Many real estate articles recommend that home buyers do some comparison shopping before choosing a mortgage lender. This is pretty standard advice. Unfortunately, few articles tell you exactly what to do.
Should you simply dial up a half-dozen banks for quotes and then select the lender offering the lowest interest rate? Should you pick a lender from some organization’s Top 5 or Top 10 list? If so, which organization’s ratings should you trust?
Because a well-planned shopping excursion could save you thousands of dollars in interest and fees, while a poorly executed effort could cost money, it’s important to know what to do and when.
Start by Gathering “Intel”
Getting rate quotes is only part of the process – and it shouldn’t be your first step.
To obtain the most favorable mortgage rates and terms, start your comparison shopping by gathering high-quality “intel.” In other words, become an educated consumer – someone who can distinguish between a good deal and a lousy one.
Your first step is to research current interest rates and mortgage terms – specifically what mortgage rates are available to you. This can easily be done online.
Click to check what rates are available to you.
While you’re doing this, also be sure to look into typical closing costs and the other fees you can expect to pay.
After, plug this information into an online mortgage calculator (or app) along with your home buying budget to calculate the total monthly payment.
Be sure to enter different sets of numbers to create “best case” to “worst case” scenarios. Your goal is to determine how much you could save from a lender to lender basis.
It’s also a good idea to research mortgage lenders in your area to get a sense of which ones may offer the best deals.
For example: if you’re a member of (or can easily join) a local credit union, it might be worthwhile to apply for a mortgage there. Credit unions frequently offer very competitive rates.
Do Some Legwork
Now it’s time to contact different lenders to get mortgage rate quotes.
Compare rates from at least three mortgage lenders, but more is better.
You should also inquire if points (fees paid to the lender in exchange for a lower interest rate) are included in each quote. If you’re not certain how points work, request more information, especially about the benefits and drawbacks in your particular case.
The Federal Trade Commission (FTC) recommends that you have all lenders quote the points as a dollar amount and not just the number of points, so you’ll know how much you’ll actually be paying.
In addition, it’s important to ask how the downpayment will affect the cost and size of the loan. Most lenders will require you to buy Private Mortgage Insurance (PMI) if you put down less than 20 percent – and these premiums are usually tacked onto the loan.
However, if you qualify for a mortgage backed by the Federal Housing Administration or the Veterans Administration, the downpayment requirement may be significantly lower.
Below are additional questions that you should ask every lender:
- How long are the turnaround times on preapproval, appraisal and closing?
- What lender fees must be paid at the closing?
- Can you waive any fees or roll them into the loan?
- Is the quoted rate a fixed or adjustable one? Note: with an adjustable rate, your monthly payments will generally rise and fall with prevailing interest rates.
- If PMI is required, what will its total cost be? And how much will the monthly payment be when the PMI premium is included?
- If an “earnest money” deposit must be made to launch the loan process, ask about the circumstances under which the lender will keep that money. If you don’t receive a satisfactory answer, walk away.
- Ask every lender if you can lock in the interest rate, and how long the lock will last. Because rates generally come with an expiration date, you’ll want to know how long the lender will honor the rate once it’s locked in.
Before you start looking for that new home, you have one critical mission to complete: getting a preapproval letter from your short-listed mortgage lenders.
Being preapproved gives you a distinct (and sometimes necessary) advantage when it comes to bidding on homes. In fact, without preapproval, you may have trouble closing on a house, especially in competitive markets.
A preapproval letter essentially states that a lender has assessed your finances and determined how much you can afford to borrow. This assures sellers that they aren’t wasting their time with someone who may not get financing.
To get preapproved, you’ll have to provide lenders with information that includes social security numbers for yourself and any co-signers, bank and investment account information, documents related to your current debt obligations, and two years of tax returns, W-2s and 1099s, as well as salary and employer information.
If this sounds a bit tedious, it is. But it’s more than worth the effort.
Finally, don’t be afraid to negotiate a better deal. If you don’t, there’s a fair chance that you’ll pay too much for your mortgage.
According to the FTC, lenders and brokers may offer different prices for the same loan terms to different people – even when all those home buyers are equally qualified.
This price difference may be due to the fact that loan officers are often allowed to keep some or all of the price difference (the “overage”) as additional compensation.
So if you don’t negotiate, you may be leaving a significant pile of money on the table – money that someone else will happily collect.