Home Buying a Home How to Shop for a Mortgage: Comparing Loan Types, Rates, Fees, and Lenders

How to Shop for a Mortgage: Comparing Loan Types, Rates, Fees, and Lenders

by Angela Brown
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Starting any new relationship can feel nerve wracking, but a long-term relationship with a financial company can feel downright overwhelming. While finding the right company to trust with one of your biggest financial purchases takes work, it doesn’t have to be scary. Once you understand what to look for in a mortgage, narrowing down your list of potential lending partners gets a little bit easier. 

One of the most important things you can do is approach the situation like you’re in charge. Yes, lenders have the power to approve or deny your loan application, but you have control over the loan type, rates, and terms you ultimately accept. 

Instead of approaching your search for lenders like someone asking for a favor, approach the process like a savvy shopper. Savvy shoppers know what they’re looking for, so it’s easier to find a good deal. 

Here’s What to Look For When Shopping for a Mortgage

Before you can find the right mortgage, you should know about the different loan types and terms available. You should also be aware of assistance programs that can help you cover down payments or provide helpful tools if you’re a first-time buyer. Some of the critical factors you’ll consider when choosing a mortgage include:

  • Loan types
  • Rate options
  • APR
  • Lender Fees
  • Down payment requirements
  • Home buyer assistance programs

Identify the loan type that works best for your financial situation

There are several different types of mortgage loans. The most common include:

Conventional loans: Conventional loans are made available through private lenders such as banks or credit unions and are not insured by the government. While these loans tend to offer some of the best rates, they also tend to be the hardest to qualify for, with lenders generally requiring a minimum credit score of 660. A conventional loan may also require a minimum down payment in order to avoid paying private mortgage insurance (PMI). 

Conventional loans can be broken down further into conforming and non-conforming loans. A conforming loan adheres to borrowing limits set by the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Non-conforming loans exceed the maximum loan amounts set for a particular property type, which for most of the U.S. is $548,250 for a single family home in 2021. To obtain a non-conforming loan (often called a jumbo loan), the borrower may be required to have a higher credit score, lower debt-to-income ratio, larger down payment, or all of the above. 

FHA loans: FHA loans are insured by Fannie Mae and Freddie Mac. Borrowers with credit scores as low as 580 may qualify for a loan with a down payment as little as 3.5%. Borrowers with scores as low as 500 could qualify for a loan with a downpayment of 10%. FHA loans have private mortgage insurance fees for borrowers who contribute less than 10% towards the down payment. The first PMI fee is paid upfront at the time of purchase. The second is paid over the life of your loan. 

USDA loans: A USDA loan is also covered by federal insurance. These loans are specifically for buyers purchasing a home in a rural or low-population area (35,000 residents or less) who do not qualify for a conventional loan. While USDA loans typically don’t require a down payment or minimum credit score, applicants must demonstrate their ability and willingness to repay the loan. There are two types of USDA loans: guaranteed and direct. A guaranteed loan is backed by the government but offered through a private borrower, who sets their own interest rate. Therefore, it can be helpful to shop around for different lenders and have a credit score of 640 or more to qualify. The USDA direct loan program is specifically for low- to very-low-income borrowers who are unable to obtain a mortgage through other means. Loan terms for direct USDA loans are often 33 years and can extend all the way to 38 years.

VA loans: Active duty and military veterans (and their spouses) can use a VA loan to purchase a home with no down payment and no PMI requirement. VA loans offer borrowers competitive interest rates and limited closing costs. Borrowers can save even further on closing costs – the most significant being the 1.4-3.6% VA funding fee – with a modest downpayment of 5-10%. To qualify for a VA loan, you will need to obtain a certificate from the VA website. However, the VA does not actually lend out the money. This is instead done by a private lending institution, such as a bank or credit union. While a private lender may have their own credit and underwriting requirements, the benefits of the loan are set by the VA and are generally the same no matter which lender you choose. 

Determine what interest rate option you want

Lenders separate their loans into two main interest rate categories: fixed-rate and adjustable. These determine how the interest rate is charged and can affect your monthly payment. 

Fixed-rate mortgage: The fixed-rate mortgage has the same interest rate through the entire life of the loan. If your interest rate is 5% the day you sign the documents, it will stay 5% until you make your last payment (or decide to refinance). Your monthly payment will also remain the same. You always have the option to refinance to a lower rate if your financial situation changes or if you want to eliminate private mortgage insurance from your monthly payment, which you can generally do once you have 20% equity in your home. 

Adjustable-rate mortgage: Adjustable-rate mortgages do not stay the same. Typically, lenders will offer a lower promotional rate for the first year or so. Once that rate ends, the interest rate increases to match the market. The interest rate on the loan can adjust multiple times over the life of the loan. These changes also mean the monthly payment can change. However, there are caps on how often the rate can change and by how much. 

Understand your APR

The term APR (annual percentage rate) represents the total yearly cost of your loan. This number includes both your interest rate and any fees charged by your lender.

Specifically, your APR is made up of:

  • The interest rate on your loan
  • Closing fees
  • Point fees
  • Loan origination fees

A lender calculates your APR by adding together the total fees and interest to be paid over the life of your loan and then dividing that by the total number of days in your loan term. That number is then multiplied by 365 to produce your annual rate, which is converted into a percentage by multiplying again by 100. 

While your interest rate is important for estimating your approximate monthly payment when shopping for a loan, your APR will give you a more accurate picture of the total cost of your loan over the long term. Lenders are required to disclose both the APR and interest rate before a borrower is legally bound to repay a loan. Don’t be afraid to ask your lender to explain their APR and what fees it includes in addition to your interest rate. 

Know the meaning behind different fees 

Ask your lender what type of fees they charge. Some of the most common types of fees include: 

  • Closing costs
  • Underwriting fee
  • Loan origination fees
  • Application fee
  • Rate lock-in fee
  • Flood certification fee
  • Discount fee
  • Courier fee
  • Taxes
  • Filing fees
  • Title fees
  • Document preparation fees
  • Appraisal fees
  • Credit report fee

When you apply for a loan, your lender will provide you with a closing disclosure statement. This statement should list out all of the fees your lender charges. Make sure you read this document carefully. 

You may be able to negotiate certain closing costs, like the loan origination fee or filing fees, but you won’t have any luck with any local or state taxes. Additionally, you may save on some of the fees by shopping around. For example, you don’t have to use the lender’s “preferred” title company for title insurance. 

Study your down payment options

For many buyers, a downpayment is a significant source of concern. Saving $30,000 or more for an initial house payment can feel overwhelming. Fortunately, there are many down payment options for borrowers. The down payment required will vary depending on your lender, your credit score, and the type of loan you obtain. 

While a 20% down payment has numerous benefits (including an exemption from private mortgage insurance), it’s not a requirement for many loans. For example, FHA loans allow borrowers to purchase a home with as little as 3.5% down, and VA loans require no down payment at all from qualified borrowers. 

If you need a loan with a lower down payment requirement, be sure to choose a lender who offers a variety of conventional and government-backed loan options. 

Research assistance programs available to home buyers

There are a variety of assistance programs that can help buyers afford to purchase a home. One of the most common types of programs is a down payment assistance program (DPA).

A down payment assistance program helps potential buyers cover some or all of the cost of their downpayment. While this can be a great way to ensure you have an attractive offer when the time comes, lenders usually aren’t keen on them. Some potential pitfalls of using down payment assistance include:

  • Sellers may be hesitant to accept offers with this type of financing, for fear the offer isn’t strong enough.
  • Down payment assistance can slow the closing process. 
  • Many down payment assistance programs have income limitations. 
  • If you use a down payment assistance program you may have higher rates on your loan. 

Other popular options are first-time buyer programs, which are often listed out by state. First-time home buyer programs are designed to make homeownership more affordable and generally available to assist with down payments and closing costs. Some programs, like those for active or former service members, also offer discounted interest rates. 

Additionally, the Department of Housing and Urban Development offers initiatives like the Good Neighbor Next Door program, which offers law enforcement officers, firefighters, emergency medical technicians and K-12 teachers the ability to purchase homes in revitalization areas for a steep discount, usually 50% of the list price, in exchange for making the home their primary residence for at least 36 months.

You should plan on doing some research on assistance programs yourself, but a good lender will also be able to provide information on the various types of assistance available. Further, if you need to work with an assistance program and your lender balks at the idea, it’s a good idea to keep shopping for a lender who is eager to work with your situation and help you get into a home.

Compare Mortgage Lenders

Once you have the goals for your loan identified, it’s time to start searching for a lender. Jack Brousseau, Director of Sales for REX Home Loans, suggests reaching out to at least three to ask about their loan products, interest rates, and lending fees. If you’re not exactly sure what to ask, here are some questions to guide you through the process of shopping for a lender.

Reaching out to multiple lenders is an essential part of the mortgage process. An estimated 50 percent of borrowers don’t compare mortgage rates. Not comparing lenders can be a costly mistake. According to NerdWallet, comparing rates from at least five lenders could save a buyer an average of $430 in interest payments in the first year of homeownership alone.

If you’re serious about buying a home, consider getting pre-approval letters from a few lenders before you start touring homes. Pre-approval will not affect your credit score until your follow through an apply for the loan. Submitting loan applications with different lenders will allow you to compare their total packages. Even then, if you complete all of your loan applications within a month, credit bureaus will be consider them as one inquiry, and the damage to your credit score will be minimal. 

Find Competitive Rates and Terms with REX Home Loans

REX Home Loans offers a quick pre-approval process to help jump-start your home search. By removing the high cost of commissions for our loan advisors, we offer competitive rates on both conventional and government-backed loans. Because our mortgage advisors don’t work on commission, there is never any pressure to go with one lender over another. Our goal is to help you find the best lending option for your mortgage, while bringing greater ease and transparency to the borrowing process.

If you’re curious about your home financing options, get in touch with REX. With brokerage, mortgage, title and escrow, insurance, and home services all under one roof, we’re with you every step of the way toward finding, financing, and closing on your next home. Plus, with our 1% cash back program, our buyers save an average of $6,500 in fees when compared to working with a traditional real estate agent.

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