If you’re looking to buy a home now or in the near future—or refinance your existing home for a lower rate—make sure to do your research and understand which loan may be the best for your specific situation. Mortgages aren’t one-size-fits-all, and by taking time to search for the best option, you could save time and money—and potentially pay off the loan more quickly.
Here’s a step-by-step guide to securing a new mortgage or refinancing your current one.
Table of Contents
Get your finances in order
Before you even start shopping, make sure to prep your finances. Lenders base their loan terms and rates on your credit score, financial history, and track record for paying off other loans such as personal loans on time. If you’re prepping to buy a home and shop for a mortgage, run your own credit report and history to look for any inaccurate items you can mitigate.
If you do have negative marks on your credit report, there may be ways to minimize them, either by paying them off, negotiating with the lender, or simply waiting until they naturally phase-out. Generally, items stay on your credit report for seven years.
Determine your needs
The next step is to determine roughly how much you have saved for a down payment, how much you’ll need to borrow, how long you’ll take to pay it off, and what loans you may qualify for. If you or a family member are a veteran, you may qualify for a low-down-payment VA loan. Depending on where you’re searching and how much you make, you may also be eligible for a U.S. Department of Agriculture (USDA) or Federal Housing Authority (FHA) loan.
Review loan types
Although a 30-year conventional mortgage is the most common loan when buying a home, there are many other options out there. A conventional loan has a fixed rate for the life of the loan, while on an adjustable-rate mortgage (ARM), the interest rate will only be locked in for a certain period of time and then can fluctuate.
When you see a term such as “5/1 ARM,” the first number shows how long the interest rate is initially fixed, and the second shows how often it may be adjusted after that time. In this example, a 5/1 ARM would have a fixed rate for the first five years and then adjust each year after that for the life of the loan. ARMs may be a good option if you plan to pay off the loan in just a few years and can get a lower interest rate.
Explore lenders and compare rates
Now it’s time to start researching lenders. Keep in mind that when you apply for a loan or pre-approval, each lender will pull your credit history, creating a “hard pull” on your credit. While a couple of credit pulls aren’t likely to harm your credit, if you get too many, it can actually lower your credit score—something you don’t want while trying to secure a mortgage.
First, search for rates online—but do remember these are simply estimates and can vary based on your own situation. Compare the interest rates and terms of your top choices. With record-low interest rates, you’ll probably find most to be incredibly favorable—and all forecasts are saying they should stay this way for some time. Although a low rate is important, also look for things such as loan origination fees, how much you’ll pay for title insurance, how quickly they can turn around the loan, down payment requirements, or early payoff penalties.
Once you’ve landed on your best two or three options, start the pre-approval process. Pre-approval shows a seller that you’re a serious buyer and your loan is likely to go through. Sellers don’t like any hiccups on the closing process, so pre-approval gives you an edge over other buyers. Plus, when you’re ready to make an offer, you’ll have a head start on processing your home loan.
To get pre-approved, you’ll need to provide your Social Security number (and your co-borrower’s number, if you have one); bank and investment account information; any debt amounts you carry; two years of tax returns; information on your current salary and employment; and how much you have for a down payment.
The lender will then pull your credit and provide your maximum loan amount, as well as your projected interest rate, as long as your financial situation remains the same prior to your closing date. Once you’ve secured your pre-approval letters, you can again compare rates and terms to determine which lender you prefer.
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Just because the lender has provided a loan estimate or pre-approval doesn’t mean it can’t be negotiated, especially if you’re able to make an above-average down payment, have a particularly excellent credit history, or currently do business or hold accounts with the lender. You may be able to request reduced fees or other loan terms if this is the case.
You may also wish to inform the lender of other rates or favorable terms you’ve received from additional lenders you’ve reached out to in hopes of creating a bidding war. This works best in times when lending is especially competitive.
Start now to save the most
Regardless of how far off you think applying for a mortgage may be, it’s best to start planning as early as possible. This may give you time to improve your credit score, resulting in a lower interest rate and potentially saving you thousands.
You may also be able to lock in a low interest rate as you search for a home — which can be especially important in our current financial landscape when interest rates are at historic lows due to the pandemic.
And remember, the money you save now with the right mortgage can give you more flexibility to pay for more parts of the home-buying process, such as repair and closing costs.
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Article last modified on June 22, 2023. Published by Debt.com, LLC