A home is one of the largest (and most exciting) purchases you will make, and it can be one of the most complicated. It’s normal to wonder how you should choose a lender to work with.
Is it okay to shop around for a lender, and how exactly would you do that?
Yes! You can and should shop around and compare services to find the right lender, who in turn will help you pick the right loan. If you like to save money and comparison shop, so do we, and we encourage it!
Some home buyers spend hours shopping online for the best hotel rates but then work with the very first lender they talk to. They may feel obligated to work with that individual just because they spent time with them and had some questions answered. Never feel obligated to a lender simply because you talked to them.
It’s important to find a lender you like and trust. Here’s what you need to know to shop for a lender like a pro.
The 3 Main Types of Lenders
These are the 3 main types of lenders.
1. Banks and credit unions.
You are probably very familiar with banks or credit unions because you already use them for day-to-day financial services, such as checking or savings accounts, online banking, and credit and debit cards. Banks and credit unions are FDIC insured, which means the money you deposit with them is insured by the federal government.
Banks and credit unions are direct lenders and have specific mortgage products they sell; they cannot offer mortgage products outside of their own loan products. You can visit their brick-and-mortar locations in person, which may be convenient for you. (However, these days it’s harder to walk in and be able to immediately sit down with a loan officer.) Banks and credit unions used to be the most common source for mortgages, but they aren’t any more.
You may have a personal relationship with professionals at your bank, which could help you with qualifying for and submitting documentation for a loan since they already have a lot of your financial information.
Most banks are more conservative in their lending than other types of lenders.
Banks tend to be very competitive and may offer the best terms in these areas: Home Equity Lines of Credit (HELOCs), construction lending and lot loans.
Tip: When banks are busy, they may increase their interest rates to “slow the flow.” You might be catching your bank when they’re trying to reduce loan applications and have increased their interest rates, or vice versa; you may end up applying when a bank is lowering their interest rates to increase business. Shop around to compare rates and fees.
2. Mortgage bankers/direct lenders.
These are companies designed specifically to offer mortgages and nothing else. They are not FDIC insured and do not hold deposits or offer services such as checking accounts, savings accounts or CDs.
Mortgage banks lend their own money or have lines of credit they use to lend money to borrowers like you. They include some of the biggest mortgage companies, such as Rocket Mortgage/Quicken Loans, Freedom Mortgage, Loan Depot, Guaranteed Rate and Fairway Mortgage.
A key advantage to working with these bankers is that they often have existing relationships with builders or real estate agents where their technology and processes are closely integrated for swift, smooth loan processing. That’s very convenient for you. But that partnership often means higher costs to you, the borrower.
Another advantage is that these bankers have close access to underwriters (such as in the next room) and can push for answers.
For these large bankers with very recognizable names, that recognition comes at a high price. And to cover their payments to builders and agents for referring business, their costs tend to be higher for borrowers.
3. Mortgage brokers.
Mortgage brokers are licensed professionals who work with many different lenders. They are unique in that they work independently and are not limited to a certain loan program or mortgage company. They shop your application to banks and mortgage wholesalers. They’ll look at from one to hundreds of loan providers for you. They represent you and are not trying to fit you into a certain product from a smaller variety of loan options. They can access more programs, including loan products for those with lower credit scores or a smaller down payment or who are self-employed or need a non-qualified (non-QM) mortgage.
Tip: Some banks and direct lenders really like offering certain types of loans, such as VA loans or loans for investment properties. They are good at certain kinds of loans that generate a better return for them. A mortgage broker can shop around and find a bank that loves you.
Mortgage brokers do not make decisions on your application and don’t directly approve your loan. They work with the lender and communicate with their underwriters to help you get approved.
Are there downsides to using a broker? Previously they didn’t have access to underwriters, but now brokers can easily access them by a phone call or email to discuss your application.
In many cases, mortgage brokers can find better pricing, move faster to close and find a better loan to help you reach your goals.*
Tip: Not all mortgage brokers are the same. Some brokers only want to submit loans to one lender because it’s an easier process for them, but it’s not always the best fit for the borrower. They may essentially act like a bank with limited choices. You want to find a broker who will truly shop around for you.
How to Compare Loans
We’ve talked about finding a good lender, now let’s discuss comparing loan products to find the right one for you. (Yes, loan professionals call loans “products.”)
Loan Quotes vs. Loan Estimates
The fastest, easiest way to compare loan products is by asking for a loan quote. This could be for a hypothetical property if you don’t have a specific one picked out yet or if you’re still learning about loan products and want to compare loan types on a high level.
A lender doesn’t have to pull your credit to generate a quote and will estimate numbers for closing costs and possibly your credit rating, but it’s a great place to start.
Most lenders are happy to provide you a quick loan quote. They may even show several options based on whether you want to pay any points to lower your interest rate, pay no points or even get some money credited back if you choose a higher interest rate.
Based on a purchase price and down payment amount you specify, they can estimate the monthly payment, interest rate and closing costs. These estimates could change significantly if you found a property and wanted to move forward because they’re using rough numbers.
If you have a certain property in mind–and preferably if you are already pre-approved with that lender then you can ask for a Loan Estimate. This is a much more serious document. It gets into real numbers. In fact, the loan fees in section A that are charged by the lender cannot change later if you move forward with a loan on that property. It’s a lot more work for a lender to generate, so to be fair, they may want to feel that you’re seriously considering working with them.
Many numbers in other sections can still change, because again, the lender is having to guess at this early stage. For example, the third-party fees may change a little (no more than 10%) depending on which title company you end up using or what the AMC (Appraisal Management Company) ends up charging for the appraisal.
Tip: An appraisal is considered a third-party fee and is technically in the category of things that you can shop around for. Yet you cannot directly choose or hire an appraiser; the lender must do that, by law. (Yes, it’s kind of ironic.) You can, however, push back on your lender if you feel the listed appraisal fee is too high. The lender does have choices for which AMC to work with. They may be able to find another AMC that will save you a little money.
The prepaid fees can change 100%. Those are completely outside of the lender’s control and would be the same with any lender, provided you closed on the same date and used the same homeowner’s insurance policy and the same interest rate. Prepaids include insurance, taxes and interest that accrues before you make your first monthly payment.
Line ‘em Up
Now, whether you’re looking at a loan quote or a Loan Estimate, you can narrow in on the loan fees and terms for true comparison. The key to comparing loan products accurately is to line up those variables so you can compare apples to apples. (Be sure each lender uses the same credit score, as well.) There are four main variables to compare.
1. To compare loans, line up the following from your Loan Estimates:
- interest rate (and whether it is fixed or adjustable)
- loan amount
- loan program or type, such as an FHA, VA or conventional loan
- loan term, or how many years the loan payments are spread across (“amortized”), such as 15 years, 20 years or 30 years
2. Next, look at the lender fees, or loan origination fees. You can directly compare the lender fees and 3rd party fees (things such as appraisal and title fees).
3. Discard the prepaid items. Prepaid items include things such as property taxes, homeowners’ insurance, taxes and interest that accrues before your first regular payment is due (as mentioned above).
The prepaid costs will work out about the same with any lender (at the same interest rate), but they could be counted differently to make the loan quote or Loan Estimate look better. For example, one lender might include 30 days of prepaids, but another lender might count 14 days of prepaids on the estimate to make their closing costs look lower. However, those numbers would be the same if you closed on the same day.
A trusted lender will help you understand the big picture, even of competitors’ loan quotes, and help you see what makes the most sense for you. That’s the kind of individual you want to work with.
Tip: You can negotiate with a loan provider on lender fees (points, underwriting, origination or document fees) but not on prepaid items such as taxes or insurance. Third-party fees will have some variance, but they will probably be very minor; don’t worry too much about those fees.
4. Now you can truly see what each loan costs. Borrowers tend to hyper-focus on the interest rate, but there is so much more to consider. Maybe one loan offers a 1.99% interest rate, but you’d have to pay $20,000 in lender fees and take three months to close. Nobody wants to do that! Another loan may offer a 3.0% interest rate but $0 in lender fees and can be closed within 30 days. You need to consider the whole picture, including loan origination fees AND how fast the lender can close and if they’ll be responsive and easy to work with.
Experience and Reputation Matter
While the interest rate and low closing costs are important, it also matters that the loan provider can actually get your loan done, on time and with as little stress as possible. A lender may promise low costs but cause lots of hassles and headaches and take a long time to close–or worse, not close at all.
There are typically three areas where a lender may excel:
- Customer service/communication
Realistically, you can probably get 2 of the above 3 qualities in a lender, even good lenders.
For example, one bank may offer excellent speed and service, but they cost more. Or a broker may offer speed and low prices but to keep his costs down, the communication may not be the very best. Or a mortgage bank may have great service and competitive prices but be very slow to close your loan.
Tip: Ask different lenders: “Out of speed, customer service and price, which two are your greatest strengths?” Assume that you’ll give up 1 of those qualities. Decide which 2 are most important to you and keep those in mind as you shop for a lender.
Be Cautious and Guard Your Personal Information
If an interest rate or loan terms look too good to be true, they probably are. Be careful who you give your personal information out to. If you see a really low rate, lower than anyone else is advertising, question it and do your homework before you assume it’s valid.
Do look for reviews on a lender. Check that the company has been in business for a while. When interest rates drop, people flood into the mortgage industry who do not have much experience. They don’t know what they’re doing. You want a lender who is knowledgeable–a mortgage expert who can guide you to make the right decision.
We hope this information will empower you and serve you as you shop for a lender and a loan.
As you shop around, we can recommend a mortgage broker* for you to consider. Click here to learn more about them.
*Disclaimer: Lending Lighthouse is providing this information because we want to help you become a better educated, more empowered borrower. That is our mission. We want you to know that we are affiliated with Innovative Mortgage Alliance, a mortgage broker. You may find their services helpful. Whoever you work with for a mortgage, we hope the resources on this web site will help you to reach your financial goals. [Rushford, please decide how to treat this disclaimer or reword as wanted!]