How To Shop Around for a Mortgage and Other Mortgage FAQs
Know the Mortgage Basics
What is a mortgage?
A mortgage is a loan that assists you in purchasing a home. It’s a contract between you (the borrower) and a lender (such as a bank, mortgage business, or credit union) that allows you to borrow money to purchase a home. You refund the money according to the terms of the agreement you signed. The lender has the right to take the property if you default (that is, if you don’t pay off the loan or, in some cases, if you don’t make your payments on time). All mortgage loans are not created equal. The CFPB covers the advantages and disadvantages of several types of mortgage loans in this article.
What should I do first to get a mortgage?
- Determine how much of a down payment you can make. The amount of your down payment may influence the terms of the loan you are approved for. The Consumer Financial Protection Bureau (CFPB) offers advice on how to come up with a down payment that works for you.
- Get your free yearly credit report. Visit AnnualCreditReport.com for more information. Examine your report for any problems and correct them. (Watch this video to learn how.) If you find any mistakes, file a dispute with the credit bureau in question. If the problem isn’t addressed before you apply, tell the lender about it.
- Get quotes from a few lenders or brokers and compare their interest rates and fees. To obtain the greatest loan for you, look into all of the loan’s fees. It’s not enough to know the amount of the monthly payment or the interest rate. Knowing the APR – the entire cost of credit expressed as an annual interest rate — is even more significant than knowing the interest rate. The interest rate plays a significant role in determining the APR, but it also includes fees such as points and other credit costs such as mortgage insurance. When comparing mortgage offers, knowing the APR makes it easy to compare “apples to apples.”
How do mortgage brokers work?
A mortgage broker can help you discover a lender and negotiate the loan terms. If you’re unsure if you’re working with a lender or a broker, ask. Before selecting on a broker, call several. Check with the National Multistate Licensing System to learn if a broker has been disciplined.
A broker can access many lenders, allowing them to offer you a greater range of loan products and terms. Brokers can also expedite the loan approval procedure. But don’t assume they’re saving you money. Compare the terms of loan offers.
Paying brokers is common. You’ll pay “points” to your broker at closing, or as a percentage of your interest rate. Ask each broker how they are compensated so you can compare offers and negotiate.
What credit score do Mortgage Lenders use?
FICO® developed distinct scoring models for Experian, TransUnion, and Equifax. Standard FICO® Scores for Mortgage Lending are:
- FICO® Score 2, or Experian/Fair Isaac Risk Model v2
- The FICO® Score 5, or Equifax Beacon 5
- And FICO® Score 4, or TransUnion FICO® Risk Score 04
Mortgage lenders frequently receive a single report with your credit records from all three bureaus and FICO® Scores. This is important when you shop around for a mortgage. It may use your middle credit score, or if you’re applying jointly, your lower middle score.
Keep this in mind when determining your credit score for a mortgage. If you want a mortgage with a minimum credit score of 580, you may need a 580 middle score based on one of these FICO® Score models.
But there are exceptions. For loans not backed by Fannie Mae or Freddie Mac, lenders may utilize various credit assessment algorithms. You may be able to secure a mortgage with no credit history or score.
A review is also underway that may allow alternate credit scoring methodologies for mortgages, even if backed by Fannie Mae or Freddie Mac. Until then, many mortgage lenders will continue to use the three traditional FICO® Scores.
Can I negotiate some of the terms of the mortgage?
Yes. Asking lenders or brokers for better conditions isn’t a bad idea. Ask whether they can beat another lender’s offer. You might:
- Ask about the lender’s or broker’s charge waivers or reductions.
- Don’t agree to cut one price while rising another, or lower the rate while raising points.
Today’s Mortgage Rates – Find Best Deals
How To Shop Around for a Mortgage Loan
It’s not difficult to look for a mortgage. At least, not if you know what to expect. Here’s how the procedure will work:
- Gather your documents — Lenders will require proof of your income, assets, and credit in order to provide you with an accurate rate quote. So start gathering the documents you’ll need for your application, such as bank statements and recent pay stubs.
- Get pre-approved — Find a lender you like and get a preapproval letter. This enables you to make an offer that the seller will accept. However, getting pre-approved does not bind you to that lender; you can switch to another later if you find a lower rate.
- Shop around with a few lenders — Request quotes from at least four lenders, as well as your current lender (if any), your bank or credit union, and any mortgage brokers with whom you have relationships.
- Compare the quotes you receive — Below, we’ll show you how to compare loan estimates and find the best mortgage rate.
- Finish your application — Choose your preferred lender, complete your mortgage application, and stay on top of administrative tasks until closing.
- Make no changes in your life before closing — If at all possible, try to avoid changing jobs or becoming unemployed. Also, do not open or close any credit accounts. Any of the last three could lower your credit score. In addition, lenders routinely recheck your credit history just before closing.
Determine your total payment. While the interest rate determines how much interest you owe each month, you also want to know how much you must pay each month for your total mortgage payment. These factors, sometimes referred to as PITI, are considered when calculating your total monthly mortgage payment:
- the principal (money you borrowed)
- interest (what you pay the lender to borrow the money)
- homeowner’s insurance and taxes
What is PMI and What Does it Cost?
Private mortgage insurance (PMI) is sometimes included in PITI, but not always. If you must pay PMI, find out if it is included in the PITI you are offered. This is important when you shop around for a mortgage.
Having Problems Getting a Mortgage? Shop Around for a Mortgage easily.
How to Get a Mortgage with Bad Credit. Will I have to pay more for my mortgage loan?
Maybe, but not always. Prepare to compare and negotiate, even if you have bad credit. Illness or temporary unemployment don’t mean you have to use high-cost lenders. If your credit report contains inaccurate information but a lender believes you can repay a loan, explain your circumstances to the lender or broker.
If you can’t explain your credit issues or demonstrate that you can pay your mortgage, you’ll likely pay more — including a higher APR — than borrowers with better credit records.
How to Get Pre-Approved for a Mortgage
Provide the lender with documentation that supports your application. Many lenders, for example, value consistent employment. Include information on your application if you’ve recently changed jobs but have been consistently employed in the same field for several years. Alternatively, if you’ve had trouble paying bills in the past due to a job loss or high medical expenses, write a letter to the lender explaining the reasons for your previous credit problems. Lenders must consider this information if you request it.
Can Mortgage Lenders Discriminate Against You?
Fair lending is required by law. A lender may not refuse you a loan, charge you more, or offer you less-favorable terms based on your:
- National origin (where your ancestors are from)
- Marital status
- Whether all or part of your income comes from a public assistance program, or
- Whether you have in good faith you acted on one of your rights under the federal credit laws. This could include, for instance, your right to dispute errors in your credit report, under the Fair Credit Reporting Act.
What to Know After You Apply
After I apply for a loan, do I have to receive anything from the lender?
Under federal law, lenders and mortgage brokers must give you several things. Within three days of applying for a mortgage loan, you should receive this home loan toolkit booklet from the CFPB. The goal is to protect you from predatory lending, brokering, and other service providers during the home-buying and loan process. After the lender receives your loan application, allow three business days. This form contains vital loan information, such as:
- the estimated interest rate
- monthly payment
- total closing costs
- estimated taxes and insurance costs
- any prepayment penalties
- how the interest rate and payments may change in the future.
The CFPB’s Loan Estimate Explainer can help you figure out what to expect.
A Closing Disclosure will be sent to you three business days before closing. This form summarizes the loan’s terms, projected monthly payments, fees, and other expenditures. If there are any discrepancies or issues regarding expenses or terms, getting it a few days before closing allows you to compare it to the Loan Estimate. The CFPB’s Closing Disclosure Explainer explains the process.
What should I watch out for during closing?
- The loan deal is “closed” when you and the lender sign the paperwork. You obtain the mortgage loan proceeds once you sign, and you’re legally obliged to repay it.
- Review the CFPB’s Mortgage Closing Checklist to learn what to expect at closing.
Watch out for scammers. You may receive an email from your loan officer or another real estate agent informing you of a last-minute adjustment. They may ask you to wire funds to cover closing charges. It’s a scam.
- You should call your lender, broker or real estate professional immediately if you get such an email.
- Scammers often urge you to pay in ways that make refunding difficult. The sooner you report a scammer, the better. Learn more about money refunds.
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