Shopping for a Mortgage — Frequently Asked Questions

Getting ready to buy a home?

A good mortgage loan is key to making your dreams of homeownership come true. But it can be intimidating to browse all the potential lenders and loans to find a mortgage that works for you. Here are answers to the most common questions about shopping for a mortgage that can help you compare loans and get the best deal.

What’s a Mortgage?

A mortgage is a homebuying loan contract between you and a lender, such as a bank, credit union, or mortgage company. The lender loans you money to buy a home, and you agree to pay it back according to the terms of your contract. Your home often acts as collateral for the loan, meaning that the lender may have the right to take ownership of your property if you fail to make the agreed payments.

What Should I Do Before Getting a Mortgage?

Before you apply for a mortgage, you should do three things:

Determine your down payment: Calculate how much you can afford to put down as a down payment for the home. This sum can affect what kinds of loans you qualify for. Aim for a 20% down payment as it brings down the total loan amount and lowers your overall costs.

Get a free credit report: A good credit report can help you qualify for loans. You can get a free annual credit report online (www.AnnualCreditReport.com). If you notice any mistakes in the report, inform the lender and dispute them with the involved credit bureau.

Compare multiple lenders: Get quotes from multiple lenders and ask them about all the costs of the loan. In addition to the monthly payment and interest rate, find out the annual percentage rate (APR) which is the total cost you’ll pay annually. The Federal Trade Commission (FTC) has a handy Mortgage Shopping Worksheet (www.bit.ly/3HiBRRd) that can help you compare lenders.

How Do Mortgage Brokers Work?

A mortgage broker is a person that can help you compare lenders and figure out loan details. They often have access to a wide lender network and can help you with the application process to save you time. Of course, you will have to pay them. The broker’s fees might get added to the final closing amount or the interest rate. Ask your broker how they want to get paid to ensure you’re clear on their terms. Additionally, a broker may not always get you the best deal, so double-check the loan terms and conditions yourself. Interview multiple brokers to find out which you want to work with—if any. You may check whether your broker has been involved in any disciplinary actions with the National Multistate Licensing System (www.nmlsConsumerAccess.org).

Can I Negotiate Mortgage Terms?

Yes. It’s a good idea to get quotes from multiple lenders so you can ask them to match other offers. You can also request a lender or broker to lower their rates or fees. Finally, if they agree to lower one fee, make sure the lender or broker isn’t sneakily raising another.

How Can I Avoid Deceptive Loans?

With so many mortgage lenders and brokers out there, you should look out for deceptive mortgage ads. Be wary of advertisements promising very low or fixed interest rates and low payments. The low or fixed rate may only apply for a very limited time, so pay attention to the fine print spelling out the APR—lenders must provide it under federal law if they mention an interest rate

Low payments may only apply to the interest rate and not the actual amount of money you borrowed, called the principal. You must eventually pay the principal and might end up with much higher monthly payments.

Finally, beware of negative amortization. This is a scheme where you pay off only a portion of the loan’s interest each month. The unpaid interest gets added to the principal, which can increase the amount you owe beyond the value of your home.

How Do I Pick the Best Loan?

Figure out the total monthly payment of your loan using the PITI method. This calculation adds together the monthly payments for the Principal, Interest, Taxes, and homeowner’s Insurance. Look for the lowest PITI when comparing loans.

You may have to take private mortgage insurance (PMI) which can be included in the PITI—but it also may not be. Ask your lender if PMI is included in the PITI and add it to the final sum if it isn’t.

Will Credit Problems Affect My Mortgage Loan?

Issues with your credit history can result in you having to pay more for a loan, or they could even disqualify you. This is why you should check your credit report before applying for a mortgage. If you have credit problems, honestly explain them to the lender and they may be willing to overlook them.

What Info Will Lenders Give Me After I Apply?

Under federal law, lenders and brokers must provide you:

How Can I Improve My Chances of Getting a Mortgage?

Give the lender as much information as possible to support your application. Hand over detailed reports on your income and employment history to show you’re able to pay the loan back. If you have missed bills due to layoffs or medical issues, write a detailed letter explaining the situation. Lenders must consider

A home loan toolkit from the Consumer Financial Protection Bureau (CFPB) within three days of applying for a mortgage loan. This document can help protect you from unfair lending practices.

A loan estimate within three days of receiving your loan application. The estimate should include the estimated interest rate, monthly payment, total closing costs, estimated tax and insurance costs, any prepayment penalties, and how the interest rate or payment could change in the future. The CFPB loan estimate explainer (www.bit.ly/3GUuttT) can give you an idea of what to expect.

A closing disclosure at least three business days before your closing. This form states the final details about the mortgage, such as terms, monthly payments, fees, and other costs. Getting the disclosure in advance gives you time to review its terms against the loan estimate and address any discrepancies with your lender.

The Consumer Financial Protection Bureau (CFPB) a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.

The content in this article provides general consumer information. It is not legal advice or regulatory guidance. The CFPB updates its information periodically. This information may include links or references to third-party resources or content. CFPB does not endorse the third-party or guarantee the accuracy of the third-party information. There may be other resources that also serve your needs.