How to shop for and compare mortgage lenders

Consider the type of mortgage you want

You can get many types of mortgages, including conventional, jumbo, adjustable-rate, fixed-rate and government-guaranteed mortgages. But not all lenders offer the same options. So, determining the type of mortgage you want can help you narrow your choices.

As you compare mortgages, consider your circumstances, future plans and risk tolerance, says Dennis Shirshikov, head of growth at Awning, a company that supports rental property owners.

“Let's say you're planning on living in the home for a long time, and you like the idea of a fixed payment,” said Shirshikov. “A fixed-rate mortgage might be the best choice. On the other hand, if you know you'll only be there a few years, you might lean towards an adjustable-rate mortgage, which typically has a lower initial rate.”

If you’re risk-averse, a fixed-rate mortgage might be a more comfortable decision since you know the rate will never change.

“I recall a couple who were planning on starting a family and wanted the stability of fixed payments, despite the higher initial rate,” said Shirshikov. “Their peace of mind was worth the cost.”

» MORE: How does a mortgage work?

Understand repayment terms

A loan’s repayment terms primarily consist of two things: the interest rate and how long you have to repay the loan.

Interest rate

Fixed-rate mortgages feature an interest rate that never changes, whereas the interest rate on adjustable-rate mortgages (ARMs) changes at set intervals.

As you decide which type of interest rate you prefer, consider whether you prefer a consistent monthly payment or are comfortable with potential rate fluctuations, says Loren Howard, founder of Prime Plus Mortgages. If you’re uncomfortable with interest rate changes, it’s best to avoid an ARM.

Term length

With most mortgages, the loan is fully repaid at the end of the repayment term. The most common repayment term is 30 years, but terms can range from 10 to 25 years.

Some ARMs amortize your monthly principal and interest (P&I) payment based on a long term mortgage, like 30 years, but with a shorter repayment term — meaning you must pay off the remaining balance in full before the term expires (commonly in five to 10 years). This lump-sum payment is often referred to as a balloon payment.

When considering a mortgage with a balloon payment, evaluate if you can make this payment when the loan comes due, either with cash or by refinancing the remaining balance into a new mortgage. If you can’t repay the balance when it comes due, you risk losing the home to foreclosure.

Check current mortgage rates

According to data from the Federal Reserve Bank of St. Louis, the average rate on 30-year fixed-rate mortgages was 6.78% as of July 20, 2023. However, mortgage rates change daily — sometimes multiple times — so it’s important to carefully monitor rates when shopping for a mortgage. A good rate falls near the current average.

You may qualify for a better-than-average rate if you have good-to-excellent credit. But if your credit score is low, expect to pay a higher rate.

You can also get a better rate by doing such things as making a larger down payment and only getting a loan you can afford. Lenders typically look at your debt-to-income (DTI) ratio to see how easily you can afford the loan. This ratio typically shouldn’t exceed 36% to 43%.

Shop around for different lenders

When comparing mortgage lenders, consider these factors to ensure you get the best deal and service possible.

• Customer service: You should be able to contact a representative quickly and easily if you have any questions or problems.
• Online access: Most mortgage lenders have an online presence. Check out the websites of the lenders you're considering to see how easy they are to use.
• Reviews: Reading online reviews, such as those published on ConsumerAffairs, can help you learn about other borrowers’ experiences with different lenders.
• Seek referrals: Ask friends, family and real estate agents for recommendations.

Once you've considered these factors, you can start narrowing down your lender pool. If you still can’t decide, consider working with a mortgage broker. A mortgage broker can help you compare rates and terms from multiple lenders and find the best deal.

Seek pre-qualification for a mortgage

A mortgage pre-qualification estimates how much money you can borrow to buy a home. The amount is based on your income, existing debt and credit score. A pre-qualification is not a guarantee of a loan, but it can give you an idea of what you can afford and help you decide where to apply for a mortgage.

To get pre-qualified, you'll need to provide a lender with basic information, such as your job history and details about your income, debts and assets. The lender will use this information to calculate your DTI and credit score and determine how much money you can borrow.

Once pre-qualified, you'll receive a letter from the lender stating how much money you can borrow. This letter can be helpful when making an offer on a home, as it shows the seller you're serious about buying and have the means to do so.

Get pre-qualified by multiple lenders before you start making offers on homes. This will give you a better idea of the interest rates and terms available. It will also help you negotiate the best deal on your home.

Here are some tips for getting pre-qualified for a mortgage:

• Make sure your credit score is in good shape.
• Get your finances in order by paying down debt and having a steady income.
• If you don’t get pre-qualified with the first lender you try, continue to shop around, as each lender has different lending requirements.

» MORE: How to buy a house

Get a loan estimate and compare

After you apply for a mortgage, you’ll get a loan estimate. This document provides detailed information about your loan terms, including the interest rate, monthly payment and closing costs. Review this document carefully before you agree to any loan.

Multiple mortgage estimates within a 45-day window only count as one hard inquiry on your credit score.

Here are some things to pay close attention to in your loan estimate:

• Interest rate: Check if you’ll receive a fixed rate that will never change or an adjustable rate that will change occasionally.
• Repayment term: Terms commonly range from 10 to 30 years. If you choose an adjustable-rate mortgage, see if you’ll be required to make a balloon payment before the loan is fully repaid.
• Closing costs: These are the fees you’ll pay to close on the loan, such as appraisal fees, title insurance and origination fees.
• Annual percentage rate (APR): This includes the interest rate as well as other fees associated with the loan.
• Monthly payment: This is the total amount of money you’ll have to pay each month, including the principal and interest and any taxes or insurance that are escrowed into your monthly payment.

Get loan estimates from at least three lenders before deciding where to get your mortgage. This will help you compare terms and rates to find the best deal possible.

Remember that when you apply for a mortgage, the lender will check your credit, and a hard credit inquiry will temporarily lower your credit score. However, if you get multiple mortgage loan estimates within 45 days, it only counts as one hard inquiry, so you won’t need to worry about this if you’re shopping around for a mortgage.

In addition, some lenders use a soft credit check to pre-qualify or preapprove you for a loan. Soft inquiries do not affect your credit score.

Negotiate

You’re not obligated to accept the first offer you receive. You can negotiate with lenders for a better interest rate, lower closing costs or other concessions.

Here are some tips for negotiating with lenders:

• Do your research and get preapproved by multiple lenders. This will give you a good idea of available rates and terms.
• Be prepared to walk away from the deal if you don't get the terms you want. Lenders are more likely to negotiate if they know you're serious about taking your business elsewhere.
• Be polite and professional, but don't hesitate to ask for what you want. Keep in mind you're the one who's going to be paying the mortgage, so you deserve to get a good deal.

When talking to lenders, mention the loan estimates you've gotten from other lenders. This will show them you're serious about getting the best deal possible. You can also ask them to match or beat other lenders’ rates and terms.

Negotiating a mortgage can be complex. If you're uncomfortable doing it yourself, consider using a mortgage broker instead.

Bottom line

When buying a home, it's essential to consider the type of mortgage you want, the repayment terms and current mortgage rates. You should also shop around for different lenders and get pre-qualified for a mortgage.

Once pre-qualified, you can get a loan estimate and negotiate with lenders for the best deal possible. Applying these tips when shopping for a loan can make the homebuying process less daunting.