Does shopping for a mortgage  get your nerves in a tangle or give you little fizzes of excitement? 

The reality of shopping for a mortgage is that it will feel different than poking through online listings, driving around suitable neighborhoods or talking through real estate “how-tos” with a real estate agent. Shopping for a mortgage is a more number-crunching process than looking at master bathrooms. 

In this guide we’ll help you determine when to start shopping for a mortgage, suggest a reasonable number of mortgage quotes you should get and help you compare mortgage rates.

Let’s walk through the finer points so you can feel comfortable when you buy a home.

How to Shop for a Mortgage

First, you will want to get your finances in order. This could involve paying down debt, saving money for a down payment and checking your credit score to make sure your creditors reported the correct information. For example, one of your creditors may erroneously report that you haven’t paid off a particular loan, when you actually have paid it off. You can check your credit at annualcreditreport.com or through another reporting site.

You may also want to try lowering your debt-to-income (DTI) ratio, which refers to the relationship between your debt and gross monthly income. You can calculate your debt by adding up your fixed monthly expenses. This can include rent, child support, student loan payments, personal loans and other recurring expenses. Your gross monthly income can include your wages or salary, a pension, side hustle income, Social Security payment and/or other additional income you receive.

Calculate your DTI using the following equation: 

Monthly Bills ÷ Gross Monthly Income (income before taxes) = DTI Ratio

You may want to get a mortgage pre-approval to see how much home you can afford. A pre-approval will show you how much of a loan you can get from a mortgage lender to purchase a home. 

Lenders, mortgage brokers or credit unions will need the following information for a pre-approval:

  • Proof of income and assets
  • Employment verification
  • Credit check
  • Social Security number

Your lender will also need the following documentation (note that Morty doesn’t collect this information until after you request to lock your interest rate):

  • W-2 statements
  • Pay stubs
  • Bank statements
  • Driver’s license or state ID
  • Tax returns (if you’re self-employed)

Compare the offers you receive through your broker, based on the following: 

  • Interest rate: Your interest rate is the ongoing percentage of the loan you pay to your lender for borrowing from them.
  • Closing costs: Closing costs are processing fees from your loan and can include everything from an application fee to searches on your home’s title. You pay them when closing on your mortgage.
  • Mortgage points: Also called discount points, mortgage points go toward the lender at closing in order to get a reduced interest rate.

Use competing offers to negotiate your rates with different mortgage lenders and finalize your loan application. Morty can help you with this process with our mortgage marketplace.

When Should You Start Shopping for a Mortgage?

It’s best to get pre-approved early on so you’ll have your mortgage pre-approval letter in hand before you start shopping for a home. It can help lenders take you more seriously.

However, do not shop for a mortgage if you’re not ready to buy. A credit check for a pre-approval can affect your credit score — you don’t want to knock down your credit score any more than you have to.

The interest rate you lock in can only be guaranteed for a certain amount of time, depending on your lender. For example, at Morty, your pre-approval offer will expire after 90 days due to the validity timeline of the credit inquiry.

How Many Mortgage Quotes Should You Get?

You can apply for a mortgage with an unlimited number of lenders, but at a minimum, you may want to consider getting three to five mortgage quotes. The more quotes you get, the more money you can potentially save.

A digital online pre-approval process like Morty’s allows you to input specific information online. You’ll find out quickly how much money you can borrow to purchase a home. 

How to Compare Mortgage Rates

All mortgage offers come in the same format called a Loan Estimate. A Loan Estimate is a three-page form that you get after applying for a mortgage and which gives you details about the loan you are eligible to get. You can quickly compare the rates, fees, loan term and other information using a Loan Estimate.

Make sure all your loan offers are for the same loan type (conventional, FHA, VA or USDA loans, for example): 

  • FHA loans: The Federal Housing Administration (FHA) insures FHA loans. If you have credit challenges or less in savings, you may want to consider a FHA loan. You’ll have to put down at least 3.5% and have a credit score of 500 or higher. 
  • Conventional loans: The U.S. government does not directly back conventional loans. You’ll need a credit score of at least 620 to qualify for a conventional loan (based on Agency guidelines.) First-time homebuyers may qualify for a conventional loan with a 3% down payment.
  • VA loans: Qualified veterans, active service members and their spouses can get VA loans through lenders. The Department of Veterans Affairs (VA) backs these loans. VA loans do not require a down payment. The VA also doesn’t ask for a specific credit score from those who qualify. 
  • USDA loans: Backed by the U.S. Department of Agriculture, USDA loans offer another government-backed option. Borrowers must live in a qualifying rural area and meet specific income requirements to qualify for USDA loans. USDA loans do not require a down payment, nor do they  have a fixed credit score requirement.

In addition to the right type of loan, make sure all quotes compare the same type of rate, whether a fixed-rate mortgage, in which the interest rate stays the same for the life of the loan, or an adjustable-rate mortgage (ARM), which refers to a type of mortgage that has an interest rate that varies throughout the life of the loan.

Finally, compare monthly mortgage payments to see which loan will cost you less on a month-to-month basis.

What is a Good Mortgage Rate?

Mortgage rates are low right now as of December 2021, around 3% on average. However, individuals who get the best mortgage rates are those with higher credit scores (due to positive credit histories), low DTI ratios, plenty of assets and money in savings and a large down payment. Let’s take a closer look. 

Stellar Credit Scores

The best mortgage rates are reserved for top-tier borrowers with stellar credit scores (740 or higher).

A quick rundown of FICO scores: Your credit score can range from 300 to 850. You can use these general guidelines from FICO, a highly regarded consumer lending entity in the U.S.:

  • Excellent credit score: Higher than 720
  • Good credit score: Between 690 and 719
  • Fair credit score: Between 530 and 589
  • Poor credit score: Below 520  

Low DTI Ratio

To get the best mortgage rates, you also want to have a low debt-to-income ratio (DTI) of less than 43%. Lenders will also check your front-end DTI ratio and back-end DTI ratio. Let’s walk through what both of those mean.

  • Front-end DTI ratio: The front-end DTI ratio uses home-related expenses in the calculation, such as your future monthly mortgage payment, property taxes and homeowners insurance.
  • Back-end DTI ratio: The math problem we shared above (Monthly Bills ÷ Gross Monthly Income (income before taxes) = DTI Ratio) calculates your back-end DTI ratio. The back-end DTI ratio includes all recurring monthly payments — not just housing expenses. Your back-end DTI ratio gives lenders a wide view of the amount you spend each month.

Plenty of Assets and Savings

What kind of assets do you have and how much do you have in savings? Lenders will want to know. Here’s a quick example. You might share with your lender that you have equities or fixed income. Equities refer to shares of a company that you expect to rise due to capital gains or the generation of capital dividends. A share of stock represents an equity interest in a company. Fixed income includes investments in which the borrower or issuer must pay fixed payments on a predetermined schedule to you. Bonds are a good example of fixed income investments.

A Large Down Payment 

The larger your down payment, the more likely you’ll get a low interest rate. If you put down a 20% down payment or more, you’ll avoid paying private mortgage insurance (PMI) on a conventional loan. PMI protects your lender if you default on your loan. 

Let’s say you borrow $150,000 to buy a home. You must put a 20% down payment — $30,000 — in order to avoid PMI. 

The Bottom Line

Mortgage rates are low right now, around 3% on average, but you may want to put some time into putting your personal financial situation in order first. Looking into your mortgage loan options or loan products often involves paying down debt, saving money for a down payment and checking your credit report. Additionally, you may want to lower your debt-to-income (DTI) ratio, boost your credit scores and determine how much you have in savings. 

Get a mortgage pre-approval to see how much home you can afford. A pre-approval will show how much of a loan you can get from a mortgage lender to purchase a home. 

Once you receive offers from lenders, you can compare interest rates, closing costs and mortgage points. Use the competing offers to negotiate rates with lenders.

Consider getting three to five mortgage quotes. The more quotes you receive, the more money you can potentially save.

Make sure all of the loan offers are for the same loan type, compare the types of rates and monthly mortgage payments to see which loan will cost you less on a month-to-month basis.

Putting down 20% or more can help you get the lowest interest rate possible for your mortgage.

Ready to shop around for your mortgage or learn more about rates and fees? Check mortgage rates with Morty today.