A white man and woman look happily at each other as they sit among moving boxes in their new home.

How to Shop for a Mortgage Loan

Updated April 1, 2024 . AmFam Team

When you set out to buy a home, it may seem like getting a mortgage is just another task that’s got to get done. But the truth is, even in a very competitive market, mortgage offers can vary significantly. That’s why it’s crucial to be thorough when shopping around for a mortgage — the decision you make will have lasting repercussions on your financial state for years to come.

Because getting your mortgage right the first time is so important, we’ve put together this article to help walk you through the various steps of mortgage shopping.

Today, we’ll review ways to manage your credit score and help you understand your mortgage shopping window. We’ll also teach you how to shop mortgage rates to secure the best deal out there. Let’s get started!

Get Your Credit Score in Check Before Mortgage Shopping

Before you begin to consider purchasing a home, you should check in on your credit score. The higher your credit rating, the better the odds of receiving affordable mortgage terms and a competitive interest rate. You’re allowed one free credit report per year, so check in with the major credit bureaus and download yours before applying for a mortgage.

What is a good credit score for a mortgage?

If you’ve got bad credit and your credit score is under 580, you may want to work on improving that score by paying down your credit cards and debt before you start shopping for a mortgage. Some lenders may not be willing to lend to you. Likewise, if your score is above 580, you’re more likely to meet the minimum qualifications for lending. A good credit score for a mortgage is between 700 and 749.

What credit score do mortgage lenders use?

Most lenders will reference the credit bureau's FICO® scores to determine your credit risk. They’ll also use this figure when assigning an interest rate to your loan.

How to apply for a mortgage without hurting your credit score

Before applying for a mortgage, be sure you understand the length of your mortgage shopping window — you’ll need to make some big financial decisions in the coming days.

When you apply for a loan, your credit score will typically drop a few points from the “hard inquiry” that lending groups will perform. You’ll typically have a 45-day shopping window for mortgages — after the first hard inquiry is performed on your FICO score.

It pays to check with your lender about the scoring model they’re using because some only allow for a 14-day mortgage shopping window. If you choose to apply with multiple brokers while shopping for a mortgage, their individual hard inquiries will be registered as a single inquiry in that time frame.

How does getting a mortgage affect your credit score?

In short, it all depends on your financial situation. If you’re in good fiscal health with plenty of savings, the shift can be nominal.

There are other ways to shop for a mortgage without hurting your credit, too. You can work with Credit Karma or another financial services group to help you understand your credit issues and get a feel for your credit-worthiness. You can also use these groups to apply for and field you offers as well. Once you’re ready to fill out your mortgage application, a hard inquiry will be performed.

Check If You’re Prequalified or Preapproved for a Mortgage

After you’ve applied for a mortgage, it’s key to understand if your lender has preapproved your application or if you’re simply prequalified. It’s a lengthier process to get preapproved for a mortgage vs. prequalified.

How Long Does the Preapproval Process Take?

The mortgage preapproval process can take anywhere from one to three business days after submitting your application. But after that hard work is done and you get approved, you’ll have a valuable letter from your lender stating you’ve been given a green light to purchase a home.

The letter will usually contain a price cap and a deadline, valid anywhere from 60 to 90 days, but typically you’ll have around a 45 day shopping window for mortgages. You may be able to extend that window with an additional re-verification by the lender.

Learn About the Types of Mortgage Loans

After preapproval, you’ll want to consider your mortgage type options and select one that best benefits you financially. It can be a challenge to compare mortgage offers when shopping, but with the help of an experienced realtor and a seasoned mortgage broker, they can help guide you to an offer and loan estimate that works best for you. Here are a few of the more common types of mortgages:

Fixed rate mortgage (FRM)

Usually a safer bet, fixed rate mortgages are great for buyers looking for predictability in their housing costs who are planning on living in the home for at least a decade. You’ll have the option to pay the mortgage back on a 15- or 30-year repayment schedule. Some lenders will offer 20- or 25-year terms, too.

In most cases, shorter the repayment periods are rewarded with lower interest rates for your mortgage loan. And if you’re able to pay the mortgage off quickly, you could save thousands of dollars in interest payments.

These are fully-amortized fixed rate loans — meaning that the loan will be fully paid off at the end of the payoff schedule. FRMs are quite popular simply because the interest rate is locked in — or fixed — over the entire life of the loan.

Adjustable rate mortgage (ARM)

This type of mortgage is ideal for those who plan on living in their home for a few years. You’ll typically get a much lower rate vs. a fixed-rate mortgage — but if you end up staying beyond the expiration date, the rate will likely be much higher. Thereafter, you’re interest rate will adjust to the average interest rate, which can be risky. The low rate period of adjustable rate mortgages usually lasts from 5 to 7 years.

Interest rates on loans of this type ebb and flow as the current interest rate goes up and down. It’s a riskier mortgage, in some cases because there’s no guarantee the market will be stable. ARMs typically start at a lower rate than their FRM counterparts.

Government-guaranteed mortgages

Guaranteed mortgages are typically offered by a government agency that purchases your loan from a lender. They guarantee to fund the loan in the event of a default on the mortgage and use the home as collateral against the debt.

Both the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) have home loan options that are great for first-time home buyers. This is because they usually come with lower down payment requirements and allow more people to qualify. USDA loans are another great option when shopping mortgages, though qualifying for one is based on your income and location.

Here are a few types of guaranteed governmental loans:

  • FHA loan
  • VA loan
  • USDA loan

FHA loans are attractive to many buyers because the minimum down payment is only 3.5 percent of the home purchase price — you’ll need at least 5 percent with a conventional loan. And if your credit needs improving, you can qualify for an FHA loan with a FICO score of 580, where other loan types will need that to be a bit higher.

Another big advantage of opting for an FHA loan is that buyers are allowed to borrow up to 6 percent of the purchase price to pay for closing costs. FHA loans require private mortgage insurance (PMI) which you’ll pay for at closing and every month until 20 percent of the loan is paid.

Bridge loans

A temporary loan on your existing home, bridge loans are short-term in length, helping to bridge the gap when you’ve got two mortgages to pay. These are used to help you pay for your home that’s still on the market after you’ve closed on the purchase of a new home.

Piggyback loans

Also referred to as a second common trust, the common piggyback loan is actually a series of loans that equal the total amount of the sale price. Typically, the loans are divided into an 80/10/10 split where 80 percent of the purchase price is funded through one loan, and two others at 10 percent are mortgaged separately. One covers the down payment, and the second trust loan is funded typically at a higher annual percentage rate.

Balloon mortgages

Usually reserved for commercial real estate purchases, balloon mortgages do not fully pay off the total sales price until the final payment, which is much larger than the amortized payments. The large balance due at maturity can be substantial.

Jumbo loans

These are loans that exceed the government-sponsored limits set for typical lending home purchases.

Learn About the Mortgage Lenders

There are many different types of lenders out there. But, how do you pick a mortgage lender that’s right for you? It may be wise to rely on a financial adviser to help you select a lender that’s best aligned with your interests. From online providers to local credit unions to privately funded mortgages, you’ve got options. For more details on how to shop for a mortgage lender, our first-time home-buyers hub can help you understand the basics of lending.

Understand the Mortgage’s Terms of Repayment

After you select a lender, they’ll work to get you a mortgage financial statement that details the specifics of your lending, including a mortgage payment breakdown. There, you’ll find information on fixed or adjustable rates, among other data. It’s key at this point that you understand how mortgage interest works.

If you’re still wondering, “can I shop around for mortgage rates?” the answer is: Yes, you can and you should! In today’s competitive mortgage climate, you can negotiate and leverage a better deal by having one mortgage firm compete against another offer.

Shopping around for mortgage lenders and letting them compete for your business can help you get a more attractive ARM or fixed rate mortgage. And you might even find the lenders offering you discounts on points, closing fees and other incentives. Review these loan terms with your financial adviser to best understand the long-term implications of one offer over another.

Interest, APR, points ̶ what do these mean?

Getting familiar with all the different terms and conditions of a mortgage agreement can be a challenge. There are many key terms you’ll need to be familiar with in order to ensure that you’re fully informed of your financial commitment to the loan. Our hidden costs of closing on a home calculator is a fantastic resource to get you up to speed on these definitions and it can build you an estimate of costs you’ll encounter at closing.

Shop for the Best Mortgage Rates

After you’ve applied for mortgages with a few groups and have offers on mortgage deals back from each, it’s time to get deep into the numbers. If you’re not looking carefully at the differences between each offer, you could be leaving money on the table.

In order to line yourself up for financial success, you need to be certain that you’re selecting the best offer out there. Work with your financial advisor or make a spreadsheet that compares mortgage rates and contrasts each offer to help select the one that saves you the most money.

How do you compare mortgages?

You may be able to plug your numbers into an online mortgage loan comparison calculator to help you see the differences between loans. Let’s suppose that you’re considering a 15-year loan vs. a 30-year loan when mortgage shopping.

If you elect to go with a 15-year loan, the total cost of the loan can be reduced by tens of thousands of dollars. You’ll pay more each month, but the benefits can be many. In addition to the savings, you’ll also have paid off your home in half the time.

How to Negotiate Your Mortgage Offer

One thing that comes as a surprise to new home buyers is that you may have the opportunity to negotiate your deal with the lender. After determining the best mortgage rate or deal, you may be able to approach a preferred lender with a different offer and see if they’ll match or beat it. Shopping around for mortgage rates can sometimes save you a few thousand dollars.

So, how can you negotiate mortgage rates? You can work with your lender to reduce closing costs — even servicing fees and other nominal costs — and you can negotiate mortgage rates as well. All you can do is try. If it works, you’ve saved more of your hard-earned money!

Make Your Mortgage Loan Selection

After receiving a response from your lenders on negotiations, it’s time to compare the final offers again and decide on which mortgage to go with. After selecting the best mortgage for you and your budget, contact the lender and let them know that you’re ready to move forward and sign the deal. They’ll put together a timeline and typically work with a title company to build out a closing statement and get you into your new home.

Because buying a home is one of the biggest investments you’ll ever make, having expert advice in your corner can make a serious difference. Our guide for first-time home buyers can help shine a light on each of the steps involved in purchasing a home.

Start Considering Your Homeowner’s Insurance Options

Buying a home and finding the best mortgage is a lifelong dream for many and you’ll want to carefully insure your new home in case something should happen. While you’re considering your insurance options, be sure to check in with your American Family Insurance agent and request a customized quote. You’ll find our agents are experts at helping you to maximize your insurance dollars — and can point you towards key savings and discounts. 

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