I got a call a few days ago from a couple of friends of mine, classmates from college.
They’re all the way in South Carolina, and they want to know how to shop for a mortgage loan on their new home construction. Rates have been moving up, and they’re at a loss on how to keep their payment more in the lines of what they initially expected. With three small children to raise, budgeting funds is more important than ever.
I’m only licensed to do loans in Utah, so I can’t help them with the actual loan. What I can do is research, and advise them on the best course of action. And in doing this for a State I am unfamiliar with, I ran into the same challenge that I’m sure many of you are facing.
How do you shop for a mortgage loan? How do you choose who to work with, and find the best rate?
Let’s look into what people normally do, and why it works against them.
1. Applying with their banking institution.
Bank are notorious for having the highest rates. Why? Because they have a bunch of retail branches, and they spend heavily on advertising. And of course, because people trust them, and don’t shop them around.
Ease of process? Usually a myth. Maybe with a smaller credit union that can take care of business in a more efficient way. But with big banks, expect delays and potentially missed deadlines. How many times have you even talked with the same person when asking for an update..??
2. Shopping online. “When banks compete you win”
No, when banks compete, Lending Tree makes money by selling quote information to the highest bidders. And usually, among the highest bidders are other companies that resell that information. So expect your phone to blow up with about 20 calls or so in the first day alone. And good luck getting off their lists, since you would have to do it with each individual caller, and some just don’t give a c**p.
Those low APRs that you see advertised? How often was that the rate you actually got? Did you read the fine print? I mean, lots of people have an 800 credit score and 25% down, right?
3. Using referrals from friends and family, or from Real Estate Agents
This is actually the safest best, as long as you still do your due diligence and shop around for comparison.
If the only pizza you’ve eaten is from Domino’s , and you really REALLY like it – does that mean it’s the best pizza around?
Ask the person providing the referral exactly what they liked about that loan officer or mortgage company. Did they get multiple quotes and that was the lowest? Did they have really good communication? Did they close ahead of schedule, or perhaps just on time and with no issues?
For a short period of time when I started out, I used to work for this mortgage company that advertised low rates. and marketed heavily. They got a tone of business during the refinance boom a few years ago, because they looked like miracle workers. Everyone had rates in the 6, 7s or higher, so a 3% interest drop or more in their rate meant hundreds saved on the mortgage payment. Also, when you’re restarting the 30 year clock on a loan, you’re bound to see savings.So referrals were pouring left and right from happy borrowers.
Here is what was happening on the back end of things:
The rates were half of percent to 1% higher than other places
The closing costs were higher, sometimes astronomical (but rolled into the loan amount they looked ok, people were still saving money)
The loan officers had no idea about mortgages, but they were great at selling. And it wasn’t hard, nobody had ever seen rates this low.
The process was ridiculously long, and paperwork got lost all the time, but hey, when you’re saving $400/month on your mortgage…
So please do your due diligence on referrals, because this isn’t the stuff you hear about.
As for Real Estate Agent referrals, just proceed with caution. Most real estate agents have absolutely no clue about mortgages, other than what they’re taught in the real estate class (which is very little, and sometimes even outdated).
And because they don’t know how mortgages actually work, most agents refer loan officers that close on time, and that they can call on their cellphone when they need an update. If that loan officer or mortgage company also shows up with cookies or lunch every now and then for the whole real estate office…well, you know. You’re just not necessarily going to get the best rate, or the best service. But this does filter out those companies that are so so bad that they constantly miss deadlines and jeopardize deals.
So how do you shop around for a mortgage loan? The right way
Dedicate some time to do your research. You’ll feel a little overwhelmed, perhaps even frustrated, but don’t give up. You’ll save yourself both money and headaches.
Google is your friend. Look for reviews. Avoid the big companies that advertise heavily because they will never ever have the best rates, it’s simply not economically feasible. Don’t trust that technology is the answer to originating your own mortgage, it’s useless without a qualified human brain to put it all together properly.
Here are my tips, and I admit that I’m biased.
I’m a hopeless optimistic, and I believe that the biggest mortgage disruption yet to come is great service at a great price. But unfortunately, I don’t have the reach that big money has. Bless the Internet, I do have a way to make my voice heard.
1. Look for a local mortgage broker.
You don’t have to take my word on this. Get as many quotes as you need, from as many different sources – ask your bank, ask that mortgage company that advertises all over the TV, and ask a couple of local mortgage brokers. Local means they’re only licensed in Utah and maybe a couple of other neighboring states, so if they’re doing business in too many states, they’re not local.
2. Make your list, and shop for a mortgage loan on the same day, or same week at least.
You should get a quote without a credit pull, but besides the local brokers, you’ll notice the big boys wanting a credit pull before wasting their time on you.
You want your quotes on the same day if possible, or within the same week to avoid market changes that could cause differences. Don’t be afraid to reach out ahead and ask for a quote on a specific day of your choosing. Interest rates change slightly daily, and it usually doesn’t make a difference. But sometimes things happen, such as a policy change or economic event, and the change can become significant.
Without a credit pull, the loan officer will need to know your approximate credit score, purchase price or home value, and loan amount. Make sure you give everyone the exact same numbers.
3. Look for the following breakdown on your mortgage quote:
A. Origination charges (could show up as underwriting or discount points) or lender credit. – this is where you’ll find your differences.
B. All other charges will be quite similar between lenders, with only minor variations. And you would absolutely have them every single time, so if one is missing, ask about it. I’ve seen loan officers omit title insurance because “it’s not charged by the lender”. But guess what – it’s required by law, and there is no way around it. Unless you find a title company that will work for free, and if you do, please give me the contact, I have some referrals for them.
1 year of homeowners insurance and 2-3 months of property taxes and homeowner’s insurance for your escrow setup.
You will also see the owner’s title insurance policy listed on purchases, but in Utah, it is paid for by the seller by default. Mortgage regulation requires it to be disclosed even if the cost is not charged to you.
On your loan estimate on a purchase, you will also see more than 2 months of property taxes. The seller will pay for the months that he or she owned the property, so that number goes down at closing (you’ll have a seller credit listed to even it out).
4. Pick your finalists
You’ll likely get a few different rates, so to make your shopping experience more accurate, pick 1 to 3 lenders that look best on the list above. Ask them to give you the pricing for the specific rate that you like. If they say they can’t, cross them off.
Get everything in writing, so the numbers don’t change too drastically once your application is started..
Keep in mind that your interest rate is not guaranteed until it is locked, so if you like it, ask your loan officer to lock as soon as your actual loan is started (on a purchase, you need to have a home under contract).
I hope this makes it easier to shop around for a mortgage, and please do contact me for a second opinion or a quote.
If the competition is close, here are a few more things that can help you make a good decision.
- In the process above, how easy was it to get ahold of the loan officer? How responsive and helpful were they?
- Ask who will service your loan. This one will likely get an evasive answer, such as “it depends on the lender I send your file to”, but here’s the catch.
All the lenders I work with also have their own servicing department and they generally keep the loans on the books. This means they can offer lower rates, because they also make money on the servicing side.
There are mortgage brokers that are actually correspondent lenders, meaning they originate your loan and sell it immediately for a quick profit. There are also lenders that put a lot of money into incentives for brokers, but they also turn around and sell the loans on the secondary market for a quick profit.
Both these cases will translate into a higher rate for you, and crappier overall service for the life of the loan. I don’t know about you, but I’d rather not get notices that my loan has been sold and my payments should go to a different place every few years.
- Ask about the process timeline, and see if you get a solid timeframe, or empty promises. Yes, you can close in 10 days if you have a big down payment (20% or over) and the appraisal requirement is waived. But most loans require appraisals, and sometimes you have to wait 10 days just for the appraisal report to come back, regardless of how fast everything else gets done.
Hope this helps you on your journey to finding the best mortgage company, and while it’s not a recipe for success, it will help you identify the really bad apples out there.
Don’t be surprised if some companies won’t even provide a quote when they pick up on the fact that you’re an informed borrower. They know they don’t stand a chance to compete, and they have other suckers to fool.
If you have credit issues, or specific situations that make your mortgage scenario more complicated, reach out with an email for more information. I don’t have to pull credit, and I’ll be happy to help you get things in order before applying.