Shopping for a mortgage can be intimidating. There are thousands of mortgage lenders and hundreds of ways lenders can tweak home loans to distort their real costs. You’re also facing the excitement of buying a new home and you may feel vulnerable as lenders nit-pick your credit report. It’s understandable that many home buyers get stuck with bad mortgages because they just wanted to get the process over with. Unfortunately, that’s no small mistake: On a 30-year mortgage, fractions of a rate point can add up to tens of thousands of dollars.
Want to avoid a similar fate? It’s all about knowing how to shop for a mortgage.
Banks and Credit Union Loan Officers
The simplest way to apply for a mortgage is to walk into your local bank or credit union and sit down with a loan officer. He or she will take your application and, hopefully, present a number of different loan options for your situation. Depending on the bank, you may get a really good deal, especially if you’re already a loyal customer.
Small local banks and credit unions often offer the best mortgage rates. Trouble is, many of them only lend to people with truly immaculate credit. This alone can rule-out many first-time buyers who simply don’t have long enough credit histories yet.
But let’s assume your bank offers you a loan. Unless the rate the bank offers is lower than national averages, how do you know it’s the best deal? Unfortunately, you don’t. So you head down the street to get a quote at another bank or you go to a mortgage broker.
Mortgage brokers match borrowers with lenders. They work as “free agents” for multiple different lenders and earn a fee or commission when they sell a mortgage to a bank. Just like talent agents shop aspiring actors to movie studies, mortgage brokers approach different lenders with borrowers’ applications.
Good mortgage brokers should be able to find borrowers the most competitive rates and also find loans for borrowers with less-than-perfect credit. But there’s a downside: The more expensive the mortgage, the more the broker gets paid. So brokers may have an incentive not to show you the absolute best loans (not to say they all do this).
So shop around and negotiate for your loan just like a home or a car: Don’t blurt out the highest rate you will accept and never be afraid to push for a better deal.
Finding a Mortgage Broker
Many mortgage brokers are independent and work out of small offices or their homes; the best way to find a good one is often to ask friends or family for a referral or pick up a local directory.
Another option is to work online: Sites like LendingTree are essentially virtual mortgage brokers; you enter your application and they shop it around, often instantly, to multiple lenders.
Shop, shop, shop. Before signing on the dotted line, investigate at least two of the three options above: a local bank or credit union, a mortgage broker or an online broker. As you shop, try to compare apples-to-apples. Ideally you should be able to compare loans that are for the same term and the same amount with the same down payment. Then, get a detailed breakdown of rates, points, fees and total closing costs.
Finally, even if you have never checked your own credit before, now is the time to get a free copy of your credit report and score. Print out your report and take it to your first meeting with a bank officer or broker; they should be able to give you a rough idea of what kinds of loans you’ll be approved of before they do a hard inquiry on your credit report (some banks charge a fee for a credit pull to discourage “tire kickers”).