How to Shop for a Mortgage
If you’re thinking about buying a home and need a loan, it’s important to know how to shop for a mortgage. Before you start applying online or calling local lenders, follow these shopping tips to make sure your mortgage comparison experience leads to a loan that’s a good fit for your finances.
1. Learn about mortgage programs
There are four standard loan programs to choose from for most mortgage borrowers: conventional, FHA, VA and USDA. To get the best mortgage rates and increase your odds of a simple approval process, you should only apply for the mortgage program that suits your financial circumstances. Choosing the wrong loan program could waste valuable time and money, and may even result in a mortgage denial.
The table below shows the minimum mortgage requirements for down payment, credit score, debt-to-income (DTI) ratio and loan limit so you can get a side-by-side comparison of the programs:
| Loan type | Minimum credit score | Minimum down payment | Maximum debt-to-income ratio | Loan limit |
|---|---|---|---|---|
| Conventional | 620 | 3% | 45% to 50% | $726,200* |
| FHA | 500 (with 10% down) | 3.5% (with 580 credit score) | 43% | $472,030** |
| VA | No guideline minimum | 0% | 41% | N/A |
| USDA | No guideline minimum | 0% | 41% | N/A |
*Based on 2023 conforming loan limits for a single-family home.
**Based on 2023 FHA loan limits for a single-family home.
Conventional loans
Conventional mortgages are the most popular choice for many homebuyers. They aren’t guaranteed by any government agency and are subject to loan limits that change every year. The approval requirements for conventional loans are set by government-sponsored enterprises Fannie Mae and Freddie Mac, and tend to be more stringent than the requirements for government-backed loans discussed below.
FHA loans
The Federal Housing Administration (FHA) insures FHA loans for borrowers under this program, and it’s a popular one for borrowers with lower credit scores. However, that flexibility comes with a hefty price: You’ll pay two types of FHA mortgage insurance to cover the lender’s risk, in case you can’t make payments and default on your mortgage (we’ll cover that in the closing costs section below). You’ll also be restricted to lower loan amounts than conventional loans — the 2024 FHA loan limit for a single-family home in most parts of the country is set at $498,257, compared to $766,550 for conventional conforming loan limits.
VA loans
The U.S. Department of Veterans Affairs (VA) offers no-down-payment loans to eligible military borrowers. You’ll need to prove you have enough military service to be approved — if you don’t, you won’t qualify for a VA loan. The VA has removed loan limits, which gives VA borrowers an edge in higher-priced markets over non-military borrowers who may need complex jumbo loans to finance mortgage amounts above conforming loan limits.
USDA loans
The USDA loan program is backed by the U.S. Department of Agriculture (USDA) to help low-income borrowers purchase homes in designated rural areas across the country. No down payment is required, but there are very strict income limits based on your family size. Although the USDA doesn’t set loan limits, the income restrictions limit how much you can borrow.
2. Know your credit scores
Credit scores are important when you shop for a mortgage for two reasons. First, they help you determine which loan program to choose. Conventional loans are usually a good fit if your score is higher than 620, while FHA loans may be your only option if your score is between 500 and 619.
Second, credit scores have more impact on the interest rate you’re offered than any other loan factor. And lenders don’t just look at one credit score — most review scores from the three major credit bureaus (Equifax, Experian and TransUnion) and use the middle score of those three for your loan approval and interest rate quote.
Don’t know your score?What’s a good credit score for a mortgage?
Conventional credit score fees changed in 2023
There are some other benefits to having a credit score this high when you’re shopping for a mortgage:
- Your private mortgage insurance cost may be lower. If you make less than a 20% down payment on a conventional loan, you’ll typically pay private mortgage insurance (PMI) to cover the lender’s investment if you default and they have to foreclose on your home. The higher your credit score, the lower your PMI premium.
- You may be approved with a higher DTI ratio. Lenders measure how much total debt you have compared to your income to calculate your DTI ratio. You may be able to exceed the ratio limits in the table above if you have high credit scores.
Your DTI ratio could affect your interest rate in 2023
Things you should know
Pay off debt 60 to 90 days before you apply. It takes a few months for debt paydowns to reflect on your credit report, so give it some time if you recently maxed out your cards. In general, keep your credit use at 30% or less of your total credit limit.
Add or remove yourself as an authorized user. If you’re a user on a card with a high balance, getting taken off may help your scores. If you hardly have any credit history, being added as an authorized user may give your scores a nudge upward.
Don’t apply for a lot of credit. Each time you apply for credit, the credit-reporting algorithm assumes you may be taking on more credit. Although one or two inquiries doesn’t typically hurt much over a 60- to 90-day period, more inquiries could push your scores down.
3. Compare different types of mortgage lenders
Once you’ve matched your credit scores and have a good idea of the best programs for your financial situation, it’s time to start comparing loan estimates from different lenders. Studies have shown that you’ll typically get the best deals by checking with three to five lenders.
Here’s a brief overview of the three most common types of mortgage lenders: banks, mortgage brokers and mortgage banks.
- Banks. Your local bank or credit union probably offers mortgages and may extend a discount if you carry large balances or investment accounts with them. Banks are also often approved for first-time homebuyer programs that may help you out if you’re short on cash for your down payment and closing costs.
- Mortgage brokers. If you want to compare a number of different mortgage lenders in one place, a mortgage broker may be a good option. They don’t actually lend money, but they’re approved by several different lenders and often have a wide variety of programs to fit different mortgage financing needs.
- Mortgage banks. Unlike regular banks, mortgage banks only specialize in home loan products. One of the big advantages of mortgage banks is that the processing of your loan is handled “in house,” which means the lender actually loans the money, and employs underwriters and processors on site to make lending decisions.
Learn more about our picks for the best mortgage lenders.4. Learn which type of mortgage is best for you
Before you start comparing mortgage rates, you need to know how each type of mortgage works. Asking for rate quotes on the same type of mortgage ensures you’re making apple-to-apples comparisons of each mortgage lender’s rates.
Fixed vs. adjustable rates
The fixed-rate mortgage is the most popular home loan type. It gives homeowners a stable principal and interest payment that doesn’t change for the term of the loan. The most common fixed-rate loan terms are 10, 15, 20, 25 and 30 years.
Adjustable-rate mortgages (ARMs) offer a temporary low rate for a set time period (that is typically lower than fixed-rate mortgages) ranging between one and 10 years, and then the rate adjusts based on the margin and index tied to the ARM program you choose. For example, with a 5/1 ARM, your rate is fixed for the first five years, and then adjusts every year for the remainder of the loan term. Make sure you review the “caps” with ARMs so you know how much the interest rate and payment could increase over time.
Short-term vs. long-term rates
You’ll usually find the lowest rates are offered for shorter terms, such as 10-year or 15-year fixed mortgages. The good news is you’ll pay much less interest over the life of the loan than a comparable 30-year mortgage term. The bad news is the shorter term means a much higher monthly payment.
The most popular term is the 30-year fixed-rate term. Although interest rates are higher than shorter-term loans, you’ll have the lowest payment because the loan is paid off over a longer period of time. However, you can make extra payments to lower the balance faster — some people choose biweekly payments to speed up the loan payoff and reduce interest charges over time.
How to choose the right mortgage type for you
The table below gives you a quick reference to compare the benefits of each mortgage type.
| Loan type | Best if: |
|---|---|
| Fixed-rate mortgage | You want a predictable monthly payment that won’t change over time |
| Adjustable-rate mortgage | You need a lower payment for a short period, and plan to sell or refinance the loan before the adjustable-rate period starts |
| Long-term fixed rate | You want the lowest payment possible or are applying for a large loan amount |
| Short-term fixed rate | You want to pay off your loan faster and can afford the higher monthly payment |
5. Shop mortgage rates
Now that you’ve determined the best type of mortgage for your credit scores and know which program to apply for, it’s time to start getting rate quotes. There are several ways you can do this:
Try an online comparison site. The biggest benefit of this approach is you’ll enter the same information for all of the lenders about the mortgage you’re seeking and should receive loan estimates on the same date. This is important because interest rates — like stocks — change daily, so be sure you only review quotes side-by-side on the same day.
Call three to five different types of lenders. If you prefer to speak to someone, you can call several types of lenders to get their quotes. It’s best to make sure you have a list handy so you give each loan officer the same information about your credit score, as well as the loan type and program you’re interested in.
6. Compare mortgage rates and closing costs
When you’re comparing loan estimates, pay special attention to the total closing costs. They typically range between 2% and 6% of your loan amount. The costs will vary depending on the loan program you apply for. Here’s what to keep in mind about closing costs:
Mortgage insurance
If you make less than a 20% down payment, lenders usually require you pay for mortgage insurance to protect them against losses. Some loan programs charge a guarantee fee instead of mortgage insurance. Below is a breakdown of how much you can expect to pay.
- Private mortgage insurance (PMI). Most borrowers pay monthly PMI between $30 and $70 per month for every $100,000 they borrow. However, the premium may be much higher with a low credit score and a low down payment, and there are several other factors that may have an impact on your premium.
- FHA mortgage insurance. You’ll pay two types of FHA mortgage insurance premiums regardless of your down payment. The first is an upfront mortgage insurance premium (UFMIP), which costs 1.75% added to your loan amount. The second is an annual MIP that ranges from 0.15% to 0.75%, depending on your down payment and loan term. The MIP is charged annually, divided by 12 and added to your monthly mortgage payment. Your credit score has no impact on FHA mortgage insurance premiums.
- VA funding fees. Although VA loans don’t require mortgage insurance, you may be required to pay a VA funding fee ranging from 2.3% to 3.6% of your loan amount, depending on your down payment amount and whether you’ve used your benefits before. However, veterans with a service-related disability may be exempt from the VA fee.
- USDA guarantee fees. USDA borrowers pay a 1% upfront guarantee fee that’s added to the USDA loan amount, along with a monthly guarantee fee equal to 0.35% of the loan amount, divided by 12 and added to their monthly mortgage payment.
Negotiating closing costs
You’ll see three categories of costs on Page 2 of the loan estimates you receive: loan costs, services you can’t shop for and services you can shop for. You’ll want to focus on loan costs and services you can shop for when you’re ready to start haggling for the best deal:
- Loan costs. These include origination charges, application fees and underwriting fees, and they’re always negotiable, along with the interest rate. Pay close attention to the section if you get a really low-interest-rate offer — it may come with expensive mortgage points that will come out of your pocket to pay for the lower advertised rate.
- Services you can shop for. Borrowers are often surprised to learn they can shop for title services and insurance required on purchase and refinance loans. That’s usually because on a purchase loan, the seller chooses the title company, or it’s negotiated in the purchase contract. However, on a refinance, you can compare title fees to make sure your total costs are as low as possible.
No-cost, full-cost and buydown rates: Which should you choose?
If there’s a big difference in the rates you’re quoted, it could be due to how your closing costs are being charged. Lenders will typically offer you a no-closing-cost, full-cost or a buydown option. Here’s how each works:
No-cost mortgage. This should really be called a “no-out-of-pocket-cost mortgage,” because closing costs are still charged but the lender pays for them by increasing your interest rate, which means you’ll have a higher monthly payment.
Full-cost mortgage. You’ll see origination charges and all costs charged to you on this type of cost structure. The interest rates are typically lower if you’re paying the closing costs out of pocket.
Discount point option. This option involves paying mortgage points to get a lower rate. One discount point equals 1% of your loan amount, which adds to your total out-of-pocket cost. For example, one discount point on a $300,000 loan would cost you $3,000.
To determine which type of cost quote makes the most sense for you, consider the following:
| Choose a no-cost mortgage if: |
|
| Choose a full-cost mortgage if: |
|
| Choose a buydown mortgage if: |
|
Things you should know
For example, if you spend $5,000 to get a rate that saves you $100 per month, your break-even point is 50 months, which is how long it would take to recover the $5,000 you spent to get a lower interest rate.
The difference between APRs and interest rates
Your annual percentage rate (APR) is disclosed on Page 3 of your loan estimate, and reflects the total cost of getting a mortgage and is different from the interest rate. Generally speaking, the bigger the difference between your APR and interest rate, the more you’re paying in closing costs. However, it’s still a good idea to compare the itemized costs on the loan estimate to make sure you’re getting the best deal.
How your lock-in period affects your rate quote
Interest rates are typically quoted based on a 30-day closing timeline. You’ll get the best rates and lowest costs with mortgage rate locks of 30 days or less. However, if you’re buying a home, make sure your rate lock doesn’t expire before your closing date. You may need to request a 45-day or 60-day rate quote if your closing date is more than 30 days away.
Keep in mind lenders charge extension fees if you don’t close within the lock-in period. You’ll get a lock confirmation in writing; keep track of your lock expiration date to avoid any costly extension fees.