Buying a home is an exciting but often stressful experience for many consumers. There are many decisions to make, from choosing what concessions to make on your house purchase to choosing the right loan. If you plan to obtain a loan to help finance the purchase of your new home, shopping around for the best rate is a great way to save money in the long run. According to the Consumer Financial Protection Bureau, nearly half of mortgage borrowers don’t shop around for lenders. These borrowers are missing out on potential savings because they are accepting the first loan they are offered without trying to find other lenders that may offer them better terms or rates. The Office of Consumer Affairs and Business Regulation created this guide to help consumers make informed decisions about mortgages.
- Pull your credit report
Check your credit report before applying for a home loan to ensure that no errors appear. If there is an error, you can contact the nationwide credit reporting companies (Equifax, Experian, and TransUnion) to resolve the issue. For more information on disputing an error visit the Consumer Financial Protection Bureau (CFPB) website. Federal law allows you to obtain a free credit report every 12 months by visiting annualcreditreport.com, calling 1-877-322-8228, or completing the Annual Credit Report Request Form.
- Set goals for what you want your monthly payment to be and know how much you can afford
Regardless of the loan amount your lender approves for you, you decide the amount you are comfortable paying each month. Consider your lifestyle and make a list of your monthly expenses. Remember to set aside funds to pay for unexpected home repairs.
- Understand what different loan options mean and how they can affect your monthly and long-term payments
- Loan Term: The loan term is how long you have to repay the loan. It is often 30 years or 15 years, but the options can vary. Loan terms are important because they will affect your monthly principal and interest payment, your rate, and the amount you will ultimately end up paying over the life of the loan.
- Interest Rate Type (fixed-rate v. adjustable-rate mortgage (ARM) loans): Fixed rate mortgage loans are set for the life of the loan and will not change. Adjustable-rate mortgage loans can start out with lower interest rates but the rate can adjust—and likely increase—over time.
- An option or payment-option ARM is a type of adjustable rate mortgage which offers several different ways to make payments. Some of the choices can be risky because they do not cover the full amount needed to pay down the mortgage loan.
- Loan Types: The majority of loans are conventional loans, which typically means they are less costly but can be harder to qualify for. You may be eligible for a loan insured through the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans Affairs or other similar programs available through cities or states. These programs usually require a smaller downpayment. There are also loans particularly beneficial for first-time homebuyers.
- Know what to look for when comparing offers
- Interest Rates & APRs: The interest rate (expressed as a percentage) reflects the additional cost you will pay each year to borrow the money. It does not reflect fees or any other charges you may have to pay for the loan. On the other hand, an annual percentage rate (APR) is a more detailed measure. The APR reflects the interest rate, points, mortgage broker fees, and other charges associated with taking out the loan. For that reason, the APR is a good measure to use when comparing loans, but don’t forget to factor in other costs that may not be included.
- Points: Points are what you pay at closing to the lender in exchange for a lower interest rate on the loan. One point equals one percent of the loan. For example, if you take out a $100,000 loan and choose to pay for one point it will cost you $1,000. Consider whether you will be staying in your home long enough to make paying points upfront worthwhile for you.
- Mortgage Insurance
- : If you are making a down payment of less than 20 percent of the purchase price of the home, you will often need to pay for mortgage insurance (sometimes called Purchase Mortgage Insurance, or PMI). Mortgage insurance protects the lender if you fall behind on your payments. The way you pay mortgage insurance will vary by the kind of loan you have.
- Closing Costs: Generally, closing costs are associated with obtaining the mortgage loan. Closing costs often include fees for underwriting or processing, appraisal, plot plan, title insurance, title and recording, and a lender attorney. Federal law requires your lender to provide you with disclosures about these and other costs after applying for the loan and again at closing. You can reduce your costs by comparison shopping of closing costs or by negotiating with your lender.
Shop for Lenders
- Do a broad search online for interest rates in your area
Running a broad search online for rates in your area will give you a general idea of market pricing and can help you narrow down the list of lenders to approach. A helpful tool for running a general search can be found on the Consumer Protection Bureau’s website. Lender information is often found on specific lenders’ websites.
- Search for different loan originators (lenders and brokers) and verify they are licensed
- Lender: Home loans are available from several types of lenders — thrift institutions, commercial banks, mortgage companies, and credit unions. The mortgage lender will determine whether, and in what amount, you qualify for a loan. Lenders also have the ability to act as brokers, so you should ask in what capacity they will be acting when you are deciding whether to use their services.
- Broker: Mortgage brokers do not lend money directly. Their job is to find you a lender. Such brokers have access to several lenders which can mean a wider selection of loan products from which you can choose. Although a broker is working on your behalf, he or she may not necessarily offer the best mortgage products that may be available to you. If you choose to deal with a broker, find out how that broker is being compensated and compare the broker’s fees with other brokers. You may ultimately decide to conduct your own research and save money by eliminating the need to pay a broker’s fee.
- Get preapproved
Being preapproved and being prequalified for a loan are not the same. While a prequalification will give you a sense of how much money you may be eligible to borrow, it is not an offer. Prequalification is based solely on information you supply. The preapproval process, on the other hand, is more official. The lender requests and receives from you, the applicant, more documentation related to your financial status, employment and credit history. Although preapprovals are valid for a period of time, they often contain other conditions that you must meet before final approval for the loan is given.
When you apply for a loan, the lender will pull your credit report. That inquiry of your credit report will also appear on your credit report. If this happens too often in a short period of time, your credit history and score may suffer. But for a major purchase, such as a home, the lenders who are seeking to review your credit history are potential creditors. If their inquiries are within a short time period, typically within two weeks, collectively those inquiries will count as one hard inquiry rather than multiple inquiries. This benefits consumers by allowing them to shop around without damaging credit history.
- Start looking for your new home
Now that you have a good sense of how much you can borrow and have been preapproved, you are in a better position to make an offer when you find the perfect home.
Select the Loan and Make an Offer
- Hire an attorney, if possible
Hiring your own attorney may be in your best interest as he or she can assist you in the different stages of the homebuying process, from dealing with the seller to reviewing the purchase and sale agreement, mortgage documents and closing documents. If you choose to hire an attorney, make sure to ask whether he or she has experience representing home buyers. Always obtain the attorney’s fee information and determine the extent of legal representation you need at the outset.
- Submit loan applications to at least three lenders
Submitting multiple applications may save you money in the long run. When you apply for a loan, the lender can charge you an application fee for pulling your credit report. Generally, nothing else will be charged until you have indicated to the lender your intent to proceed with the loan.
- Review Loan Estimates
As of August 1, 2015, lenders are required to provide or mail you a Loan Estimate within three days of receiving your application, unless the application is denied. A loan estimate includes the loan terms and a good faith estimate of settlement costs to help you compare offers with ease. (Sample of Fixed Rate Loan Estimate.) Furthermore, the Loan Estimate includes information about what fees can and cannot change from the time of application to closing.
- Get answers to important questions (the below are questions suggested by the CFPB)
- Is the interest rate fixed or adjustable?
- Do I need to pay points?
- What fees will I have to pay? Will I pay them myself or will the lender loan the fees to me?
- What is the term of the loan?
- How much will my payment be and will it eventually pay off my principal?
- What other costs will be added to my monthly payment?
- Can I repay the loan early without penalty?
- Will the payments change over the life of the loan? How high can my payment go?
- For an adjustable rate mortgage, are the payment adjustments and the interest rate capped?
- How much will I need to put down?
- Does the written offer match what I was told about the loan?
- Select the best offer and lock in the rate
A rate lock or lock-in protects you against interest rate increases while your application is being processed. Generally, a lock-in is valid for 30 to 60 days to ensure there is enough time for settlement and other lender contingencies. For this reason, you should submit the necessary documents promptly to avoid any delays in the processing of your application. Remember to get the lock-in rate commitment in writing and keep a copy. Verify that your lock-in rate is from the mortgage lender, bank, or credit union.
- Shop around for mortgage closing services
The Loan Estimate provided by the lender has information about which closing services and vendors you can compare and choose. Some of the common services are the closing attorney, title insurance, home inspector, and home appraiser.
- Compare the Closing Disclosure to your Loan Estimate
As of August 1, 2015, lenders are required to provide a Closing Disclosure to consumers three business days before completing the transaction (generally when you sign the note at closing). The Closing Disclosure will include the terms of the loan and other details of the loan. (Sample of Fixed Rate Closing Disclosure.) Carefully review your Closing Disclosure and compare it to the Loan Estimate you received when you applied for the loan. If you have a question about any increase, ask the lender. Do not sign if you are not comfortable with the final documents.
- Obtain a copy of the Settlement Statement before your closing
Ask your lender for a copy of the settlement statement well ahead of the closing date so that you have an opportunity to review all your costs related to the transaction. Disclosure of these costs will ensure that you understand all fees associated with the purchase and mortgage, as well as any prepayments you have made. It also allows you the time to question and correct any mistakes or inaccuracies you see and prepare for the closing.
- HUD Approved Housing Counseling Agencies in Massachusetts help consumers decipher the homebuying process for a fee.
- The CFPB Step-by-Step Toolkit provides more detailed information for homebuyers.