1. Get your credit in shape

credit score concept, male hand draws a chart with credit history values.
SergeiShimanovich / Shutterstock

The best mortgage rates go to the borrowers with the strongest credit, so you need to make sure your credit is in good enough shape that lenders will want to work with you.

Mortgage lenders want to see a healthy, if not high, credit score before they start dishing out favorable loan terms. Credit scores range from 350 to 850. If you haven't seen your score in a while, you can easily check your credit score for free right now.

If yours is above 720, you'll generally be considered a good credit risk, but different types of mortgages have different minimum credit score requirements:

  • Conventional loans (most mortgages): 620.
  • FHA loans, insured by the Federal Housing Administration: 580.
  • VA loans, guaranteed by the U.S. Department of Veterans Affairs: 580.
  • USDA loans, backed by the U.S. Department of Agriculture: 580.

Keep in mind that those minimum scores for FHA, VA and USDA loans aren’t hard-and-fast limits. You might still get funded through one of those loan programs if your score is down near 500, but 580 is considered a red line many lenders may not want to cross.

If your score is too low, get rid of some debt, which will reduce your debt-to-income ratio, a key metric lenders will use to determine your creditworthiness. Pay off credit card balances, which will free up cash flow and reduce your rate of credit utilization (use).

Sometimes, better credit just takes time. Make sure your credit history isn’t filled with a bunch of short-lived accounts. Lenders want to see consistency and a willingness to commit to long-term financial relationships.

2. Select a mortgage type

In the U.S., several different types of mortgages available. Popular mortgage options include:

  • Conventional loans are the most common type of mortgages. They are not backed by the government, so they usually come attached to some of the strictest qualification guidelines.
  • FHA loans have low credit score and down payment requirements and are intended to help borrowers who have less-than-perfect credit or who lack the savings for a large down payment.
  • USDA loans are for middle- and low-income borrowers in rural and suburban areas. No down payment is required.
  • VA loans are intended for veterans and active-duty members of the military, including the National Guard and reservists, as well as certain family members. These loans also don't require a down payment.

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3. Get a mortgage preapproval

approved stamp - businessman stamping document in office
ronstik / Shutterstock

Before you head out with a real estate agent to look at homes, it’s a good idea to get preapproved for a mortgage.

A preapproval is a formal letter from a lender that details how much money you can borrow and at what interest rate. If you’re shopping in a hectic real estate market, a preapproval can be a game changer.

Once you've applied for a loan and the lender has done a thorough review of your supporting documents and credit history, it will tell you how high it's willing to go with your loan. And then, you'll know how much you can spend on a house.

A preapproval letter is a good thing to have in your back pocket when you're ready to make an offer on a home, because it shows the seller that you'll be able to get financing.

Preapproval also can help you lock in an interest rate prior to purchasing your home. So if mortgage rates rise, you won’t have to worry about paying a higher rate on your loan.

Preapproval is not the same as prequalification. A prequalification is a relatively quick going-over of your financial situation that allows a lender to give you a general idea of what you might be able to buy. There's no guarantee that the loan amount included in your prequalification letter is what you’ll ultimately get approved for.

4. Review both fixed- and adjustable-rate offers

As you move forward on your homebuying journey, you’ll eventually have to make a choice that could have a significant impact on the overall cost of your home loan: Do you go with a fixed-rate or adjustable-rate mortgage?

With a fixed-rate loan, your mortgage rate will hold steady for the life of your loan. If you bag a 30-year fixed-rate loan at 3.05%, that’s the rate you’ll pay from beginning to end. (Unless you refinance. But let’s not get ahead of ourselves.)

Your rate won't change and neither will your monthly payment, so fixed-rate mortgages make budgeting a lot easier.

Adjustable-rate mortgages, also known as ARMs, generally start out with lower interest rates. But after a certain number of years, the rate can change — or "adjust" — on a regular basis, up or down, in sync with a benchmark interest rate like the prime rate.

ARM rates are described using two numbers that look like a fraction, and each part refers to a length of time. With a 5/1 ARM, for example, the first number means your initial rate will stay the same for five years. After that, your rate will adjust every (one) year.

At the outset, ARMs are usually the cheaper option than fixed-rate mortgages. But if interest rates spike, so will your ARM rate — and monthly payment amount. The predictability of a fixed-rate mortgage carries a lot of value.

5. Shop lenders

Man in a suit offers to sign a contract holding a pen and documents for signature
Vitali Michkou / Shutterstock

The mortgage industry is intensely competitive. Lenders are perpetually trying to outdo each other in the battle for your business, so take the time to do some comparison shopping.

As you compare lenders to find the best mortgage rate, be sure to look at other aspects of their loans, including fees, penalties and various terms and features that might impact the overall cost of your mortgage.

The devil really is in the details — ask anyone who has ever been surprised by a balloon payment or gargantuan prepayment penalty.

Remember, you can always partner up with a mortgage broker to help guide you through the process of nailing down your first home loan. Once your mortgage closes and you’ve bought your first home, you’ll have one more person to celebrate with.

How to Get a Mortgage.

Just break the mortgage process down into a few smaller steps. Here's how.

See Guide

About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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