How to shop for a home loan in 5 steps

With so many financing options out there, finding the right mortgage can be a challenge. That’s why we’ve broken down the home loan shopping process into five simple steps to help you choose the best mortgage and servicer for your situation.

1. Review your finances

Buying a home requires preparation. You'll need to review your finances to make sure you have enough saved for a down payment and closing costs, and that you can meet the requirements to qualify for a loan. If you don’t have enough saved up, you'll need to make a plan to get there.

Your credit is one of the first things lenders check when determining if they’ll lend to you. This is because your credit reflects how reliably you’ve paid back debt in the past. The better your credit, the more creditworthy you appear.

The minimum credit score requirement for conventional mortgages was recently dropped, though lenders still will review your overall credit to evaluate your creditworthiness.

To check your credit, request a free tri-merge credit report at AnnualCreditReport.com. Check for mistakes and request corrections, if needed.

2. Decide on the type of loan you need

There are several different types of home loans to choose from. The best one for you will depend on your situation and whether you qualify for a government-backed loan.

Conventional loans

Conventional loans are not insured or backed by the government. Lenders can sell conventional loans that conform to specific requirements, including a maximum loan amount, to Fannie Mae or Freddie Mac. Conforming loan requirements include:

• Minimum down payment of 3% for a fixed-rate loan and 5% for an adjustable-rate mortgage.
• Maximum debt-to-income ratio (DTI) of 43%, though qualifying factors may allow a ratio as high as 49%.
• If you put down less than 20%, you'll have to pay for private mortgage insurance until you have 20% equity.

Jumbo loans

Jumbo loans are conventional loans that exceed the conforming loan limit. The requirements for jumbo loans are up to individual lenders, but usually include:

• Down payment of at least 10% to 20%
• A higher credit score, usually at least 680
• A DTI ratio less than 45%
• Lenders may require proof of cash reserves

FHA loans

FHA loans are backed by the Federal Housing Administration. Typical requirements include:

• A credit score of 500 – 579 if you're making a down payment of 10%. Alternately, a credit score of at least 580 allows you to make a down payment as low as 3.5% with lenders such as Rocket Mortgage®.¹
• A maximum DTI ratio of 43%, though it can go as high as 50%, depending on qualifying factors.
• Borrower must pay an up-front mortgage insurance premium of 1.75% of the loan amount, and an annual MIP based on your loan balance. Depending on your down payment, you'll pay the annual MIP for 11 years or the full term of your loan.

VA loans

VA loans are backed by the Department of Veterans Affairs and are available only to eligible military personnel, veterans, and their surviving spouses. The VA requires no down payment, though lenders may set their own minimum. Typical requirements include:

• A VA Certificate of Eligibility (COE)
• Maximum DTI of 41%
• One-time VA funding fee of up to 3.3% of the loan amount
• The home you're buying must meet VA standards and be your primary residence.

USDA loans

USDA loans are backed by the U.S. Department of Agriculture and offered to low- to mid-income borrowers buying homes in specific rural areas. Typical requirements include:

• Minimum credit score of 640
• Maximum DTI ratio of 41%, with exceptions
• Property must be in an eligible rural area
• Household income can’t exceed 115% of the area’s median income

Rocket Mortgage doesn’t currently offer USDA loans, but we’re happy to help you find the best loan option for your needs.

3. Gather the required financial documents

To approve a mortgage, a lender must review the property’s details and your personal finances. Here are some of the documents commonly required:

• Proof of income. This demonstrates your ability to repay the loan and can include pay stubs, W-2 forms, income-tax returns, and 1099 statements.
• Asset statements. Assets also demonstrate your ability to repay the loan and can include retirement, investment, and bank statements.
• Other documents and information. This can include photo ID, gift letters, existing loan balances, and more.

You can apply for mortgage preapproval once you've gathered the required documents. This will give you an estimate of how much your lender expects you can borrow, and shows real estate agents and sellers that you're ready to buy.

Once you've found a home to buy and signed a purchase and sale agreement with the seller, you submit your documents along with your formal mortgage application.

4. Request and compare loan offers from various lenders

To get the best loan offer, you'll want estimates from different lenders. When you apply for a mortgage, your lender will provide you with a Loan Estimate within 3 business days. This document will estimate all the terms of your loan and your closing costs.

When comparing Loan Estimates, pay attention to the following:

• Estimated loan amount.
• Whether it's a fixed-rate or adjustable-rate mortgage.
• The interest rate and the annual percentage rate, which helps you understand the total cost of the loan.
• The monthly payment, including property taxes, homeowners insurance, and homeowners association fees.
• Closing costs.
• Mortgage rate lock policy.

5. Select a lender and secure your rate

Once you’ve chosen a lender, you accept the Loan Estimate and proceed to underwriting.

At least 3 business days before your loan is scheduled to close, you'll receive the Closing Disclosure. This document details the final terms of your loan and the amount of cash you need to close.

You'll pay closing costs and sign the final documents at closing, which will fund your loan and transfer legal ownership of the property to you.

FAQ

Here are answers to common questions about shopping for a mortgage:

When should I begin shopping for a mortgage?

Begin shopping for a mortgage after you check your credit and understand which type of mortgage you want. Then, you can approach lenders for quotes on a mortgage and fill out a loan application for the best offer.

Does it hurt my credit score to shop around for a mortgage?

When you apply for a mortgage with several lenders, each lender performs a hard pull on your credit, which can reduce your credit score by several points. But if you submit multiple applications within a short time, the credit bureaus understand you're shopping for a loan and will count only one inquiry on your credit.

How do I know how many lenders to apply to?

It’s recommended to compare at least three lenders. Then, you can compile a list of options and pick the lender with the best mortgage rates, terms, or other factors.

What do I need to qualify for a mortgage?

Typically, your lender or mortgage broker will require proof of income, a good credit history, and enough cash on hand to cover a down payment and closing costs.

The bottom line: Home loan shopping doesn’t have to be stressful

Finding the right mortgage becomes much simpler when you break it down. Start by reviewing your finances, choosing the loan type that best fits your situation, gathering your financial documents, comparing lender quotes, and locking in your rate with the best lender.

To include Rocket Mortgage in your rate shopping efforts, submit an online application.

¹ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.