How to Pick a Mortgage: A Step-by-Step Guide

Buying a home is a big financial decision, and the right mortgage makes a difference in how much you’ll pay. To pick a mortgage, it’s important to understand the different loan options, prepare your finances, compare lenders and loan offers and consider your goals, needs and preferences. Here, we’ll walk you through these essential steps.

Step 1: Learn the mortgage types

You won’t know exactly what types of mortgages you can pick from until you consult with a loan officer, but you can get an idea beforehand. This’ll help you ensure your credit and finances meet the requirements of the loan program, as well as prep for the down payment and closing costs. The main kinds of mortgages are:

Fixed-rate and adjustable-rate mortgages (ARMs)

• Fixed-rate mortgage: With a fixed-rate mortgage, your interest rate stays the same for the entire loan term, usually 15 or 30 years. The 30-year term is the most common — it comes with lower monthly payments over a longer repayment period.
• Adjustable-rate mortgage (ARM): An ARM typically starts with a lower, fixed interest rate for an initial period, such as 5, 7 or 10 years. After that, the rate adjusts periodically — usually every six months — based on market trends. An ARM may be a good option if you plan to move before the initial period ends or expect your income to rise. Otherwise, you’ll need to be prepared for the possibility of higher monthly payments.

Conventional and government-backed loans

• Conventional loans: Conventional loans are the most popular type of mortgage. Generally, they require a higher credit score, but also a minimum down payment of just 3%-5% depending on your situation. If your down payment is less than 20%, though, you’ll pay for private mortgage insurance (PMI).
• FHA loans: FHA loans have a lower minimum credit requirement compared to conventional loans: a score of 580 if you have a 3.5% down payment, or 500-579 with 10% down. You’ll pay for FHA mortgage insurance (MIP) regardless of your down payment. Depending on your loan term and down payment, MIP may be required for the life of the loan. . 
• VA loans: Available to eligible active-duty military, veterans and surviving spouses, VA loans don’t typically require a down payment or mortgage insurance. Instead, you’ll pay a funding fee.
• USDA loans: If you have lower to moderate income and you’re buying a home in a specific rural or suburban area, a USDA loan can help. These loans don’t require a down payment, but they do charge some fees.

Step 2: Prepare for pre-qualification or pre-approval

Once you have an idea of the type of mortgage you may qualify for, ready your credit and finances for a pre-qualification or pre-approval. Consider your:

Credit report and score

The higher your credit score, the more likely you’ll qualify for a lower mortgage rate. You can find your score through Equifax, Experian and TransUnion, the three major credit bureaus; a third-party like Credit Karma; or your credit card issuer. If your score doesn’t meet the minimum for a mortgage, take steps to improve it, such as paying all bills on time and paying down credit card balances.

Along with understanding your score, request a free copy of your credit report from the bureaus. Review the report for errors, such as inaccurate contact information or payment history. If you find any, contact the bureau to dispute them.

Minimum credit score requirements by loan type

Debt-to-income ratio (DTI)

Your debt-to-income (DTI) ratio is the percentage of gross monthly income spent on debt payments (the mortgage plus any other loans or balances). This helps lenders evaluate whether you can reasonably afford to repay the mortgage. A higher DTI ratio presents more risk for the lender which often translates to a higher interest rate.

To calculate your DTI ratio, you can use our DTI Calculator, or simply add up your monthly debt payments, including minimum credit card payments, car loans, student loans or personal loans, and divide that total against your gross monthly income. 

DTI requirements by loan type

Down payment

Your down payment helps determine how much house you can afford, the size of your loan, your interest rate and more. You’ll avoid mortgage insurance if you can put 20% down, but that may not be feasible. If you’d rather buy a home sooner than wait to save, it may be worth putting less down and paying mortgage insurance now. You can calculate various down payment amount using our Down Payment Calculator.

Here are our tips to save for a down payment. 

Minimum down payment requirements by loan type

Step 3: Shop mortgage lenders

When you’re ready to start looking at homes, shop around for mortgage lenders. You can compare advertised APRs, but you won’t know what rate you actually qualify for until you contact the lender. To help find a fit, you can look at lender ratings and reviews, or ask family or friends for referrals.

Step 4: Compare loan offers

Generally, it’s a good idea to get quotes from at least three different mortgage lenders. That may include your bank, a credit union, an online-only lender or an independent mortgage company. 

Request a pre-approval or pre-qualification from the lenders you’re interested in. This can help you understand what amount you may qualify for and, if it’s a pre-approval, at what rate. You can get pre-qualified with us through Zillow Home Loans.* The process takes as little as five minutes and does not impact your credit score.

When comparing mortgage offers, consider the:

• Loan amount: Are you getting more money with one lender versus another?
• Interest rate: Which lender offers the lowest rate? Is it locked in? For how long?
• Closing costs and fees: What fees are included in the APR (annual percentage rate)? Are they excessive compared to other lenders? Which ones are due at closing?

Step 5: Go beyond the numbers

The interest rate and fees are important when picking a mortgage, but so are your personal needs and preferences. Think about things like:

• Do you want a fixed monthly payment? In that case, you’ll need a fixed-rate loan.
• Do you plan to move in the next 5-10 years? You may be able to save money with an ARM.
• Can you handle a higher monthly payment? You may want to look at an ARM or a 15-year loan.
• Are you comfortable making a bigger down payment? That may point you to a conventional loan.
• Will you need an assumable loan? In that case, you’ll need a government-backed mortgage.
• Do you need down payment assistance? Some lenders offer their own programs to help with a down payment and closing costs.
• Do you need a lender who specializes in a specific type of mortgage, such as VA loans?
• Are you self-employed? You may prefer a lender who offers bank statement or no-doc loans.
• Are you in healthcare or a public service profession? Some lenders offer physician loans or loans specifically for teachers, firefighters, police officers and EMTs.
• Do you want a lender with branches nearby, a mobile app or some other convenience?

Picking a mortgage is a journey of discovery about your finances, goals and future. The above steps can help you guide you to a decision about the right type of loan and lender for your needs.

*Zillow Home Loans; an equal housing lender. NMLS #10287.