How to Shop for a Mortgage: Your Guide To Shopping & Saving

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 mortgage shopping — 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 — from managing your credit score to readying your savings for closing day, and everything in between.

Navigate to:

Get Your Credit Score in Check
Check If You’re Pre-qualified or Pre-approved
Learn About the Types of Mortgage Loans
Learn About the Loan Lenders
Understand the Terms of Repayment
Compare the Mortgage Rates
How to Negotiate Your Mortgage Offer
Make Your Selection


Get Your Credit Score in Check

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 your credit score is under 580, you may want to work on improving that score before you apply. 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 to mortgage lenders use?

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

How long do I have to shop for a mortgage before hurting my credit score?

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 45 days to shop for a mortgage after the first hard inquiry’s 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 window. If you choose to apply with multiple brokers, 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 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 apply, a hard inquiry will be performed.
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Check If You’re Pre-qualified or Pre-approved

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

How do you get pre-approved for a mortgage? First, you’ll need to gather bank and tax documents and forward them onto your lender. In addition to paystubs and other financial records, lenders will look carefully at your FICO score and explore your employment history. You’ll usually apply online to get pre-qualified for a mortgage, and you’ll likely have to scan physical documents and upload them into your profile.

The mortgage pre-approval process can take anywhere from 1 to 3 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. You may be able to extend that window with an additional re-verification by the lender.
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Learn About the Types of Mortgage Loans

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

Fixed rate mortgage (FRM)

These are fully-amortized 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)

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. Here are a few types of guaranteed governmental loans:

  • FHA loan
  • VA loan
  • USDA loan

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 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.
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Learn About the Loan 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.
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Understand the 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. Review these 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 build you an estimate of costs you’ll encounter at closing.
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Compare the 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 adviser 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. Suppose that you’re considering a 15-year loan vs. a 30-year loan. 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.
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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 rate or deal, you may be able to approach a preferred lender with the offer and see if they’ll match or beat it. Shopping around 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!
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Make Your 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, 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.
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Start Considering Your Homeowner’s Insurance Options

Buying a home 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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Related Topics: Owning A Home , At Home , Finance