the duration of the loan. The length could be anywhere from one to 30 years. An adjustable-rate mortgage (ARM) is a mortgage loan where the interest rate changes over time, usually based on a Prime index. The interest rate on an adjustable-rate mortgage may start off cheaper than the rate on a fixed-rate mortgage, but it may increase in the future.
  3. FHA loan program is well-liked by borrowers with lower credit ratings since mortgage loans made via it are insured by the Federal Housing Administration (FHA). However, to protect the lender from loss in the event of your inability to make a monthly payment, the loan requires you to pay for two types of FHA mortgage insurance.
  4. VA loans. Veterans can get 100% financing through the VA without requiring initial payment. You can't get a VA loan unless you can verify that you've served in the military long enough. Veterans Affairs (VA) borrowers now have an advantage in high-cost areas over non-military borrowers who may need difficult jumbo loans to finance sums exceeding conforming loan limitations because the VA has removed lending ceilings.
  5. USDA loans. The U.S. Department of Agriculture (USDA) backs this program, which helps people with low incomes buy homes in some rural areas. You don't have to pay upfront, but your annual household income can be a certain amount. Although there are no official caps on USDA loans, the loan amount you can take is constrained by your income level.

Collect the documents

Once you've chosen a mortgage type and length, gather proof of your income, investments, debt, and other things. Different lenders will require information to provide you with an accurate loan estimate, including:

  • Forms W-2, 1099, and other income reports;
  • Documents from the bank;
  • Investment account statements, including those from brokerages and 401(k)s;
  • Info on all your loans, credit card balances, and other monetary obligations;
  • An overview of previous rentals;
  • Gift letters clarifying that money given to you for a down payment is not considered a loan;
  • Any relevant paperwork on your divorce, child support, or alimony;
  • Default and foreclosure paperwork, if relevant.

Pre-approve with several lenders

Finally, you can conduct mortgage research without jeopardizing your credit. You are free to talk to as many lenders as you choose, so long as the most recent inquiry into your credit is completed within 14 days of the first inquiry. After the first hard inquiry is made on your FICO score, you will generally have 45 days to shop for mortgages. Some lenders' scoring models only include a 14-day window shopping for a mortgage, so it pays to check with your lender about the model they're employing.

Experts advise consulting with multiple mortgage companies. Freddie Mac found that borrowers who shopped around among at least five different lenders saved an average of $3,000 each. The catch is that there's no upper limit, and you can secure a mortgage with more favorable terms if you take the time to compare around.

The financial conditions will vary from mortgage to mortgage and from lender to lender. Closing costs and commission percentages, in addition to interest rates, can differ. A lower interest rate from one lender might be used to negotiate a lower rate with another lender.

Assess the interest rates

Now that you know what kind of mortgage will work best with your credit history and which program to apply for, you can begin comparing interest rates. You can use a price comparison website to find the best deal. The major benefit of this method is that if you give all interested lenders the same information about the mortgage you want, you can expect to get loan quotes on the same day. This is significant since interest rates, like stocks, change daily, so be sure you only compare quotes on the same day.

You can also call three to five different types of loans. If you want to speak to someone, you can call numerous lenders to acquire their quotations. It would be best if you had a list ready, so you can present the same information to each loan officer on your credit history, the loan type you're interested in, and the loan program you're applying for.

Compare your loan offers

As mortgage offers come in from various sources, you'll want to weigh your alternatives and choose the best that suits your needs. After submitting a loan application, you will receive a loan estimation from each lender. Compare mortgage offers using the three factors below.

  • Closing costs. Lenders have some leeway in determining their pricing structures, which are the prices you can pay when closing your loan. When negotiated, closing loan costs for some loans can be reduced by the lender. Low down payments usually necessitate obtaining private mortgage insurance (PMI).
  • Rates. An individual's interest rate may be lower with one lender than with another. When the interest rate on a mortgage is reduced, the resulting monthly payment also decreases.
  • Mortgage points. These are the costs you'll incur upfront to secure a more favorable mortgage interest rate. Buying points often results in a 0.25% reduction in your interest rate and costs 1% of your loan balance.

When making a choice, keep in mind all three criteria. An alternative lender may offer a more attractive interest rate, but only after you pay more in points and closing charges.

How many mortgage estimates should I get?

It would help if you shopped around for your mortgage loan. One wonderful method is to receive at least three Loan Estimates from three separate mortgage lenders. While working with only one lender may be tempting, we encourage shopping around for your mortgage loan.

How do you evaluate a mortgage lender?

You need to do some comparison shopping if you want to locate the best mortgage provider. Think about using your bank, the credit union in your community, online lenders, and other possibilities. Ask about rates, loan conditions, how much of a down payment is required, requirements for mortgage insurance, closing costs, and underwriting fees, and compare these specifics for each offer.

Should I compare APR or interest rate for the mortgage?

While the interest rate of a loan determines how much interest will be accrued on the balance over the loan, the annual percentage rate (APR) takes is not only the interest but also any other fees you will be required to pay. The APR gives a more accurate depiction of the cost of borrowing money, so you should focus on the APRs of each loan when evaluating loan offers.

Can different mortgage lenders have different rates?

Mortgage rates can vary depending on the lender. There is a wide variety of overhead fees that must be taken into consideration by various lenders. They are also required to consider the borrower's financial position, including the borrower's debt-to-income ratio, credit score, and down payment amount.

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