• Ben Stiller
• Nov 10, 2023
• Mortgage Process
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Buying a home is one of life's most significant milestones, and it comes with a set of financial choices that will influence your life for years to come. Securing a mortgage is one of the pivotal decisions you'll make when purchasing a house. To ensure you get the best deal and make an informed choice, here are some details to remember when shopping for a mortgage.

How to Shop for a Mortgage: The Process

Before searching for a lender, it's essential to understand the fundamental aspects of the mortgage process. Most mortgages require a down payment, typically ranging from 3% to 10% of the home's total sale price. While a 20% down payment is a common goal, your specific financial situation will dictate the amount you can afford.

The total mortgage amount is determined by subtracting your down payment from the home's purchase price. You'll also need to factor in additional expenses, such as closing costs and fees, which typically range from 2% to 5% of the home's purchase price.

Mortgage terms vary but usually fall into 10, 15, 20, or 30-year options. During this time, you'll make monthly payments covering three main components:

Principal: This is the amount borrowed, excluding interest or what you've already paid off.

Interest: The fee charged by the lender for borrowing the principal - is based on the lender's annual percentage rate (APR).

Escrow: An account holding funds for expenses like homeowners' insurance, property taxes, and, if required, mortgage insurance.

The lender retains the deed to the home during the repayment period. Once the mortgage is paid in full, the deed transfers to you. However, if you default on payments, the lender can foreclose and take possession of the home.

Types of Mortgages

Mortgages fall into two broad categories: conventional loans and government-insured loans.

Conventional Loans: Offered by banks, credit unions, and mortgage lenders, these loans are not backed or insured by government agencies and may be sold to different lenders shortly after closing.

Government-Insured Loans: Backed by government agencies, these loans are originated by private lenders. They are designed to assist homebuyers who might not qualify for conventional loans. Examples include:

Moreover, mortgages can be categorized as either fixed-rate or adjustable-rate mortgages (ARM):

Fixed-Rate Mortgage: The interest rate remains constant over the loan term, providing predictability for monthly payments, albeit potentially with slightly higher rates.

Adjustable-Rate Mortgage (ARM): These mortgages start with a fixed rate and shift annually according to market rates. For example, a 7/1 ARM has a seven-year fixed rate, followed by annual adjustments. ARMs may offer lower initial rates but come with more risk due to potential rate fluctuations.

Checking Your Credit Score and Report

Lenders assess your FICO® Scores and credit reports when you apply for a mortgage. Typically, lenders review scores from all three national credit bureaus (Experian, TransUnion, and Equifax) and use the middle score for decision-making. For joint applicants, the lower middle score is considered.

Each type of loan has specific credit score requirements:

To enhance your credit readiness, maintain timely bill payments, reduce credit card balances, and avoid new credit applications. Once your credit is in good standing, you can seek out mortgage offers. Start with a mortgage pre-approval. While these terms are often used interchangeably, they have distinct meanings:

How to Shop for a Mortgage

The final step in finding the ideal mortgage is shopping for the best rates. Multiple lenders must access your credit report, resulting in several credit pulls. However, credit scoring models often group these inquiries together if they occur within a short period. Comparing offers from multiple mortgage loan officers is how borrowers secure the best rate for their mortgage.