-You can save thousands of dollars on your mortgage loan simply by shopping around.
-For best results, apply and get pre-approval from at least three different lenders. Don’t just compare advertised rates you may see online. For best results, aim to get offers from five providers.
-Once you receive your quotes, don’t look only at the interest rates. Also compare lender fees, mortgage insurance, down payment options and any discount points.
-For even greater savings, use the competing offers to negotiate a better deal.
Do you want to get a mortgage quote with optimal terms? It might be easier than you think. You would just need to apply and get pre-approval by at least three different providers.
The whole process can take a few hours, and will be well worth your time. Shopping around can save you hundreds of dollars per year and thousands over the life of a loan. The Federal Home Loan Mortgage Corporation (FHLMC) estimates that home buyers who get just one additional quote can save an average of $1,500, and those who get five quotes can save around $3,000.
Shopping for a mortgage may seem daunting if you’re a first-time home buyer, but the process is straightforward once you get the hang of it. And you can use most of the same documentation for all your applications.
Here’s what the process entails.
Set some time aside and research the market to choose three to five providers. These can include direct lenders such as banks, credit unions and online lenders, as well as indirect lenders like mortgage brokers. Your existing lender, if any, and your current bank or credit union can be good starting points.
Mortgage Brokers Versus Direct Lenders
Mortgage brokers don’t give money directly to consumers. They also don’t set loan terms or make lending decisions. Think of them as matchmakers. Their job is to help you gather and compare quotes from multiple direct lenders, and match you with the best provider for your needs.
Brokers will usually charge you (or the actual lender) 1-2% of the loan amount. So, before partnering with a broker, check how much their services will cost and who will pay for them. Even if you are leaning toward working with a broker, it’s still a good idea to find a few mortgage quotes on your own and compare them to the broker’s offers.
Watch this video for more insight into the differences between banks and mortgage brokers:
Questions to Ask
Before you complete any mortgage applications, ask prospective lenders these questions:
-How long will the process take?
-Who will be my primary contact, and how will we keep in touch?
-Who is responsible for the mortgage underwriting process?
-Which steps take place online, and which take place in person?
-If you work with a broker, ask these questions:
-How many quotes did you review?
-Which lender and rate do you recommend, and why?
-How much do you charge for your services?
-Who will pay for those charges: the lender, me or both of us?
Pre-Qualification vs. Pre-Approval
Pre-qualification is the first step in the homebuying process. The lender will ask you a few basic questions about your financial situation. They will not ask for proof or documentation at this stage, and you won’t need to submit a formal application. This helps the lender gauge whether you qualify for a mortgage at all and, if so, what your maximum loan amount is likely to be.
In contrast, for pre-approval, you will need to supply various financial documents, make an application, and go through a formal credit check and underwriting. At the end of this process, you’ll know the exact loan amount and interest rate for which you qualify.
To give you an accurate quote and obtain pre-approval, a lender will look at your income, assets, credit and previous mortgage or rental history. You will need to collect the following documents.
Income and Employment
W-2 forms: Your will likely need W-2s from the last couple of years.
Pay stubs: Lenders typically ask for pay stubs from the last 30 days. If you receive other forms of payments, such as commission or overtime, you’ll need to produce proof of those as well.
Income tax returns: You may need to provide copies of your tax returns from the last two to three years, along with IRS Form 4506-C.
Alimony or child support documents: You must show proof – such as a copy of the court order – that you will continue to receive (or make) payments for at least three years after the date of the application.
If you’re self-employed, a freelancer or an independent contractor, lenders may ask you to prove a minimum of two years of steady self-employment, such as:
-Letters or contracts with clients
-Your business license
-Proof of insurance
The lender may also ask for two years’ worth of federal tax returns, a cash-flow analysis form, and a year-to-date profit and loss statement.
Assets and Debts
Monthly debt payments: You must list any current mortgages, credit cards, auto and student loans, and other types of debt you may have.
Bank statements: You will typically need to submit two to three months’ worth of bank statements.
Retirement and investment accounts: If you have retirement or investment accounts, your lender will want to see proof of those. You’ll likely need to provide two or three months of statements for 401(k) plan accounts, individual retirement accounts, stock investments and certificates of deposit.
Gift letter: Some providers may allow you to use financial gifts from family members for your down payment. Your family member will need to sign a “gift letter” confirming they don’t expect repayment. They may also need to show copies of their bank statements.
You won’t need to submit copies of your credit reports yourself, but lenders will ask for permission to check your credit history and credit score.
Lenders may ask for additional documents, such as:
-Mortgage or rental history: You may need to provide proof of payments for a specified period. Renters will likely also need to provide landlord references and contact information.
-Divorce decree: If you are divorced, lenders may ask for a copy of your divorce decree, which shows whether you have to pay alimony or child support.
-Records of bankruptcy or foreclosure: If you have ever had a bankruptcy, lenders may ask for proof that you have no outstanding debts. If you’ve had a foreclosure, you may have to show proof of transfer of the deed to the property.
-ID for noncitizens: If you are not a U.S. citizen, lenders may ask you to show proof of your immigration status and permanent residence.
-Other credit information: If you have little or no credit history, you may need to provide alternative documents, such as utility, telephone and other regular bill payments.
Down the road, the lender you select will also require the purchase and sale agreement of the home you will purchase. This is the agreement between you and the property seller that shows the purchase price and other details about the deal. You’ll also need to provide verification of any earnest money you provide the seller.
After preparing your documents, fill out and submit your mortgage quote applications. Fortunately, most providers have similar application processes. This means you’ll need to provide the same documents and answer similar questions with each application. What’s more, most lenders these days offer online pre-approval applications, so the process can be relatively quick.
Don’t worry about having to commit. Getting pre-approval is obligation-free and doesn’t mean you have to close the deal. You can always choose to go with another lender if you find a lower rate.
Keep in mind that applying for pre-approval usually lowers your FICO score slightly, usually around five points. It is helpful to try and get all your quotes in the same two to four weeks, as any “hard” inquiries – those from lenders or brokers – during that period will count as one. Getting all quotes very close together (even on the same day) will give you the most accurate comparisons.
Once you get your mortgage quotes, it’s time to compare them. Here are the numbers you should watch out for:
-Annual percentage rates (APRs)
The easiest way to compare these is by looking at each lender’s Loan Estimate. These documents come in the same format, so it’s easy to compare them and find the best deal.
How to Read Loan Estimates
On the first page of each Loan Estimate, you’ll find:
-Loan type (conventional, VA, FHA, etc.)
-Loan term (e.g., 30 years)
-Rate type (fixed or adjustable)
-Monthly payment amount
In addition to comparing the interest rates and monthly payments, make sure that all your offers are for the same loan and rate type.
Here's an example "Page One."
On the second page, you’ll find the closing costs and any other upfront expenses, such as homeowners’ insurance and pre-paid taxes. While you can’t comparison shop for tax expenses, closing costs can vary considerably from one lender to the next, so you’ll want to pay close attention to this section.
The closing costs include the origination fees, which are the provider’s own charges. A lower origination fee can save you a lot of money upfront.
On the second page, you’ll also find information on “points,” also called “discount points.” These are additional fees you can pay upfront in exchange for a lower interest rate. Pay close attention. If a lender has unusually low interest rates but charges points, that means you’ll have to pay extra upfront to get that lower rate.
What’s a Good Mortgage Rate?
At the time of this writing, mortgage rates hovered above 5%. The long-term average for 30-year fixed mortgage rates since FHLMC started keeping records in 1971 is around 8%. But rates are constantly changing, so find a good online source and keep an eye on daily rates.
Know, however, that you may not qualify for the best rates. The best, or lowest, rates go to top-tier borrowers who have:
-Credit scores of 740 or higher
-Excellent credit reports
-Low debt-to-income ratios (DTI)
-Considerable assets and savings
-Down payments of 20% or more
You can still get a good offer even if you aren’t a top-tier borrower by knowing how to shop for a mortgage. To get the best rate possible, start improving your credit six months to a year in advance.
You can use your quotes not just to compare, but also negotiate better interest rates or origination fees. Mortgage quotes aren’t final until you close the deal, and providers have some flexibility to adjust their rates and fees.
With this in mind, ask lenders if they can match or, better yet, beat competing offers. Even a small discount can save you hundreds and even thousands of dollars in the long term.
Lenders normally re-check your credit history right before closing the deal. If possible, don’t do anything that could hurt your credit score until then. This includes:
-Opening or closing credit accounts
Mortgages are not for everyone. If you have a low credit score or don’t qualify for a mortgage for some other reason, you may want to look into alternative ways to obtain. There are other options – such as home equity agreements – that can solve problems that debt cannot.
Click here to learn more about Unlock’s Home Equity Agreement, a new way to access the equity in your home.
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