After months of hard work, you’re finally prepared to buy your dream home. You saved up the cash for a down payment and closing costs. You paid down your debts and repaired your credit. You made sacrifice after sacrifice to get yourself ready for home ownership.
Now, it’s time to shop for a mortgage.
“Wait a minute,” you might be thinking, “I didn’t realize a mortgage was a thing you shopped for.”
While it may seem like getting a mortgage is just a necessary evil you need to suffer through to buy a home (okay, that’s not completely untrue!), you can have a substantially better experience and save money if you shop around for the right lender. Here’s what you need to know.
I. 4 big reasons you should shop around for a mortgage
Buying a home is likely one of the biggest purchases — if not the biggest — you’ll make in your life. It’s a financial decision that can have an impact on your bottom line for decades to come. That’s why it’s imperative that you take the time to shop around for a mortgage and compare multiple lenders to get the best deal.
1. Save money with a better rate
For one thing, shopping around for a mortgage can score you a substantially better interest rate.
According to the Consumer Financial Protection Bureau (CFPB), 77% of home buyers only apply with one lender when they get a mortgage. The CFPB also found that rates can vary more than 0.5% from one mortgage company to the next, even for the same buyer. This is why applying with multiple lenders is crucial for getting the best mortgage rate.
A rate change of 0.5% may not seem like much, but it can really add up over the life of a loan. For example, say you’re buying a home that’s $300,000. Lender A offers you a rate of 4% for a 30-year loan, while Lender B offers you a rate of 4.5%.
With Lender A, you’ll pay $1,432 a month, or $515,609 total over the life of the loan.
With Lender B, you’ll pay $1,520 a month, or $547,220 total over the life of the loan.
By choosing Lender A, you’d save $88 a month, or $31,611 over the life of the loan. Not bad for submitting a few extra mortgage applications, right?
2. Pay less in lender fees
Another way you can benefit by shopping around for a mortgage? Saving money on lender fees.
Lender fees are charged by mortgage companies for doing the work of creating mortgages. Making mortgages isn’t easy, and lenders have to take on a lot of risk to do it. So they charge buyers in the form of lender fees.
Lender fees can include:
- Credit report fees: $15 to $35
- Application fees: $50 to $995
- Loan origination fees: 1% to 2% of the loan amount is typical, but can be up to 3%
- Broker fees (if you use one): 1% to 2% of the loan amount
- Rate lock fees: these can be 0.25% to 0.5% of the loan amount, but many lenders don’t charge for this and offer a rate lock for free for a period of time
All together, lender fees can tack on an extra 3% to your total loan amount — though they can’t exceed that 3%.
Going back to our example of a $300,000 home, let’s say you’re putting down 10%, or $30,000. That makes your total loan amount $270,000. If your lender maxes out those lender fees, and charges you 3%, that’s $8,100 in lender fees!
But here’s the thing: lenders don’t have to charge lender fees. These fees are totally at their discretion (though again, they can’t charge more than 3% of the total loan amount). You could save substantial money by going with a mortgage company that doesn’t charge lender fees, or at least charges lower lender fees.
Ask prospective lenders about how much they charge in lender fees upfront and compare them.
3. Get better customer service
Saving money on your mortgage is important, but it isn’t everything.
You’ll have to work with your lender through a long and frustrating home financing process (in addition to working with them for up to 30 years after your loan closes!). And the reality is, all lenders are not created equal. It’s important to make sure your lender will be a trusted advocate by your side through the whole process — not an added frustration during an already stressful time. The lender’s ability to push the loan through the process and keep you in the loop could make the difference in whether your loan is approved during the contingency period — the agreed upon amount of time you have to get your loan approved (usually 30 to 60 days) before the seller has the right to cancel the contract.
It takes an average of 45 days to close on a home purchase, and that’s saying nothing of all the time you’ll spend with your lender getting approved before your offer is accepted.
It’s a good idea to test whether you’ll get decent customer service from your lender before you choose to work with them.
Are they responsive? Do they proactively communicate and manage expectations clearly? Do they follow through on their commitments? Are they pleasant to deal with? Do they have experience closing deals in your specific market? Are they patient with your questions, or are they always rushing off the phone?
These are all good questions to mull over as you apply with and evaluate prospective lenders. Make sure to work with a company that gives you the service you deserve and that your loan does not prevent you from closing on your home.
Lenders should be fighting for your business, and doing everything possible to make you feel valued as a customer. Applying with multiple companies gives you a window into how it would be to work with those companies through the financing process.
II. Check out current mortgage rates
Okay, you’re convinced you need to shop around for a mortgage. Congratulations, that puts you in the ~25% of savvy, prepared buyers!
So, what’s next? Time for a little pre-shopping research by checking out current mortgage rates. Exploring current market rates gives you a rough idea of where you can expect your rate to be and serves as important context when you start applying with lenders.
With a little research, you can easily compare mortgage rates for different lenders, and create your list of prospects.
III. Get multiple rate quotes from lenders
After you’ve done all your rate research, and chosen a few prospective lenders, it’s time to get rate quotes. Here’s how to do it.
How to get rate quotes without affecting your credit
Rate quotes are free, and they don’t require you to run your credit report. Simply call up your list of prospective lenders and ask each one for a rate quote.
What you’ll need on hand to get a useful quote: Your credit score (learn how to get your free credit scores here), your down payment amount, and a rough estimate of your home purchase price. It’s also a good idea to let the lender know the city where you’re looking to buy property.
This information will give the lender an idea of what your loan might look like so they can quote you more accurately.
What’s included in a rate quote?
A useful rate quote should include the following four pieces of information:
- Mortgage rate: This is the interest rate you’ll pay on your home loan.
- APR: Your annual percentage rate (APR) is the total cost of financing your home — it includes your mortgage rate plus any finance charges on your loan. Your APR will be higher than your rate and is a reflection of your true cost of the loan.
- Estimated fees: These are fees associated with your loan like closing costs and lender fees.
- Estimated monthly payment: This is how much you’ll pay each month for the home.
Some lenders let you get a quote without even having to speak to anyone. Many now have simple online prequalifications, where they’ll ask for basic, self-reported information, and then send you an automated estimate within minutes.
This can be another way to compare prospective lenders without doing a ton of upfront work.
Learn how you can get a lower rate
While it’s important to get an idea of where you’re at now with your current credit score, you should also ask each lender what their best rates are, and what credit score you’d need to get a top rate.
You can also ask how much you’d save each month, and over the life of the loan, if you were able to get the best rate.
If you’re still below the credit threshold needed to get the best rates (typically, the lowest rates are reserved for those with a score of 760 or higher), you can always continue to work on improving your credit so you can improve your rate.
Another way you can get a lower rate is through mortgage points. More on those soon!
IV. Compare the lender quotes
Now it’s time to compare your quotes and narrow down your options. Here’s how to do it.
Use a mortgage calculator
You’ve got your quotes in hand, so it’s time to engage a mortgage calculator (we’ve got a super simple one here) to compare your options side-by-side.
If you’re the spreadsheet type, you’ve probably already got your lender comparison chart all fired up and ready to go. If you prefer to go a little more low tech, you can simply write down your findings by hand.
Let’s go back to that $300,000 home where you’re putting down $30,000 (10%) and the lender is kicking in $270,000 (90%):
|Lender 1||Lender 2||Lender 3||Lender 4|
|Lifetime cost of mortgage||$464,048||$472,492||$455,682||$478,166|
These numbers are for example purposes only
Now you can see how each lender stacks up, cost-wise.
All other things being equal, you’ll probably want to go with Lender 3, as that’s how you’ll save the most money.
But if, for example, you get substantially better service from Lender 1 than you do from Lender 3 and they have better local experience closing deals, it might be worth considering taking a slight rate hit to choose Lender 1.
Decide if you’ll use points or credits
Another important decision you’ll make while shopping for a mortgage is whether you plan to use points or credits. Let’s walk through what buyers need to know.
What are points on a mortgage?
Points are a way of “buying down” your mortgage rate, meaning you pay the lender more money upfront, and they give you a lower rate. Typically, you pay 1% of the loan amount for around a 0.25% reduction in rate. Points are paid at closing, and you can buy up to three points on a loan.
Note also that you don’t have to buy full points — you can buy them in fractions. So you could buy half a point, putting 0.5% more toward the home, and getting a 0.125% reduction in rate.
Let’s go back to our $300,000 home with $30,000 down. You’ve already decided you’re going with Lender 3 at a rate of 3.85%. Now let’s say you buy one point (to reduce the interest rate by 0.25%) for 1% of the loan amount. The loan amount is $270,000 so that’s $2,700 for one point.
Now, your new mortgage rate would be 3.6% (the rate is 0.25% lower with the one point you purchased).
How much would this save you on your loan? Let’s compare:
|With 1 point||With no points|
|Lifetime cost of the mortgage||$441,915||$455,682|
So, with one point, you’d pay $2,700 in fees to save $38 per month, or $13,767 over the life of the loan.
But note that you need to stay in the home for several years to recoup the costs of points, and they’re not always the best deal overall. For this example, you’d need to stay in the home for 72 months — or six years — to start seeing any savings from your points (calculated by taking the total fees you paid divided by the monthly savings, or in this example, $2,700/$38 savings per month). Our handy Points Calculator can compute your savings and breakeven for you so you can put away your pencil and paper!
The pros and cons of mortgage points
One big advantage to discount points is you can save money on your new home. With a lower rate, you’ll pay less each month for your mortgage, and you could save substantially over the life of the loan. The longer you stay in the home, the more “worth it” points are.
Plus, you may be able to get a nice tax break from mortgage points (as they’re considered prepaid interest).
There are downsides to points, too. If you’re not planning to be in the house for a long time, or you’re unsure if you’ll need to move in the near future, points might not make sense for you.
Another con? Points are pricey. Is there a better way you could use that money? Like say, putting down more on the home, and dropping mortgage insurance sooner? Or maybe you could use that money someplace else, like for new furniture or moving costs.
What are credits on a mortgage?
Lender credits are kind of like the reverse of points. With credits, you take a higher mortgage rate in exchange for the lender covering some of your closing costs.
These work like negative points. So if the lender covers 1% of the loan amount in closing costs, your rate goes up by 0.25% and you have one negative point.
Using our example of a $270,000 loan amount, the lender would give you $2,700 to cover closing costs, and your rate would go up by 0.25% from 3.85% to 4.10%.
Let’s see what it would look like to use a credit in comparison to not using credits:
|With 1 negative point (1 Credit)||With no credits|
|Lifetime cost of the mortgage||$469,669||$455,682|
So, with one negative point, you’d pay $39 extra per month, or $13,987 more over the life of the loan. Given that you saved $2,700 in closing costs, this higher monthly rate might be worth it if you are not planning to stay in your home for a long period of time.
Ready to run the numbers yourself? Head over to our super simple points and credits calculator.
The benefits and drawbacks of credits
One upside of credits? If you don’t plan to stay in the home very long, they may very well work out in your favor. And if you don’t have the cash on hand to cover closing costs, they may be your only option to buy a new home.
Even if you do have the money to cover closing costs, credits still might make sense, depending on your situation.
For example, does the home need immediate repairs? If you have a limited amount of cash available (as most buyers do), you might want to put that money toward the home’s needed repairs — which will also improve its value and your equity — over putting cash toward closing costs.
Further, if you can borrow the money cheaper than you can put it to work yourself (through investments in the property or elsewhere), it might make sense to keep the cash, and increase your rate a bit by using credits.
But understand that the more credits you use, the higher your rate will be, and this could make your home a lot more expensive over time.
V. Get pre-approved
You’ve done your homework, shopped around, gotten your rate quotes, and compared costs. Now you’re ready to take the next step and get pre-approved.
Why you should get a pre-approval
A pre-approval is an important step to getting a mortgage and buying a home. Plus, it makes you a more competitive buyer. Basically, with a pre-approval, you’re letting your lender under the hood of your finances to verify that you have the ability to repay the loan.
The lender will need to confirm your income, debts, credit score, accounts, assets, tax returns, and expenses. Then they’ll provide you with documentation (usually a letter) stating that you’ve been pre-approved for a home up to $X amount. You’ll use this letter to shop for — and make offers on — homes.
The benefits of a pre-approval
Getting a pre-approval has several important benefits for buyers, including:
- You’ll be more competitive at the offer table. The stronger your pre-approval (that is, the more the lender has already verified your financial situation), the stronger your offer will be. That’s because sellers are looking for certainty from offers. They want to know the loan will close, and that financing problems won’t hold up the deal. That’s why sellers love cash, because it’s fast and certain. A strong pre-approval sends a similar signal to sellers.
- You’ll have a much better idea of what you can afford. What you think you can afford for a home and what a lender will actually loan you to buy a home may be two different things. With a strong pre-approval, you’ll know what your home budget is before the first open house. That way, you won’t waste anyone’s time looking at homes you know you can’t afford.
- You’ll get better service. Speaking of which, real estate agents and sellers alike want to know that you’re not wasting their time. If you’ve got a solid pre-approval lined up, it opens up doors for you — literally. Many sellers won’t even show their homes to buyers who don’t have a pre-approval (this is especially true in competitive markets). Plus, buyer agents may not want to give you the time of day without knowing that you can afford to buy a home first. In real estate, only serious buyers get the best service. Getting a pre-approval is a great way to signal you’re serious.
- It’s free! Getting a pre-approval is free, and it’s non-committal. Just because you get one doesn’t mean you need to use that lender to buy your home. It’s more of a way to set yourself up for success out the gate.
What’s the difference between a pre-qualification and pre-approval?
The terms pre-qualification and pre-approval are often used interchangeably, but there are a few key differences between them. And those differences can make a big impact on your home offers. Here’s what buyers need to know.
Pre-qualifications are usually quick, estimated approvals, offered without verification of your information. They’re the flimsiest option when it comes to getting approved.
Basically, with a pre-qualification, a buyer usually self-enters some financial information like income, monthly debts, assets and credit score. Sometimes, the lender will do what’s called a soft credit pull, which is a credit check that doesn’t hurt your credit (think: using a site like Credit Karma to get your credit score).
Pre-qualifications are often offered in a matter of minutes. Many large lenders boast 2-minute pre-qualifications that you can basically automatically generate for yourself online by entering some self-reported financial information.
You technically can use a pre-qualification to shop for a home, but they’re far from a sure thing. Without verifying any of your information, the lender can’t really say whether they’ll loan you the money, just that you may qualify for up to $X amount, subject to verification.
Sellers may be wary of pre-qualifications for that very reason. Almost anyone can get one, and they aren’t verified, so accepting an offer with only a pre-qualification can be risky.
Pre-approvals are stronger than pre-qualifications, because they require more documentation from you, and further verification of your financials from your lender.
A pre-approval letter includes how much home you can afford, and states that the lender has verified your assets. After you get pre-approved, your lender should be able to give you a solid idea of your mortgage rate, too.
To get a pre-approval, you’ll submit all kinds of financial documents (more on those soon!) and your lender will underwrite your finances to determine how much they can safely loan you. They’ll also check your credit, using what’s called a hard credit check, which does show up on your credit report and lower your score a bit. Though note that you’ll now have 45 days to shop around for a mortgage, and your credit will only be hit one time. We highly recommend you use this time to receive multiple quotes and shop around!
The pre-approval process can take anywhere from a couple of days to a couple of weeks. And though it’s not a full commitment to lend (pre-approvals are still subject to the lender’s approval), it’s a much stronger indication of your ability to get the loan.
In the world of real estate, pre-approvals are worth the work, especially if you’re in a competitive market. The lender has already verified your financial situation, and that adds a layer of protection for the seller, knowing that you’re likely to be approved for your loan.
An approval letter is a guarantee the lender will give you a mortgage for up to $X amount. Approvals usually require even more documentation (that is, basically everything you’d need to submit to get the loan), and are only offered for a finite period, typically around 90 days.
Understand that even though this means you can get a loan and you’ve done your part to get approved, a true loan approval can only happen after you’ve had an offer accepted on a home (hopefully using your pre-approval!) and applied for a mortgage for that particular home.
That’s because the lender doesn’t only need to verify all the details about you and your finances — they also need to verify all the details about the property.
For one thing, the lender needs to appraise the property. An appraisal is an official assessment of how much a home is worth, done by an independent third party who specializes in assessing home values.
This makes a lot of sense when you think about it: the lender needs to make sure they aren’t loaning you more than the home is worth. They also need to verify that the property is safe and mortgageable.
Understand that toward the end of the loan approval process, the lender will re-verify your income and check your credit one last time. Provided everything checks out on the home, and nothing major has changed for your financial situation — like losing your job or buying a brand-new car while your loan was processing — you should be good to go.
How to get a pre-approval
Getting a pre-approval is relatively simple: Simply gather up your financial documents, and apply with a lender. Remember: you can apply with any lender for now. A pre-approval isn’t a commitment on your part — or the lender’s, for that matter — but it’s a way for you to get an idea of how much home you can afford and make competitive offers. You can always apply with other lenders later.
Usually, lenders’ applications will prompt you to upload your documents, and their application portals can even often connect with your financial accounts.
Carefully follow the instructions on the application, upload your documents, and you’re on your way to pre-approval. The lender should do the rest — underwrite your finances, verify your information, and make sure everything is correct on your application.
During the pre-approval process, you should be ready to answer all document requests from your lender. The quicker you are to get everything in to them, the quicker you’ll get pre-approved.
Documents you’ll need to get pre-approved
Ready to get started on your pre-approval? Before you head into the process, it’s a good idea to have all your documentation to make sure everything goes smoothly with your lender. Not having the documents you need can hold up your pre-approval, and put your offer at risk.
Here’s a list of the documentation you’ll need get pre-approved:
- Driver’s license, passport, or other government-issued identification
- Pay stubs from the past 30 days
- Two years of W2 forms from your employer (and any other income sources)
- Two years of tax returns
- Two months of statements for all of your asset accounts including checking, savings, and any investment accounts like CDs, IRAs, or other stocks or bonds.
- Details on any other assets you own like real estate holdings, or financial gifts from family.
- Two years of residential or rent history (i.e. where you’ve been living, how much you pay each month, etc.)
Being organized will ensure you get a quick pre-approval that can put your mind at ease, help you make a more competitive offer, and get you into your dream home.