Whether you’re a first-time home buyer or looking to move into a different house, chances are you’re going to need a mortgage. But how do you go about getting the best rate?
Team Clark is all about saving you money. A house is likely the biggest purchase you’ll make in your lifetime. Finding the best mortgage terms could save you tens of thousands of dollars — or more — over the life of your loan.
In this article, we’ll walk you through the steps of getting a mortgage the right way, with some guidance from Clark Howard and insider tips from a mortgage industry veteran.
Table of Contents:
- Get Your Credit in Shape
- Get Pre-Approved for a Mortgage
- Figure Out How Much House You Can Afford
- Pick the Right Type of Mortgage
- Shop for the Best Rates
- Gather Your Documents and Apply for the Loan
- Prepare for Some Back & Forth
- Close on Your Home
1. Get Your Credit in Shape
Before you apply for a mortgage, you should make sure your credit is in good shape. The better your credit score, the better the interest rate you’ll qualify for. You should aim for a credit score of 740 or higher. That should get you the very best rates in most cases, says Rob Downs, Sr. Loan Officer at South State Bank.
There are multiple ways to get your credit scores and credit reports for free. You’ll want to check both because if there’s an issue with your credit score, your credit report will give you an indication of what that is. You’ll also want to make sure you get reports from all three major credit bureaus:
“Be wary of using free credit report services like Credit Karma for this step,” Downs says. “They tend to use the Vantage scoring system which will not provide the actual FICO credit score lenders will use. Instead, check with your bank or credit card provider to see if they offer a FICO score.”
Downs also notes that lenders usually pull reports from all three credit bureaus and then use the middle score. So you could have a credit score lower than 740 and still get the best rate, as long as your middle score is at least that high.
What to Do if Your Credit Score Isn’t High Enough
If you do discover that your credit score is not what you’d like it to be, you may want to delay your purchase. Borrowing a lot of money at a less-than-optimal interest rate will mean that your monthly mortgage payment will be higher, and you’ll end up paying a lot more to own your house in the long run.
You can take steps to improve your score, like paying down debt and increasing your credit limits. Read about sneaky ways to improve your credit score here.
There’s also the possibility that you’ll find an error on your credit report that’s dragging your score down. If that happens, it is possible to have it corrected. Here’s how.
Errors should take 30 days to correct once you inform the bureau and creditor of the mistake. But sometimes the process can take up to three or four months. That’s why you should pull your credit scores and reports at least four to six months before you’re ready to apply for a mortgage.
Clark says the next thing to do — after you’ve done a background check on your credit — is to monitor your credit and scores. This is to ensure that your credit score holds steady or improves as you get closer to applying for a loan. Team Clark recommends using the free services at Credit Karma, Credit Sesame or both to keep an eye on your score.
2. Get Pre-Approved for a Mortgage
Once you feel like your credit is in a good spot, it’s time to start the process of getting a mortgage. You can find out how much money you qualify to borrow by applying for mortgage pre-approval. This will also give you a sense of how much your monthly payments will be.
How much a lender is willing to lend you will depend on things like your credit score and debt-to-income ratio. A pre-approval is not an actual mortgage application (which is tied to a specific property), but it will require a hard credit check.
Why You Need to Get Pre-Approved
Pre-approval is a key step in the home-buying process, according to Downs.
“Mortgage pre-approval is typically required by realtors, as they want to ensure that you will have your financing in order and be prepared to offer as soon as you find your home,” he says. “Typically they — and the seller’s agent — will want to see a pre-approval letter from a lender submitted with your offer.”
Downs says that if the lender and/or loan officer has a good reputation in your local market, it can also help increase your chances of going under contract since there will be greater trust in your pre-approval.
Here’s what a pre-approval letter will generally look like. As you can see, it will include the amount of money you’re pre-approved to borrow, along with information about the terms of the loan:
Note that you aren’t locked into getting your loan from the lender that pre-approves you. You are still free to shop around to get the best rate, which we’ll cover below.
Clark has a firm rule about the pre-approval process: Once you get a pre-approval letter, don’t apply for any other credit within six months of when you expect to buy your home.
“It’s not so much what the credit application will do to your credit score, though that is a concern,” he says. “It’s more that it harms your debt-to-income ratio, which could put you in a riskier lending category. Your mortgage application could be denied or you could find yourself pushed into a higher interest rate.”
Where to Get Pre-Approved for a Mortgage
As a general rule, Clark is a big fan of credit unions. But you need to make sure you’re happy with the level of customer service at a credit union before you give them your business.
Clark says that there are a lot of options out there, and you’re no longer at the mercy of the big banks.
Ultimately though, you should go wherever you feel most comfortable for your pre-approval. As we said, you are under no obligation to get your mortgage from that lender if you find better rates elsewhere.
3. Figure Out How Much House You Can Afford
Just because you can borrow a certain amount of money doesn’t mean you should. There are several other factors that come into play when determining what price range you should be considering.
Chances are you’ll be pre-approved for a higher amount than would probably make sense for you financially. It’s up to you to calculate what that translates to as a monthly payment.
Clark’s thinking on how to figure out how much house you can really afford has evolved over the years.
He used to recommend that you start by seeing what you qualify for on a traditional 30-year fixed-rate loan, then back off and shop for houses that cost 90% of that amount or less. But no longer.
“I realized that people were still ending up with more mortgage than they can afford,” he says. “Ignore what you’re pre-approved for. Instead, base what you can really afford on what your current rent is. Remember with that mortgage, you’re going to also have taxes and insurance.”
Clark says if you’re buying your first house, you should start with how much you’re paying in rent. And then you should calculate a mortgage payment that is no more than your rent plus the monthly overhead costs that renters don’t pay: things like property taxes and homeowners insurance.
4. Pick the Right Type of Mortgage
Once you know how much money you’re able to borrow, you’ll need to decide what kind of loan is right for you.
Do you want a 30-year mortgage or a 15-year? Would you prefer a fixed rate for the life of the loan or one that adjusts with economic conditions? Do you need a conventional loan, or will you be borrowing a lot of money and require a jumbo mortgage? You’ll need to answer all of these questions and more.
Downs says that conventional 30-year fixed mortgages are the predominant loans most buyers choose.
“With good credit, they offer exceptional interest rates and lower payments,” he says.
There are also FHA and VA loans to consider.
“Credit-challenged borrowers may opt for an FHA loan, which is a government-backed loan that can still provide good rates but does come with additional mortgage insurance requirements,” Downs says. “For those that qualify, a VA loan provides exceptional rates and even offers a 0% down option.”
Thankfully, you shouldn’t have to figure all of this out by yourself.
“A great loan officer will discuss your overall purchase and financial goals and present not only the options that are available to you but the mortgage option that best fits your goals,” Downs says.
5. Shop for the Best Rates
After you decide on the best type of mortgage for you, you’re ready to start shopping for your mortgage.
To get a good sense of what kind of rates are available, you might want to start with a site like LendingTree.
Just be aware that in many cases, you’ll be asked to provide an email address or telephone number. That means you may be inundated with pitches from companies trying to win your mortgage business. If that doesn’t sound fun to you, Clark has his own, more traditional strategy.
He says that most people only get one quote for a mortgage, which is not the right approach. You’ll want to get quotes from at least three lenders to get access to the best deals.
“You should go to a credit union, the lender recommended by your real estate agent and a mortgage broker,” Clark says.
Your real estate agent could be a great resource when it comes to picking a lender. See if they have someone they recommend. If they do, it’s likely a lender they and their clients have found easy to work with in the past.
“If you trust your realtor, feel free to ask them for a referral,” Downs says. “It is in their best interest to make sure you are expertly handled.”
Another option is to work with a mortgage broker. Mortgage brokers can shop your mortgage with several different companies to find the best rate. Ask your friends and neighbors if there’s a broker they recommend.
How to Choose the Best Mortgage Offer
Once you have multiple rate quotes in hand, you’ll need to figure out which one makes the most sense for you.
“Mortgage estimates can vary greatly between multiple lenders,” Downs says. “When it comes to shopping rates and doing an apples-to-apples comparison, there are only two things within the lender’s control to compare: the rate and what you’re paying for it in lender fees.”
Those fees could include:
- Origination fees
- Credit report fees
- Appraisal cost
- Any other applicable fees charged by the lender
Points are another kind of fee you need to know about. A point represents 1% of the total amount of money borrowed.
There two kinds of points:
- Origination points: This is simply a fee to line lenders’ pockets.
- Discount points: Money paid in advance to lower the interest rate over the life of a loan.
Clark has a simple rule when it comes to points: Never pay points to buy down your interest rate!
Keep in mind that not every lender charges points, so if you can avoid paying them entirely, all the better.
All other closing costs associated with the home purchase (title, attorney, taxes, etc.) are beyond the lender’s control. But Downs says you should be able to get an accurate estimate on them ahead of time.
Beyond price, you should also consider the following in your lender selection: online reviews, responsiveness and whether they’re a local lender with a good reputation.
6. Gather Your Documents and Apply for the Loan
Once you’ve identified the most favorable loan for you and a property that you want to make an offer on, it’s time to submit your formal application.
What you’ll need to provide will depend on your particular situation and the loan company’s requirements, but will typically include:
- The Uniform Residential Loan Application
- W-2s from current and past employers
- Recent pay stubs
- Income tax returns
- Alimony or child support documents
- Bank & investment account statements
- A “gift letter” if you’re using gifted money for a down-payment
- Credit explanation letter if there are derogatory marks on your credit file
So how will you submit all of these documents?
Downs says the mortgage industry has lagged in terms of technological innovation, but that great advances are being made to streamline the lending process and provide better security.
“Most lenders will offer you a secure portal to complete your application and upload the needed documents,” he says. “Some lenders even provide their own mobile apps that allow buyers to upload documents and track their loan as it moves through the process.”
Of course, you can still choose to email documents or even provide paper copies. A good lender will do whatever’s needed to assist you.
The lender will use all of this information — plus what they discover in your credit check and their assessment of the property you’re looking to purchase — to help determine the final loan terms.
Locking In an Interest Rate
When you are offered an interest rate, you have the option of locking it in. Mortgage interest rates fluctuate all the time based on larger market conditions. A mortgage rate lock holds that rate steady, typically for a period of 30, 45 or 60 days.
Clark says the decision about when to lock in your rate should be based on whether you’re buying new construction or an existing home.
“If you’re buying a home that’s being built, you never want to apply and lock in too early because builders’ schedules are notorious for running late,” Clark says. “You have to be sure almost everything is done by the builder before you lock in your rate when you’re buying new construction.”
The decision about when to lock in your mortgage interest rate is a little different when you’re buying an existing home.
“Rate lock strategy has everything to do with understanding current markets that affect mortgage rates and the buyer’s risk tolerance,” Downs says. “Some buyers recognize they have a great rate and want the peace of mind of locking it in and moving on with life. Some buyers are hyper-sensitive to locking in the absolute best rate, which is perfectly understandable, but ‘floating’ your rate comes with risks.”
In general, Downs, says, rates increase quickly and decrease slowly.
“Timing a rate lock is like playing poker. Seek advice from your lender to make an informed decision about when to lock in your rate,” he says.
7. Prepare for Some Back & Forth
After you’ve submitted your application and supporting paperwork, the lender will need to check your credentials. In most cases, they will also require an appraisal of the property from an appraiser that they choose. This whole process can take anywhere from 30 to 60 days, but that’s not always the case.
“Good lenders will move at the speed that is needed to complete your underwriting, appraisal, and closing based on your contract contingencies and closing date,” Downs says. “In competitive real estate markets like we’ve seen in recent years, it is not unheard of to close in 21 days or less in order to have your offer accepted.”
During this time, you should expect some level of communication with the lender as they continue to gather any information that can help you get the most favorable rate.
Keep all of this in mind with your lender selection. If you expect that you’ll need a quick closing, choose a lender that commits to getting your loan done in the time needed.
“It’s always beneficial to discuss your closing date and contingencies you include in your offer with your loan officer before you submit the offer, so they can commit to being able to meet them,” Downs says.
8. Close on Your Home
Finally, once you’re approved for your mortgage and your offer has been accepted, it’s time to close on your home. Here’s what that involves.
“At least three business days before closing, your lender will be in touch with the final terms of your loan via a document called the Closing Disclosure,” Downs says. “This document will provide your final monthly payment and the amount of cash you’ll need to wire to the title company that is conducting your closing.”
The title company handles the money exchange between you and the seller and makes sure the property title is put in your name once the purchase is complete.
Here’s an example of what a Closure Disclosure might look like:
Downs warns that once you receive your wire instructions, make sure you confirm them directly with the title company. Wire fraud related to mortgages is very real, and there have been cases of home buyers getting duped into wiring funds to the wrong account. That can cause a huge hardship — and even financial ruin.
A general rule of thumb is to wire a bit more than is required in the exceptionally rare event there is a slight change to the fees at the last minute. If you wire more than what is required, you will receive a refund for the overage from the title company.
Once your funds are wired, notify your lender and confirm receipt with the title company.
Then, simply show up to the closing to complete your purchase. There, you should expect to sign multiple documents related to the sale of the property and the mortgage.
Once the title is transferred from the seller to you, you’ll get the keys to your new home!
Shopping for a mortgage may seem intimidating, but if you follow the steps above it’s really not a difficult process.
Yes, it can be time-consuming to gather all of the documents and shop around for the best rate. But the money you’ll save by being diligent in your search for the best mortgage will set you up for financial success well into your future.