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People are creatures of habit, and we like to shop at places we’re familiar with and where we’ve had good experiences, whether buying groceries, furniture, or a car. However, when it’s time to shop for a mortgage to buy or refinance a home, we often go straight to our regular bank and don’t take the time to look at other options.
That can be a costly mistake.
Screening Multiple Lenders is Essential
Mortgage rates vary from lender to lender, but the competition for your business is highly competitive, so with a little work, you can find the best deal for the type of loan and term you want.
Your local bank is always an option, but savings and loans, credit unions, nonbank financial companies such as Quicken Loans, and online lenders have changed the landscape quite a bit.
If you’ve already got a relationship with a bank, they already know the value of your business. They may offer a discount if you use them for other services such as checking and savings accounts, retirement investments, etc.
Another option is using a mortgage broker. Brokers aren’t tied to a specific lender, and their relationships can often match you with the best deals at better rates than you might secure on your own.
However, lenders usually pay brokers commissions, and they could have a conflict of interest, steering you to products that pay them better, even when other choices may be more suitable.
One effective strategy is to ask people you know for referrals. This could be friends, family members, business associates, your accountant, an attorney, or a real estate agent.
Don’t Worry About Too Many Credit Inquiries
If you do some preliminary research and contact various screened lenders, you may need to go through a soft credit check to see what you qualify for.
Mortgage shoppers aren’t usually penalized for too many credit inquiries from lenders because the credit bureaus can recognize when a mortgage shopper is making the rounds of lenders. Home buyers catch a break with multiple inquiries that might otherwise affect their credit score if they happen in a narrow timeframe, generally within a 30-day window.
On a related note, checking your credit profiles through Experian, Equifax, and Transunion early in the home-buying process is smart. Your risk profile is determined in part by your FICO score, and you want to ensure it’s as high as possible and accurate before reaching out to lenders.
Start as early as six months before you shop to give you time to clean up issues that could be dragging down your score.
» MORE: See today’s refinance rates
The Potential for Big Cost Variations
You may get the best terms from your current bank, but the odds are against it. There’s so much variety in the rates and terms offered by different mortgage lenders that it would take a real stroke of luck for your regular bank to be the one that just happens to have the best deal for you.
The amount of money and the time involved in a typical mortgage mean that minimal differences in the terms of two competing loan offers can add up to some serious cash. When you consider that, it’s surprising that people aren’t more aggressive about shopping for a mortgage than they are.
However, differences in mortgage rates are only one variable to consider. Other costs to compare include the following.
All mortgages come with fees known as closing costs. The lender adds additional charges to cover expenses associated with the loan, such as legal filings, obtaining credit reports, origination fees, and many more.
That’s how loan originators make their money because they usually sell off the loan to investors shortly after closing. Investors are the ones who buy the loan and collect interest over the long term.
The amount and type of fees vary from lender to lender. One lender may charge for something another does not or may include three services under a single fee that another lender charges for separately.
In some instances, you may be able to negotiate with the seller so they’ll take on some of the fees associated with the home purchase.
No Closing Cost Loans
That’s an attractive label, but the loan has a cost. In these cases, the closing costs are rolled into the loan amount or are covered by charging a slightly higher interest rate to recoup the difference.
You’re still paying the closing costs in the long run, but doing it this way can make sense for people who want to minimize their upfront out-of-pocket costs.
Most lenders will allow you to buy a lower interest rate by paying for points. These discount points cost 1% of the loan and typically reduce your interest rate by one-eighth to one-quarter of a percent.
When comparing closing costs from lender to lender, you first want to compare offers with no points included. That makes it easier to compare the basic costs and interest rates. Then go ahead and figure in the points if you want.
Down payment requirements may vary from lender to lender. One lender may look at your profile and the home you want to buy and require 10% down, while another may allow a 5% down payment.
Fannie Mae and Freddie Mac have a program that requires only 3% down on 30-year loans for borrowers with good credit. However, not all lenders currently offer this product.
If you want a minimal down payment without going the FHA route, your regular bank may not offer this loan type.
Terms and rates can be dynamic, so one thing to ask after you’ve started the application process is how much wiggle room you have if it changes in your favor.
Some lenders will allow a one-time adjustment if mortgage rates fall after you lock in your rate, but some charge a fee. Others won’t let you change a locked rate under any circumstances.
Your regular bank isn’t likely to tell you about mortgage options they don’t offer. They’re going to want your business. However, other lenders may offer loan products that better fit your needs.
One example would be a USDA Rural Development Loan. Few lenders offer them and you generally need to contact your local USDA office to get a list.
But if you’re a first-time homebuyer who meets income limits and other qualifications, these no-money-down loans take a lot of work to beat.
Another example is portfolio loans. These are mortgages a lender keeps on their own books or sells to investors with whom they have a direct relationship rather than channeling them through Fannie Mae, Freddie Mac, the FHA, or another agency.
With portfolio loans, the lender can set their guidelines rather than following those set by an agency. This can provide greater flexibility for borrowers needing help to meet agency-backed loan requirements.
Such loans are often popular with business owners who have difficulty documenting their earnings or do not want to open their books to outsiders but can prove their creditworthiness in other ways.
Other programs are available through the VA or for people who have gone through bankruptcy and have returned to financial health.
Choosing a Lender
When shopping for a mortgage, start by looking at a variety of lenders, including large banks, community banks, credit unions, online lenders, nonbank lenders, and mortgage brokers, to see what terms they’re offering.
Narrow it down to two or three of the most suitable and ask them to provide detailed quotes and price breakdowns of what they’re willing to offer. Submit your requests to all of them on the same day, ideally one right after another, so you know they’re working from the same market rates, which can change every few hours.
You might even apply to each so that they need to respond with a detailed, good-faith estimate breaking down all the costs.