The mortgage process can be intimidating, especially to first-time homebuyers, but it doesn't need to be. As long as you know some of the basics about mortgages before you start the process, and choose a good lender to guide you through the process from the offer to closing, getting a mortgage can be relatively painless.
With that in mind, here's what you should know before you start looking for a lender, including how to compare different lenders and their mortgage offers.
Know your credit score and do damage control if necessary
To be clear, you don't need to know your credit score before you start shopping for a mortgage lender. However, checking your score beforehand can give you an idea of what sorts of terms mortgage lenders may offer you (more on that later) -- and whether you're even ready for a mortgage in the first place.
Many credit card issuers offer a free FICO score as a perk, but if you want your complete (three-bureau) credit report, you'll probably have to pay for it. MyFICO.com is one popular website that sells FICO scores from all three credit bureaus.
Certain loan programs require certain minimum credit scores. Just to name one example, a conventional mortgage requires a minimum FICO credit score of 620, while a low-down-payment FHA mortgage can be obtained with a score as low as 580. So if you check your FICO score and find that you have a 600, you'll know to focus your search on lenders that specialize in FHA loans.
On the other end of the spectrum, some lenders offer their own unique terms, such as 100% financing for borrowers with excellent credit scores. So if you know your FICO score (and how to interpret it), you'll know which loan programs you can realistically qualify for.
It can takes months or years to boost your credit score significantly. However, there are some ways you may be able to boost your score quickly, and you should consider them before applying for a mortgage.
Know the difference between interest rate and APR
One major distinction you should know before you begin comparing lenders is the difference between interest rates and APR.
An interest rate is simply the price you pay for borrowing money, expressed as a percentage of the principal amount you're borrowing. As a basic example, if you're borrowing $1,000 for one year, a 4% interest rate implies that you'll pay $40 in interest to the lender.
On the other hand, annual percentage rate, or APR, is the total cost of borrowing money. In addition to the interest, or finance charge, APR also includes certain fees you'll pay to borrow the money, such as a mortgage origination fee charged by the lender.
The point is that APRs and interest rates are often slightly different, and APR is the number you should consider when comparing lenders' offers. You may be surprised how different the APR can be between two loans with the exact same interest rate.
Know what other consumers are paying
As a final pre-shopping item, you can use national average mortgage rates along with your credit score to get a rough idea of the APR you can realistically expect to obtain for a mortgage.
One tool that is very useful is the Loan Savings Calculator provided by myFICO.com. This breaks down the national average APRs, as well as state averages, for various types of mortgages (30-year, 15-year, adjustable-rate, etc.) into credit tiers.
For example, let's say I have a FICO score of 730 (Note: Lenders typically look at your FICO scores from all three credit bureaus and use your middle score to determine your rate). If I plan to get a 30-year mortgage in Florida, I can see that the average APR obtained by other borrowers in my credit tier is 3.808% as of Oct. 4, 2017.
Look beyond the APR
In addition to interest rates, there are some other to ask prospective lenders about.
For starters, ask how they communicate with clients (phone, email, etc.) and how quickly you can expect them to respond to messages. Having been through the mortgage process three times myself, I can tell you firsthand that it can be infuriating to have to wait several days when you ask your lender for a status update.
You can also ask about turnaround times, fees you'll be expected to pay, and how much of a down payment they'll require. There are minimum down payments for certain loan programs (such as 3% for a conventional mortgage), but some lenders require more.
By far the smartest thing you can do is shop around for a mortgage lender. Talk to lenders at national banks, regional banks, credit unions, and others. Ask your real estate professional for recommendations. And be sure to check out online reviews, as they can tell you a great deal about each lender's reliability, customer service, and other qualities.
"Shopping around" doesn't just mean speaking with a few lenders. It means taking the time to complete the pre-approval process with at least a few lenders in order to compare the loan terms each one offers you.
A mortgage pre-approval is essentially a thorough mortgage application that doesn't have a particular home in mind. The lender will check your credit, verify your income and employment, and give you a firm commitment to lend a certain amount of money at specific terms.
Finally, don't worry about your credit suffering from completing several mortgage applications and credit checks. There's a special provision in the FICO formula that allows for "rate-shopping" for mortgages and auto loans. As long as all of your applications occur within a two-week period, they will count as a single credit inquiry for scoring purposes.
Consider all factors and choose the best option
As a final thought, while the APR you receive is probably the single most important factor to consider, it's not the only one. For example, if you have narrowed your search down to two lenders, and one has excellent reviews, always closes on time, and answers your emails within an hour, it may be worth choosing them, even if they're offering a slightly higher APR.