How to Shop for a Mortgage

Wondering how to shop for a mortgage? If you're in the market to purchase a home and feel like you're on the path to a serious case of borrower's remorse, you're not alone. If you don't feel this way, chances are you will end up there anyway.

The truth is, unless you've been on the lending side of the industry, you probably aren't totally aware of how the thing works, and there are expensive consequences for being uninformed when it comes to home financing. The good news is you don't need to read all thousand pages of the Dodd-Frank Act to get a great deal on your next home loan. You simply have to realize that you hold the cards, even if you don’t know it. 

The level of competition in the mortgage industry is astounding and massive profit margins on home loans mean lenders are often willing to bend over backward to earn your business. All you have to do to reap these rewards is shop like an insider. Here’s how to do it...

How to Shop for a Mortage

When looking to purchase a home, learning how to shop for a mortgage is the key to success. For instance, will you be better off with a fixed rate mortgage or an adjustable mortgage? What are the current interest rates for refinancing homes? Will using credit card refinancing help improve my credit score?

Having the answers to these questions and more will help you find the best mortgage lender for your circumstances. Here are some things you need to know.

Step 1: Get Educated

When learning how to shop for a mortgage, many people think mortgages are all about the interest rate, and thus believe “the better the interest rate the better the deal.” These same people are the ones going lender to lender asking “What is your rate?” only to get frustrated when the loan officers don’t hear hard numbers in return. What these same people don’t realize is there are many ways that someone paying 4.99% can actually be getting a better deal than someone paying 4.75%.

Simply put, there are more variables to compare. Some are price related, while others are not.

Reputability of Your Lender

Like everything else in life, there are good and bad lenders and the consequences of choosing poorly can be life-altering. Fraud is rampant in mortgage lending. Usually, such fraud comes from the boutique lender on the corner or the shiny-looking online startup, but as we know from the recession of 2008, shady practices are not just limited to the new guy. 

With that said, generally larger companies are under greater exposure and scrutiny. And for that reason alone you can generally sleep better as a client of a larger corporation than a cut-rate mom-and-pop lending shop.

The right mortgage program

Are you aware of the differences between an FHA and a conventional loan? Do you know the advantages of a shorter or longer-term? It’s important not to approach the mortgage process with any preconceived notions.

You could be the best negotiator in the world but if you end up with a 30-year fixed annual percentage rate (APR) for purchases when a 15-year would have made more sense, it doesn’t matter what the interest rate is, you lost.

Points 

Although paying points may sound bad, it really depends on your goals. By either buying down your interest rate or accepting a lender credit to cover some closing costs, you can tailor your loan to meet your personal goals. This largely depends on how long you plan to live in your home.

To understand how, check this article on Mortgage Math: How to Choose an Interest Rate.

Mortgage Insurance

Mortgage insurance is a cost assessed monthly to certain loans that do not meet a certain risk threshold. It is a considerable cost but it can be avoided. Make no mistake a mortgage with mortgage insurance is not the same as one without it, even if the former has a lower interest rate. 

Closing Costs

Closing costs are not cheap. Even if they are rolled into the loan you will still feel the cost eventually. Be sure to learn the closing costs associated with purchasing and refinancing, and determine how you will cover those costs. Oftentimes, paying them upfront is the best long-term decision.

Step 2: Get Qualified

For many, qualifying can be the most challenging part of the mortgage process, but it is also the most important. Your qualifications not only determine what programs you will have access to, but it will largely determine the cost of your loan as well. 

For those seeking to refinance a home, your lender will typically qualify you and price out your loan options all at once. For those purchasing a home, on the other hand, the vast majority of home sellers are going to want to see that you are pre-approved. This means that you have talked to a mortgage professional and based on your income, savings, and credit, they have determined that you will most likely qualify to borrow.

The amount you are initially pre-approved for does not guarantee that you will qualify for that amount. All loans are underwritten to double-check that they meet lender guidelines. That means, the more information you offer loan officers during the pre-approval process, the more likely you will be to make it to the closing table.

Do not use a pre-approval, unless a loan officer has fully validated it based on all necessary qualifying documentation. See the following:

• Tri-merge credit reports from all three major credit bureaus
• Income documentation: Pay stubs, W2s, tax returns, etc
• Asset documentation: Bank statements, investment account balances, 401k statements, etc.

Once you have the documentation together and a loan officer has validated your pre-approval, keep everything handy so that when you find a house you will be ready for the fun stuff.

Lending is among the greatest of all capitalist traditions and capitalists prefer lending to low-risk borrowers. That is the cold hard truth. Mortgage lenders will take your income, credit, assets, and property value/ condition into consideration when assessing your risk.

When all is said and done, the better these variables stack up the more options you will have and the better deal you will (usually) receive. However, no matter what your qualifications, as long as you are not denied outright, you can still get a better deal by shopping around. 

Side Note: For those worried about credit inquiries (hard-pulls), though credit-reporting bureaus do factor the number of inquiries you've had into your credit score, the bureaus are aware that purchasing a home is a multi-step process and that multiple inquiries are necessary to find a good deal. Therefore, they will only count one inquiry against your score as long as they are all within a short period of time (a month or so). In the end, even if they count two inquiries, it should have a very minimal effect on your overall score.

Step 3: Get a Purchase Agreement

Imagine going to the local farmer’s market, haggling with a vendor until she agrees to half price on a bag of apples, but instead of buying them, you tell her, “Thanks! I don’t have any money right now but hold that price for me. I’ll be back in three weeks.”  Getting a purchase agreement is something you need to know when learning how to shop for a mortgage.

Most people don’t realize this is exactly what they are doing when they ask about rates and costs during the pre-approval stage. Bear in mind, you cannot secure pricing or lock in an interest rate unless you have a signed purchase agreement (PA) between yourself and a seller. This is because pricing is based on the market and not only is the market going to change in the meantime. 

Lenders are also legally allowed to quote you anything they want at this stage. They will commonly pull a bait and switch if you ask about rates too early, which means that there is no way to accurately compare costs. A signed PA is, therefore, your ticket to begin shopping around. 

Pro-tip: The benefit of being patient is that you will have greater leverage. If you approach a loan officer (over the phone, online, or in-person) with all the necessary documentation, a purchase contract signed, and express that you are ready to move forward today, they are likely to bend over backward to earn your business. This is often the strongest negotiating chip you have as a borrower.

Step 4: Find Three Lenders

Th best way to get a great deal on a mortgage is to triangulate your options. Selecting three lenders will help you:

1. Find the right program to fit your specific needs
2. Learn the options offered by different lenders
3. Decrease the chances that you are getting bad advice
4. Save time
5. Gain the leverage you need to help you negotiate the best deal

Pro-Tip: When shopping for a mortgage, always ask for a “Loan Estimate” (LE) from every lender you work with. “Good faith estimates,” loan worksheets, or word of mouth are not LEs and are therefore not legally binding. Click here to see an example of an LE.

To get a diversity of opinions, I suggest choosing one highly-rated online lender, one national name-brand bank, and one respected local credit union. That way you can weigh each of their costs with their respective value and benefits.

Once you have selected three lenders, commit to giving them all the information and documentation they require in order to get an accurate loan estimate at their best price. Of course, you will have to weather their sales tactics but after you do this with one lender you can use the first offer to leverage a better deal from the second. Rinse and repeat until you receive an offer that you are comfortable with after weighing all variables.

Pro-tip: Shopping for a mortgage toward the end of the month is often a good choice. Lenders pay commissions to loan officers based on hitting certain sales tiers which usually reset at the beginning of each month. This means that at the end of the month loan officers (and their managers) may have a greater incentive to offer discounted loans.

During the process, you may find that one institution is cheaper than the others, but, for one reason or another, you would prefer to work with one of the other two lenders. This is okay. In this case, try to use the cheaper offer to nudge a better deal out of the more desirable companies. What you end up with may surprise you.

Step 5: Be Cool

During my time in the industry, there was no greater feeling than ‘firing’ an unreasonable or outlandish client. Remaining level-headed and cordial is extremely important, and is really just good life advice in general. You always stand a much better chance of getting what you want if the person on the other end likes you.

Furthermore, your loan officer can oftentimes be your greatest advocate. Their commissions depend heavily on writing your loan, but in order to cut the price, they have to negotiate with their manager or director. The more your loan officer likes you, the greater chance they will go to bat for you. 

That's why it's so important to learn how to shop for a mortgage.

If Done Correctly...

Have you learned how to shop for a mortgage? Shopping around for a mortgage can take as little as an hour or so longer than accepting the first price you're offered. When you look at the upside, it also could be the most profitable hour of your life. 

Even if you save a modest $1,000 in upfront costs (and that really is modest), that's $1,000 for an hour of easy work. Not bad. That’s not to mention the money you'll save over the next 15-30 years if you manage to leverage a lower interest rate as well. 

Remember, although borrower's remorse is common, it’s also avoidable. Shopping like an insider is the easiest way around it.

Frequently Asked Questions