How to Shop for a Mortgage
Shopping for a mortgage can be an intimidating task if you’ve never done it before. While it’s a necessary step in your path to homeownership, it can seem overwhelming. You’re dealing with large sums of money and a lot of fine details that are going to impact your life for many years to come.
If you prepare yourself ahead of time and do your homework, you can go into negotiations for a mortgage from a position of knowledge and power. Once you understand all the ins and outs, it’s a lot easier to hunt down the best mortgage for you. Let’s take a look at some of the key components you’ll want to know about shopping for a mortgage.
Understand Mortgage Types
Depending on your situation, there may be more than one type of loan that you’ll be presented with when you shop for a mortgage. Typically, these are broken into two categories:
- Conventional Loans: The majority of mortgages are what is known as conventional loans. You can get these from a bank, credit union, or private lender.
- Government-Backed Loans: Under certain circumstances, you may qualify for a government-backed loan rather than a conventional loan. The difference between these loans and conventional loans, as the name suggests, is that they are either partially or completely insured by the government.
The requirements for government-backed loans are different than conventional loans. The nature of that difference is based entirely on what the loan is for and which part of the government is issuing it. Common government-backed loans include:
- FHA Loans: These are backed by the Federal Housing Administration. While a conventional loan may require you to put down as much as 20% for a down payment, there are circumstances when you can get an FHA loan with as little as 3.5% down if you qualify. Typically, these loans are reserved for those who don’t have a large amount of cash savings and don’t have exceptional credit.
- USDA Loans: These loans are available for those who are seeking to move to rural or suburban areas rather than living in the city. There are additional qualifications that both you as the borrower and the property you’re looking to buy will have to meet.
- VA Loans: Backed by the Department of Veterans Affairs, a VA loan is reserved for qualified veterans. These loans also have favorable terms, and in some cases, you may be able to qualify for no down payment.
Check Out Financing Options
There are two financing options available for mortgages:
- Fixed-Rate: A fixed-rate mortgage is one that has a set rate that will not change over the life of the loan. If you don’t want to deal with unpredictable fluctuations in your mortgage payments, then this could be a good option. You’ll get locked in at one specific rate and stay there until the loan is paid off. The potential downside of this is that the rate may be a little high at the start because it’s going to stay at this rate for the entire term.
- Adjustable-Rate: An adjustable-rate mortgage is a loan with an interest rate that can change over time. Typically, you’ll have an introductory rate that will be locked in for a specific term, and then when that term ends, the rate will be recalculated. Your introductory rate will likely be lower than what you would pay for a fixed rate. The trade-off is that after that fixed term has ended, the rate could potentially increase. This could be a good option if you’re planning to pay off your mortgage quickly before the rate changes, or if you think rates will be better in the future.
Make Sure You Know Your Credit Situation
Once you’re familiar with the types of loans available and how you might finance them, you’ll want to know your credit score before proceeding any further. The lender you go to is going to look at your credit score to determine how much they’re willing to loan you, the terms of the loan, and even whether or not you qualify for a loan at all.
Knowing your credit score will help you anticipate what types of loans and terms will be offered to you. If you know you have a high score, then it’s more likely that you’ll be able to negotiate for the loan you want. However, if your score is too low, you may want to work on it. To approach this as thoroughly as possible, consider familiarizing yourself with your credit score 4 to 6 months ahead of time. This way, if you recognize any problems with your credit rating, you have some time to work on improving it.
When you’re ready to get a mortgage, be as picky as you can be. Just like you wouldn’t buy the first car you saw on a used car lot without considering any others, you shouldn’t pick the first mortgage you happen to find. Compare lenders to see who’s going to offer you the best rates. There are several potential lenders out there, and some are much larger and older than others with a proven history. It’s always a good idea to check reviews online. You can also consider hiring a mortgage broker to help you with this part of the process.
Negotiate Your Best Deal
When you feel confident that you’ve found the right lender, know that they are required to give you a loan estimate after you apply. The loan estimate should include estimated interest rates, monthly expenses, and closing costs. Once you’ve been provided an estimate, you may be able to negotiate for better terms. For instance, if you have a significant amount of money to use as a down payment or if you have exceptional credit, you may be able to negotiate for better rates or reduced fees.
The Bottom Line
Getting a mortgage is a big step for everyone to take in their life. Homeownership represents the biggest purchase that many of us will ever make. So, it certainly requires consideration and planning. Knowing the ins and outs of how mortgages work and understanding all the financial terms can go a long way. When you have all the background information you need ahead of time, you’ll find that the process is much easier.