When you’re shopping for a mortgage, there are a lot of moving parts to the process.
In this article, we’ll take a look at how your credit history comes into play, what you need to know before applying for a mortgage and how to compare the quotes you receive when you’re shopping for a mortgage.
Follow Clark’s method to shop for a mortgage
Owning your own home is fantastic. It’s your castle, your place. And one of the greatest benefits of owning a home is that you can create wealth for yourself.
“Despite the post-recession housing crash, buying a house remains an excellent way to build wealth over time. In fact, with interest rates still low, housing is incredibly affordable,” money expert Clark Howard says.
Paying rent puts money in someone else’s pocket. But buying a house means paying down your mortgage balance a little bit every month and seeing the value of your house grow over time, along with your equity in that property.
“I call real estate the ‘get rich slow’ method,” Clark says. “All the promoters and hucksters pretend it’s the get-rich-quick method, but it isn’t. Yet over time, you should do just fine!”
How to shop for a mortgage: Table of contents
- Check your credit
- Start monitoring your credit and scores for free
- Apply for a mortgage
- Compare your quotes
Check your credit
When you want to learn how to shop for a mortgage, your annual credit report should be your first stop. It’s where the rubber meets the road in your financial life.
You can pull a free copy of your credit reports at AnnualCreditReport.com. Be sure to check the reports from each of these credit bureaus:
Go through the reports thoroughly. You’re looking for two things in particular — any errors and any unpaid collections.
Errors technically should take 30 days to correct once you inform the bureau and creditor of their mistake. But in actuality, the process can take up to three or four months. That’s why you need to start this step at least four to six months before you’re actually ready to apply for a mortgage loan.
When it comes to unpaid collections, you want to make sure there are no surprise delinquencies eating up your credit. If there are, many times they’ll be small bills that you just forgot about or that got lost in the mail. Get those things paid off as soon as possible before you apply for a mortgage.
Monitor your credit and scores for free
Clark says the next thing to do after you’ve done a background check on your credit profile is to continually monitor your credit and scores. This will ensure your credit continues to hold steady or improve as you get closer to applying for a mortgage loan.
A couple of websites will let you check your credit and scores for free:
Apply for a mortgage
It’s very important to pre-qualify for a mortgage before you start the house hunt. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.
Just keep these pointers in mind as you go through the application process:
Know the right way to go through underwriting
If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score.
Unfortunately, most lenders will base your rate on the lower score if you’re a couple — not the higher score.
Do all your shopping for mortgage rates within two weeks
Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your credit file. You can minimize the damage by getting all quotes within a 14-day period.
That way it doesn’t look to the credit bureaus like you’re applying for multiple loans from multiple lenders!
Be sure to get more than one quote
Most people only get one mortgage quote. That’s the wrong way to go about it. 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.
The 90% mortgage rule
You’ll probably be approved for a higher home purchase price than would probably make sense in your life. It’s up to you to think through what that translates to as a monthly payment.
Don’t forget to add to that figure the monthly taxes and insurance, along with possible repairs and maintenance that you wouldn’t otherwise have to pay when you’re a renter.
Clark has a simple rule of thumb to follow when shopping for a mortgage: See what you qualify for when it comes to a traditional 30-year fixed rate loan. Then back off and go house shopping at only 90% of that dollar amount.
“So if you qualify for a $200,000 mortgage, for example, don’t look at houses above $180,000. By doing that, you will help create extra financial breathing room in your life,” Clark says.
“The expense of housing is like a rubber-band — stretch it too far and it will break. Stay at 90% or lower and your wallet will smile.”
Compare your quotes
Once you have you offers in hand, take out a piece of blank paper. You can make your own crib sheet to compare the offers apples-to-apples.
Each offer you receive from each source should have three columns. So draw up three columns on your crib sheet. In the first, list the interest rate. (Most people stop right there. But that is only part of how you compare one loan offer to another.)
Second, list whether you have to pay points and how much that will cost. Each point is 1% of the amount you are borrowing. This is simply a junk fee to line the pocket of the lender.
Third, look at your closing costs. Lenders now have to give you an estimate of the maximum you will have to pay. This makes it much easier for you to figure out which loan is actually your best deal.
Here’s a sample crib sheet so you can visualize it:
|Lender name||Interest rate||Points||Closing costs|
In this case, the best offer is from the third lender.
As you go through the process of learning how to shop for a mortgage, remember to you will have to do a lot of paperwork. Get your lender the info right away when they ask for it. Then document what you gave to them and when you did it.
The last thing you want is to have a finger pointed at you for being negligent with paperwork when there’s a problem and you can’t close on time!