Finding The Best Mortgage: A Shopper's Guide

Shopping for a mortgage is a crucial step in the home-buying process. It involves finding a lender that offers the best rate, loan options, and customer experience. Affordability is a significant factor in selecting the right lender, as interest rates, fees, closing costs, and down payments influence the overall cost of a mortgage. To find the best deal, it is essential to compare rates and terms from multiple lenders, including traditional sources such as banks and credit unions, as well as non-bank financial companies. Online lenders and comparison websites offer a convenient way to shop and compare current mortgage rates. Additionally, understanding your credit score and debt-to-income ratio can help secure a more favourable mortgage rate.

Compare rates from multiple lenders

Comparing rates from multiple lenders is a crucial step in getting the best mortgage deal. It can easily yield thousands of dollars in savings. Research from Freddie Mac shows that borrowers can save $600 over the life of their loan by getting just two extra quotes and $1,200 or more by getting five quotes.

When comparing rates, it's important to consider more than just the interest rate. The fees, closing costs, and down payment requirements will also impact the overall cost of the mortgage. Lenders may also add points to a loan offer to make their interest rate seem more competitive, so be cautious of this when comparing rates.

It's a good idea to get pre-approved by at least three lenders. This will allow you to get a real understanding of the rates on offer and the amount you're able to borrow. Each lender will provide you with a Loan Estimate, making it easy to compare interest rates and fees.

You can compare rates from lenders by checking their websites or using online comparison tools, which allow you to compare rates from multiple lenders simultaneously. You can also speak to a mortgage broker, who can help you find a deal with a lender and work out the details of the loan. However, don't just accept the first offer you receive, and be sure to compare the terms and conditions of loan offers yourself.

Understand your credit score

Understanding your credit score is crucial when shopping for a mortgage. Your credit score is a numerical representation of your ability to pay back a debt obligation. Lenders will refer to your credit score to assess how well you handle debt and determine your loan eligibility and terms. A higher credit score demonstrates your reliability and stability as a borrower and can help you secure a lower interest rate.

Credit scores typically range from 300 to 850. The score required to qualify for a home loan varies depending on the lender and the loan type, but it is generally between 580 and 620. Some lenders may approve a score as low as 500, but a higher score will give you access to more options and lower interest rates.

When you apply for a mortgage, lenders will obtain your credit score from the three major credit rating agencies: Experian, TransUnion, and Equifax. They will then use the middle or median score to qualify you for a home loan. If there are two or more borrowers on a mortgage loan, the lowest median score of all clients is usually considered. An exception to this is a conventional conforming mortgage with multiple borrowers backed by Fannie Mae, in which case the lender typically averages the median score of the borrowers.

You can obtain your credit score and report from FICO for a monthly fee of $29.95 to $39.95. This service generally includes monthly updates, allowing you to monitor your credit health. Additionally, you can receive a free copy of your credit report, excluding the score, from each of the three major credit bureaus once per week from AnnualCre.

It is important to note that shopping around for a mortgage can impact your credit score. Each lender performs a hard pull credit check, which can lower your credit score by several points. Therefore, it is recommended to submit your applications within a few days so that they are counted as one pull.

Assess your debt-to-income ratio

Your debt-to-income ratio (DTI) is a key factor in mortgage approval. Lenders use it to determine how well you manage your monthly obligations and if you can afford to take on more debt. The DTI is the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, and other debts. It's calculated by dividing your monthly debt payments by your monthly gross income.

Lenders generally view a lower DTI as more favourable. A lower DTI indicates that you are adequately managing your debt, and it also means that you are more likely to be approved for a loan and get a better interest rate. A DTI of 20% or below is considered excellent, while a DTI of 36% or less is considered ideal. Most mortgage programs require a DTI ratio of 43% or less, and lenders may approve borrowers with DTIs as high as 50%. However, a higher DTI may result in a higher interest rate and less favourable loan terms.

There are two types of DTI ratios: front-end and back-end. The front-end ratio, or housing ratio, calculates the percentage of your monthly gross income that would go towards your housing expenses, including your monthly mortgage payment, property taxes, homeowners insurance, and homeowners association dues. Lenders typically say that the ideal front-end ratio should be no more than 28%. The back-end ratio includes all of your monthly debt obligations, such as credit card bills, car loans, student loans, and any other revolving debt, in addition to your mortgage payments and housing expenses. Lenders typically want the back-end ratio to be no higher than 36%.

Before calculating your DTI, make sure to request a free credit report to avoid missing any outstanding balances. When calculating your DTI, include all your monthly debt payments, such as credit cards, student loans, personal loans, and any other recurring monthly debt payments. If you are applying for a mortgage with a co-borrower, include both partners' debt payments. Then, divide the total debt payments by your monthly gross income (your income before taxes and other deductions).

Keep in mind that your DTI is just one factor that lenders consider when evaluating your loan application. They will also look at your credit history, credit score, and total assets. It's important to assess your DTI and understand your financial health before applying for a mortgage to ensure you get the best terms and interest rates.

Explore different loan terms

When shopping for a mortgage, it's important to explore different loan terms to find the best fit for your financial situation. Here are some detailed tips to help you navigate this process:

Understand the Basics of Loan Terms:

Firstly, familiarise yourself with the basic concepts of loan terms. The term of a loan refers to the duration over which you will repay the borrowed amount. Typically, loan lengths can vary from 10 to 30 years, and this is an important factor to consider when comparing different mortgage offers. Shorter loan terms generally result in overall savings but come with higher monthly payments since you're paying off the loan and interest over a shorter period.

Fixed vs. Adjustable Rates:

Interest rates come in two main types: fixed and adjustable. Fixed-rate mortgages lock in your interest rate, keeping your monthly payments stable throughout the loan term. This option is popular among borrowers who value predictability and long-term certainty regarding their loan costs. On the other hand, adjustable-rate mortgages (ARMs) may offer a lower initial interest rate, but this rate can fluctuate over time, leading to potential increases in your monthly payments. While ARMs can be cheaper in the short term, they offer less predictability, and you could end up paying more if you stay in your house longer than expected.

Compare Loan Estimates:

Always compare official loan proposals, known as Loan Estimates, before making a decision. Lenders are required to provide these estimates, and they outline the key terms and costs associated with the loan. By comparing these estimates, you can identify potential surprises or risks associated with the loan, such as prepayment penalties, balloon payments, negative amortization, or interest-only loan structures. If you have any concerns, ask the lender for clarification and consider requesting a Loan Estimate without the concerning feature to better understand the cost difference.

Assess Your Financial Situation:

Your financial health will play a significant role in determining the loan terms that are best suited for you. Consider your credit score, income, debt levels, and overall financial stability. Lenders will assess these factors when evaluating your loan application. A higher credit score and a lower debt-to-income ratio (DTI) can improve your chances of securing favourable loan terms. Additionally, a larger down payment can decrease the perceived risk to lenders, potentially resulting in lower interest rates and avoiding the need for private mortgage insurance (PMI).

Research and Compare Lenders:

Explore a variety of mortgage lenders, including banks, credit unions, online lenders, and brokers. Each lender may have unique offerings, rates, and loan types. By comparing multiple lenders, you can identify the most competitive rates and find a lender that aligns with your long-term financial goals. Remember to consider not just the interest rates but also the closing costs, fees, and other factors outlined in the Loan Estimates.

Choose between a mortgage broker and a lender

When shopping for a mortgage, you have two main options: working with a broker or going directly to a lender. Here are some things to consider when choosing between the two:

Mortgage Broker

Mortgage brokers are professionals who can help you find and negotiate a deal with a lender. They have relationships with multiple lenders and are knowledgeable about the various home loan products offered. This means they can save you time by reviewing your financial situation and goals and then presenting your information to multiple lenders to get quotes. Brokers can also manage the loan approval process and act as a central point of communication between you and the lender.

One potential benefit of using a broker is that they can often get you a better rate from a bank than if you went directly to the bank yourself. This is because banks want to generate more business and are willing to offer lower rates through brokers. However, it's important to remember that brokers are not required to present every available option to you and may focus on products from their "preferred" lenders. Additionally, while brokers must disclose their commission, their fees may not always be entirely offset by a credit from the lender, potentially resulting in an origination fee.

Direct Lender

When you choose a direct lender, you work directly with them throughout the loan process. Lenders provide the funds for your home purchase and set their own requirements for issuing a loan, such as minimum credit score or debt-to-income ratio. Going directly to a lender allows you to compare rates and terms from multiple lenders and negotiate for the best deal. You can also use online lenders and comparison websites to shop for mortgage rates efficiently.

It's recommended to shop around and get quotes from at least three lenders to find the most favourable interest rates, terms, and other factors. Additionally, a larger down payment can decrease your perceived risk to lenders, potentially resulting in lower interest rates. Checking your credit score before approaching lenders for quotes is also advisable, as a higher credit score can lead to lower mortgage rates.

Frequently asked questions