Finding the right mortgage lender is an essential step in your journey to homeownership—one that has the potential to shape your financial life and homeownership experience for decades.
Below we'll help you navigate this complex terrain and secure a mortgage that aligns with your unique financial situation.
1. Get Your Finances in Order
Your finances not only determine your eligibility for a mortgage but also influence the terms and rates you might be offered. Here are a few ways to whip your financial health into shape:
- Review Your Credit Report: Pull a copy of your credit report from at least one of the three major credit bureaus, Equifax, Experian, and TransUnion, and review it for errors or discrepancies. If you find any, dispute them and have them corrected.
- Calculate Debt-to-Income Ratio: Your debt-to-income (DTI) ratio tells lenders how likely you are to uphold your mortgage agreement. Aim for a DTI ratio below 45 percent, including all debts like credit cards, auto, and student loans.
- Save for a Down Payment: The amount you may need for a down payment depends on a few factors—the cost of the home, the type of mortgage you have, and the lender's specific requirements. Generally, a conventional loan requires a down payment of 10 percent, while government-backed loans like FHAs and VAs require as little as zero to 3.5 percent down.
- Avoid Major Purchases: Making big purchases or raising new debts before applying for a mortgage can affect your qualification. Wait to make significant purchases until after you've secured a mortgage.
2. Explore Mortgage Types
There are many types of mortgages, but here are the three most common:
1. Conventional Mortgage: Conventional mortgages typically require a 10 percent down payment, a credit score of 620 or higher, a two-year track record of employment, and a DTI of no more than 45 percent.
2. FHA Loan: FHA loans are backed by the federal government and available to qualifying first-time home buyers. To be eligible, you must have a minimum credit score of 500 and a debt-to-income ratio of no more than 45 percent.
3. VA Loans: VA loans offer several benefits, including zero down-payment options and competitive interest rates often 0.5 percent lower than other mortgage options. To qualify, borrowers must be eligible active-duty military service members, veterans, or qualifying spouses.
3. Research and Compare
You shouldn’t settle for the first lender that comes your way. Instead, research multiple lenders to understand their offerings, interest rates, fees, and terms. Online comparison tools can be handy at this stage in the game, as they allow you to see a side-by-side comparison of multiple lenders and their rates.
4. Get Pre-approved
A mortgage pre-approval is a letter from a lender indicating the type and amount of loan you can qualify for. Getting pre-approved gives you a better understanding of how much you can afford to borrow and keeps you from wasting time by looking at homes beyond your financial reach. Pre-approval also shows sellers that you are a serious and qualified buyer, which gives you a competitive edge when making an offer—especially in a competitive market. Additionally, pre-approval allows you to lock in an interest rate, protecting you from sudden rate increases.
But, you don’t have to stop at one pre-approval. In fact, many experts recommend getting at least three pre-approval letters from three different lenders. This is another way to shop and compare as each mortgage lender will have a unique offer including interest rates, loan amounts, origination fees, and other upfront closing costs.
5. Negotiate Your Rate
While it's true that market conditions influence mortgage rates, there is often room for negotiation—especially if you have a solid financial profile. Your lender may be willing to compete for your business, so if you have strong credit, a stable income, a substantial down payment, and a low DTI, try negotiating for a better interest rate. You may not get what you want, but asking never hurts!
Right Start Mortgage: Your Mortgage Experts Since 1989
Contact the expert mortgage advisors at Right Start Mortgage for more information. Whether you want to purchase or refinance your home, we’re here to help. Get started today! Request a free personalized rate quote.