We want to share with you some information right from the Federal Trade Commission (FTC) web site on how to best shop for a mortgage:
“Home loans are available from types of lenders—thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price.
“You can also get a home loan through a mortgage broker. Brokers arrange mortgage transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose. [Emphasis added.] Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they are under contract to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks.
“Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers, and most brokers’ advertisements don’t even use the word ‘broker.’ Therefore, be sure to ask whether a broker is involved.”
Learn more about the 3 main types of lenders here.
Never be afraid to shop around and ask for loan quotes from several lenders. This is an important purchase, and you want to work with someone you trust. We recommend considering a mortgage broker with lots of experience and a solid reputation for competitive loan pricing and proven service.*
3 Steps to Comparing Loan Quotes
Find an example property you might want to buy and ask several lenders or mortgage brokers for a loan quote using that same property. A loan quote is a quick, informal estimate that a lender can give you without pulling your credit. It’s a great way to learn the cost of a loan from each lender. (It’s best to do this before you have a property lined up to purchase, but you could also do this with a property under contract.)
Here’s how to compare those loan quotes.
Step 1. To compare costs accurately, provide all lenders with the same information for their quote.
Pick a subject property and ask each lender to use the same: you
- purchase price
- loan amount (purchase price minus your down payment)
- loan term (such as a 15-year or 30-year fixed mortgage)
- credit score (actual or estimated)
- interest rate
For the best comparison, each lender should use the same interest rate. You can ask the first lender for their no-points interest rate and have the other lenders use that same rate.
Ask each lender to give you a quote in writing and make sure they used the same details you provided. If you line all of those pieces up and each quote has the same interest rate, you will get the same monthly principal and interest payment.
(The interest rate used in a quote is not necessarily the interest rate that you’re going to get because rates can and do change, and you have not locked in a rate yet.)
To receive a loan quote, you do NOT have to fill out an application. We will say that again: You do NOT have to fill out an application with every lender. Many lenders will direct you to apply with them right away, but you have no obligation whatsoever to apply. You’re simply shopping around at this point.
Insider tip: Each lender does NOT need to pull your credit report. You can have one lender pull your credit, and you can share that credit score with each additional lender. Or you can just set a credit score that every lender should use. That way, interest rates aren’t adjusted due to a higher or lower credit score.
Step 2. Strip away all the prepaid items:
prepaid interest, prepaid taxes, prepaid insurance, etc.
Prepaid items can be easily manipulated to make a loan look more desirable, and it happens frequently. For example, loan officers may show one day of interest on a refinance even though you’re likely to pay 30 days of interest. They may underestimate how much your taxes will be or how much you’re going to prepay in insurance. Remove all those costs for now.
You will eventually want to know the actual cost of your prepaid items. But for now, ignore them.
Lenders and mortgage brokers do not influence your prepaid items. No matter who you choose as a lender, your property taxes will be the same. The insurance policy you choose will cost the same regardless of which lender you work with. So strip out all prepaids items while shopping around.
Insider tip: Annual Percentage Rate (APR) is another metric that lenders can use to “cheat” with. It is supposed to help consumers shop around by comparing the total interest rate including fees, but we don’t recommend relying solely on it because it can be manipulated so easily.
Step 3. Look at the total cash to close for each quote.
This will be the sum of your down payment and your closing costs. One total number.
If your loan amount, your loan term, your interest rate and your credit score are equal, you will be able to quickly see who has the lowest loan fees and most likely the lowest interest rate.
There are some closing costs that can be negotiable. But ultimately the total cash to close is what you’re interested in. Choose the most reputable lender or the mortgage broker with the lowest total cash to close, after everything is lined up and prepaid items are stripped out.
It’s Your Mortgage, Stay in Control
Most loan officers who work for banks are salespeople. Most salespeople are taught to take control of a conversation. They will try to get you into their branch, try to sell you their loan product, and try to avoid providing you a loan quote in writing. They don’t want you shopping around. Or they may provide you a quote with all sorts of unnecessary and useless information, because they don’t want you to do an “apples to apples” comparison as you’re shopping.
Make sure that you take control of your mortgage. Make sure you get the information we’ve discussed above. Have each lender use the same loan amount, interest rate, loan term and credit score. Have them strip away all prepaid items (or you can do that part).
Ultimately, look at the bottom line–the total cash to close. Get it in writing. Compare that number among the lenders, and you’ll be able to see who has the lowest priced option for you.
Rates Matter, But So Do Trust and Reputation
Please remember, it’s not all about finding the absolute lowest interest rate. You can shop and shop and eventually save an extra $30 here or $300 there. But to save a little, you may find someone who’s new to the industry or who switches things on you at closing. (Yes, it happens.) Find someone you can trust who has a solid reputation, lots of experience with the type of loan you’re doing, who will work hard for you and who will be able to close your loan on time with no surprises.
*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.