How to Shop Around for a Mortgage: A Step-By-Step Guide
If you’re thinking about buying a home in the near future, you’ve likely heard the phrase, “shop around for a mortgage” before. But, do you really know what it means to shop around for a home loan? If you don’t, you’re not alone. This is standard advice, but in practice, it can feel vague and intimidating to a first-time homebuyer. That’s why we’ve brought you a step-by-step guide to this process. Keep reading to learn what shopping around for a mortgage means, why it’s important, and how to do it right.
What does it mean to shop around for a mortgage?
At its core, the phrase “shopping around for a mortgage” refers to the process of getting quotes from different lenders before you apply for a loan. As a rule of thumb, it’s a good idea to get quotes from at least three different financial institutions before you make your decision about where to apply. There are many factors to consider such as mortgage rate, closing costs, loan term, mortgage insurance, and much more.
While mortgage shopping around can feel like extra work at the moment, in the long run, it can help you save money. Sometimes, it can help you save quite a bit. A 2018 study by Freddie Mac found that consumers saved an average of $1,500 when they got an extra quote on their mortgage. If they got five quotes, they saved an extra $3,000. This is why it’s crucial to speak to multiple lenders. Also, you should tell each mortgage broker that you are speaking with different lenders, as this will help you get a more competitive offer. A mortgage lender may offer to help cover some of the closing costs, reduce broker fees, or give you a more favorable interest rate to beat their competition.
How to shop around for a mortgage
Now that you know what shopping around for a loan is and why it’s important, the next step is to learn how to complete this process. With that in mind, we’ve created a step-by-step guide for you below. If you follow each of these steps, you’re very likely to come out of this process with a loan estimate that suits your needs.
Find at least three lenders
As we said above, you’re going to want to get quotes from multiple lenders, at least three. If you don’t have any specific lenders in mind, it’s a good idea to ask family and friends for mortgage lender recommendations. Barring that, you can also read online reviews and research lenders until you find a few that make you feel comfortable.
Gather your financial documents
When you start asking for quotes, each lender is going to ask for copies of some important financial documents. In light of that, it’s easier if you can get the paperwork ready now. Every lender is different, however, here is a general list of the documents that you may need to supply.
- W-2s: If you work for a company, your lender is going to ask for at least two years of W-2s as proof of income.
- Pay stubs: Those who work a traditional 9-to-5 job will also need to provide copies of a recent pay stub with their year-to-date income listed.
- Tax returns: If you’re self-employed or don’t receive a W-2, you’ll need to provide two years of tax returns instead.
- Bank and asset statements: You’ll need to provide recent statements for any bank accounts in your name, as well as other assets like an IRA or 401(k). Every single page of these statements will be needed — even the blank ones — so don’t leave anything out.
Ask for quotes
Once you have your paperwork ready to go, you can visit or call the lenders. You’ll tell them you’re looking for a quote on a home loan. In return, they will ask for copies of your financial paperwork and ask for your permission to perform a credit inquiry with the credit bureaus.
If you are worried about having multiple inquiries on your credit report, don’t be. As long as you ask for all of the quotes within the same time frame, for the same type of loan, the credit bureaus have agreed to count multiple pulls as one. The exact time frame that you need to work within varies by credit bureau. Some give you 14 days while others give you 45. To that end, it’s a good idea to gather your mortgage quotes as quickly as possible just to be safe.
Pick the best one for your unique situation
After you have all of your quotes in hand, look them over and closely consider your loan options. For best results, make sure that you’ve given each lender the same information so that you can make an apples-to-apples comparison. While you’re reading the mortgage quotes, be sure to look at the interest rate, as well as any fees that you will be charged.
The bottom line on shopping around for a mortgage
While mortgage shopping around for a quote may involve a little extra work before you apply for your home loan, it can save you a lot of money. In light of that, use this post as your guide to this process. Armed with this knowledge, you should have a much better idea of how and why it makes sense to shop around before applying for a mortgage loan.