How to Shop for a Mortgage | The Motley Fool (2024)

FAQs

Is it a good idea to shop around for mortgage lenders? ›

That's why it's important to get quotes from more than one lender, compare your options and ask questions. The more you shop around, the more information you'll gain — and the more money you could save. Shopping around for a mortgage could save you hundreds or thousands of dollars.

Mortgage Credit Pull Window

Credit checks from lenders within that window will count as a single inquiry on your credit report by the FICO score algorithm. With FICO scores, you actually have a 45-day window for rate shopping, but some older FICO scores limit it to 14 days.

Each inquiry can shave a few points off your score. That's why you want to be careful to rate shop within a window of time, so multiple hard inquiries can be treated as one for scoring purposes. The other type of credit check, a "soft inquiry," won't harm your score.

In fact, you can consult as many lenders as you want as long as your last credit check occurs within 14 days of the first credit check. Optimal shopping period time frames are built around FICO^® scoring models. FICO^® gives you a 14-day grace period for mortgages when they go into one inquiry.

If you're self-employed, the loan approval process will be somewhat similar to that of a W-2 salaried applicant: You'll need to provide certain documentation to verify your income and prove to the lender that you're a creditworthy fit for a mortgage.

How can shopping for a mortgage impact your credit? When exploring mortgage options, your credit score typically only takes a hit when you obtain a loan preapproval from a mortgage lender. That's because getting preapproved involves a “hard” credit inquiry, meaning the lender looks at your credit history and score.

Don't open or close any credit cards

Your credit utilization rate (CUR), or the percentage of available credit you're using on revolving lines of credit, is another important part of your credit score. Closing a credit card could push you above the 30% rate lenders prefer.

Request a deed in lieu of foreclosure – A deed in lieu of foreclosure arrangement can help stave off financial hardship. Under its terms, you'll give your mortgage lender the deed to your home, releasing you from your mortgage responsibilities and avoiding having a foreclosure appear on your credit report.

Since hard inquiries affect your credit score and what is found may even affect approval, you might be wondering: How many inquiries is too many? The answer differs from lender to lender, but most consider six total inquiries on a report at one time to be too many to gain approval for an additional credit card or loan.

Mortgage rate shopping isn't hard, and it can easily yield thousands of dollars in savings. In fact, research from Freddie Mac shows that borrowers can save $600 over the life of their loan by getting just two extra quotes and $1,200 or more by getting five quotes.

Does getting multiple mortgage quotes hurt your credit? ›

Mortgage rate shopping can have a minimal impact on your credit score, as long as you get all your mortgage quotes within a 14- to 45-day window. Each hard inquiry can lower your credit score by less than five points, but applying with multiple lenders can actually have a positive impact over time.

Rate shopping is the act of comparing interest charges and other terms from multiple lenders before accepting a loan or credit card offer. It's a way to ensure you're getting the best possible terms on your credit and, if done correctly, will have only a minor impact on your credit scores.

Typically, the hard credit pull required to get a mortgage loan will decrease your credit score by about 5 points. Once you actually get the loan, you might have a short-term dip of 15 – 40 points. If you consistently make monthly payments on time, though, you'll likely see your credit score recover and even improve.

Shopping for a mortgage is almost guaranteed to save you money because all mortgage companies offer different rates to different borrowers. And if you know what you're doing, it doesn't have to be difficult or time-consuming.

The most commonly used FICO Score in the mortgage-lending industry is the FICO Score 5. According to FICO, the majority of lenders pull credit histories from all three major credit reporting agencies as they evaluate mortgage applications. Mortgage lenders may also use FICO Score 2 or FICO Score 4 in their decisions.

If interest rates go up after you've locked in your rate, you get to keep the lower rate. On the other hand, if you lock your rate and interest rates fall, you can't take advantage of the lower rate unless your rate lock includes a float-down option.

Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.

Income Stability

If your lender notes a self-employed income decline of over 20% over the FHA-required income analysis period you may not qualify for the home loan.

While your net income accounts for your taxes and other deductions, your gross income does not. Lenders look at your gross income when determining how much of a monthly payment you can afford.

This is not the case. Brokers differ in their lender networks and the deals they can negotiate. Take the time to shop around and speak to several brokers to ensure you're getting access to the best possible mortgage options for your situation.

Should you shop around for a mortgage advisor? ›

It's a good idea to speak to a few different firms to see what's on offer and to compare fees. There are two main types of mortgage advisers. Mortgage advisers connected directly to lenders usually only recommend mortgages from that specific lender.

Shop around

The mortgage rates offered by various lenders will be similar, but the difference between rates could end up saving you thousands of dollars. The difference in interest paid between a 5% and 5.5% fixed rate on a $375,000 high-ratio mortgage would be about $9,400 at the end of a five-year term.

By shopping around and comparing offers from multiple lenders, you can potentially get a lower rate and save money on not only a month-to-month basis but over the lifetime of your loan” says Channel.