To handle a loan before buying a home, first obtain a pre-approval letter from a lender to understand your budget and strengthen offers. Check and improve your credit score, as higher scores secure lower interest rates. Compare fixed-rate vs. adjustable-rate mortgages (ARMs) based on long-term goals, and calculate debt-to-income (DTI) ratios to ensure affordability. Prioritize shopping multiple lenders to secure competitive rates and terms.

Pre-approval is critical because it provides a clear budget, making home shopping efficient and increasing seller confidence. A credit score above 740 typically qualifies for the best rates, as FICO scores directly influence mortgage pricing. For example, a score of 620 may result in a 1% higher rate than a 780 score, costing thousands over a loan term. Pre-approval also reduces financing delays, with 72% of sellers preferring pre-approved buyers (, 2023).

Comparing loan types ensures alignment with financial goals. Fixed-rate mortgages offer stability, while ARMs may save money initially but risk higher payments later. A 30-year fixed loan currently averages 7.25%, whereas a 5/1 ARM averages 6.75% (Bankrate, 2023), but ARMs adjust after five years. Managing DTI below 43% (Federal Reserve guidelines) is mandatory for conforming loans, as exceeding this ratio increases rejection risks.

Shopping lenders saves money: 85% of borrowers save at least $500 by comparing three lenders (Consumer Financial Protection Bureau, 2022). For instance, a $300,000 loan at 7% for 30 years costs $2,207 monthly, but a 0.5% rate reduction lowers payments to $2,080. These steps collectively reduce borrowing costs, ensure affordability, and streamline the homebuying process.