Introduction

Shopping for a mortgage can be more complex than comparing credit cards or auto loans, but it’s time well spent. A mortgage will likely be the largest loan you ever take on, and interest rate savings of even a half of a percent could save you thousands of dollars over the life of the loan. Below, we break down the steps you can take to prepare, get preapproved, and compare mortgage offers.

1. Check Your Credit Score and Credit Report

Your credit history and credit scores can have a big impact on your eligibility for a mortgage and the rate you receive. Check your credit reports early in the process in case there are any inaccuracies that you want to dispute. Ideally, you can get everything resolved before you go into contract to avoid potential complications.

Improving your credit scores can also take time, so the sooner you know where you’re at, the better. You can get your Experian credit report for free with an Experian account, complete with explanations for different parts of the report and what factors are helping and hurting your score the most.

2. Gather Personal and Financial Documents

Once you know where your credit is at, it’s time to get your documents ready for a preapproval or prequalification. It can take time to gather all the material. But many of the documents are required for the final mortgage application anyway. You’re just getting some of the work done early.

The specifics can depend on your situation, but required documents may include:

• Copy of a government-issued picture ID, such as a passport or driver’s license
• Copy of your Social Security card
• Your work history from the previous two years
• Recent rental history with the landlords’ information
• Immigration documents, if applicable
• A gift letter, if someone is giving you money for the purchase
• Recent pay stubs or a job offer letter
• Proof of other income, such as disability, Social Security, alimony or child support
• Tax returns from the previous two years
• Other recent tax documents, such as W-2s and 1099s
• A profit-and-loss statement and tax returns for your business, if applicable
• Recent statements from various accounts: checking, savings, retirement accounts, brokerage
• Recent loan and bill statements
• Statements showing the accumulated cash value of life insurance policies
• Information about other properties you own, if any

3. Contact Loan Officers and Brokers

You can now start reaching out to mortgage loan officers and brokers. Brokers are independent professionals who can help connect you with various mortgage lenders. They can take your information and shop around to help you find the best offer. Loan officers are the person you work with when applying directly with a mortgage lender, such as a credit union, bank, or non-bank mortgage lender.

Contact several brokers and loan officers to see if they can help you based on your situation. Be sure to discuss where you want to buy a home, your credit, and how much you’ve saved for the purchase. And ask if they’re aware of any special programs, loans, or grants that can help—often, these are for low-income or first-time buyers.

4. Get Preapproved for a Mortgage

Try to get preapproved for mortgages with your favorite brokers and loan officers, including those with financial institutions you already do business with. Although you might need to complete an initial application with each one, they’ll likely ask for similar documents and information.

A preapproval can give you an estimate of whether you’ll be approved and the terms of your loan. The lender can also give you a preapproval letter that can make your offer more appealing because it reassures sellers that you can likely get a loan.

5. Consider the Type of Loan

Once you’re preapproved, your loan officer or broker can walk you through the options and the pros and cons of the various types of loans. Here’s a high-level breakdown of the common types of mortgages:

Conventional Loans

A conventional loan is a mortgage that lenders offer to borrowers without going through a government-backed program. Many conventional loans are conforming loans, meaning they align with government guidelines for loan amounts and eligibility.

Jumbo Loans

A jumbo loan is a type of nonconforming conventional loan that has a loan amount higher than federal loan limits. The specific amount may adjust based on inflation and to account for differences in various housing markets.

Government-Backed Loans

Federal agencies back certain types of mortgage loans to make it easier for people to buy a home. The three common options are:

• FHA loans: Insured by the Federal Housing Administration, these loans tend to have lower down payment and credit requirements.
• VA loans: Backed by the U.S. Department of Veterans Affairs, these loans are for eligible service members, veterans, and surviving spouses.
• USDA loans: Backed by the U.S. Department of Agriculture, these loans are for low-income borrowers in eligible areas.

Fixed- and Adjustable-Rate Loans

Fixed-rate mortgage: With a fixed-rate mortgage, your loan’s interest rate will stay the same over the lifetime of the loan. Lenders typically offer 15- and 30-year loans, and a fixed rate can make your monthly payments predictable.

Adjustable-rate mortgage (ARM): There are different types of ARMs, but they all generally have an interest rate that’s fixed for a certain amount of time and then can change every six months or year.

6. Compare Rates and Fees

Once you’ve been preapproved for mortgage loans from several sources, compare the down payment requirements and fees. Also, consider other differences, such as who was easiest to work with and whether you’ll need to go to a branch to complete the process. If you’re considering an ARM, ask if the loan has a prepayment penalty—that could affect the cost of refinancing in the first few years.

The interest rates on the offers are also important, especially if there’s a big difference between the rates. But know that rates may adjust daily, and sometimes several times a day. Some lenders might let you lock your rate while shopping for a home, while others may only allow you to lock the rate after your offer is accepted.

Conclusion

Shopping for a mortgage can help you find a loan officer or broker who you want to work with and get you the best possible rate and terms on your loan. But unless you already have excellent credit, improving your credit scores could also help you get a better rate with any type of mortgage.

For expert mortgage services, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate the mortgage process and secure the best rates and terms for your new home.