I bought our first home by taking a leap of faith. In a series of posts, I will write about my buying experience, the lessons I learned, and best practices. In this article, I will describe how I shopped for a mortgage loan and compared 10 different banks while sitting in my office cubicle.
People often tell stories of extensive and hectic mortgage shopping that involves going around banks, making phone calls to bankers, and so on. Even my colleagues had to go through hours and hours of research and travel to find the best mortgage.
However, I only spent an hour searching for a mortgage loan using my method. I did not make any calls, and instead, I received 10 calls from bankers on my cell phone.
Late on a Sunday night, our offer for a lovely 4-bedroom south Florida home was accepted, and our immediate next job was to secure a home loan. It was time for mortgage shopping!
How I prepared for Mortgage Loan Shopping
The pre-approval process taught me another important lesson, which was the documentation required at the time of the actual loan application. As I mentioned earlier, I believed that renting was a more financially sound decision than buying a home. However, as we began to cherish the idea of living in a larger home, decorating and renovating it according to our taste, and gardening, our financial priorities began to shift. Unfortunately, our rental condo did not allow for any of these things.
We felt social pressure as all of our friends and relatives were already homeowners, and even the resources I managed were homeowners as well. I hope you can understand what I mean.
All of these factors led us to begin the process of buying a home, which I will discuss further in my next post on our home-buying experience.
I came across a helpful article that provided tips for first-time homebuyers, which I followed closely. I obtained my credit report and score, consolidated all of my cash into a single account, and analyzed our income and expenses to determine how much of a loan we could afford and how much we could contribute towards a down payment.
To make an offer in our area, we needed a pre-approval letter. Our Realtor obtained this for us from a local credit union. During this process, I learned my exact credit score from all three credit bureaus, which averaged 796. Based on our calculations, we could afford a 20% down payment, which would help us avoid mortgage insurance fees. We also decided on a 30-year fixed mortgage.
Before you begin shopping for a mortgage, it is important to have certain data readily available.
- The prevailing rate in the market
- What is your credit score
- How much loan you can afford to pay, consider the exact amount of monthly hidden costs (including tax, HOA, Insurance, and utility bills)
- How much down payment you can afford
- What type of mortgage loan is most suited to your need (ARM, 15 years, 30 years, etc)
- How soon do you need to close the house (talk to your Realtor about the date seller wants)
Mortgage insurance, to me, is unnecessary and avoidable spending. We also made sure we had enough money for closing costs and home repair costs, including upgrades.
Sunday night, the night our offer was accepted, I researched rates at the Zillow marketplace. I read articles on effective mortgage shopping. MSN has a good write-up. Bankrate put up a few good points. Forbes’s article on three pitfalls helped us. Most of this advice suggested spending time while shopping and going out to talk to loan officers directly. I also went through the federal govt. advice for mortgage shopping.
In July 2014, the lowest rate that we received was 4.05%. I made note of the five cheapest rates along with their contact numbers for the following day.
I did not want to spend too much time making phone calls to various banks. Instead, I wanted the bankers to come to me. Since I had a lot of work to do, I could not afford to visit brick-and-mortar banks. Thus, I knew exactly what I was going to do the next morning.
I am a customer of both Chase and Bank of America. I had already checked their rates through their internet banking sites. However, their rate quotes for excellent credit were significantly higher than those that I received on Zillow. Therefore, I removed them from my list.
How exactly I did shop for a mortgage loan
After my initial round of meetings on Monday morning, I went to a conference room that I had booked earlier. Once there, I entered ‘do not disturb’ mode and proceeded to open Lending Tree and Credit Sesame accounts. I provided the necessary information and my social security number.
To shop around for mortgage loans, you do not necessarily need a Lending Tree account. You simply need to provide basic information and your social security number. Since I was already a Credit Sesame user, I only had to log in and select the mortgage shopping option.
Interestingly, Credit Sesame provided only two options, unlike Zillow’s hundreds of bankers. I later realized that Credit Sesame had picked lenders that had tied up with them and offered loans in our county. It is important to remember that there will be no credit check until you pick a lender and contact them directly through Credit Sesame.
Similarly, with Lending Tree, there is a significant difference. Lending Tree is not a lender but functions like travel sites such as Cheap Tickets and Orbits. They are intermediaries or middlemen.
Lending Tree requested my state and city, home type, purchase price, and down payment amount, as well as my social security number and the option to select my credit score range (good, bad, excellent).
Once I submitted the information, Lending Tree forwarded my requests to five different lenders instantaneously. My phone started ringing almost immediately after I finished clicking. I had previously read user reviews of Lending Tree and was prepared for the storm of phone calls.
As soon as I finished talking to the first banker who called me, I had six missed calls and four voice memos. The banks had my social security number, but they couldn’t use it without my verbal permission. If they did, people would become millionaires by suing them and they would have folded their shops by now.
I received calls from Discover Home Loans, West Star Mortgage, Quicken Loans, Wells Fargo, and a local mortgage company called Paramount Mortgage. I later discovered an email from Lending Tree about these five companies, but by the time I read the email, I was already done talking to all five of them.
I found the Federal Trade Commission guide for mortgage shopping to be very useful, and I followed it word for word. In particular, I recommend going through the section “Obtain All Important Cost Information” in the guide. You should keep this guide handy when it’s your turn to compare mortgages.
People who reviewed Lending Tree online were unhappy with the barrage of phone calls they received, but the bankers who called were all cordial and nice. After all, they are mortgage bankers who are trying to secure a few hundred thousand dollars from their clients, not just sell a single item for $50.
Mortgage bankers are some of the smartest salespeople in the country, and they will do their best to convince potential clients why they are the best in the business. With my Asian Indian accent, I managed to handle them well without revealing too much information or allowing them to run a credit check.
I allowed only a few short-listed lenders to run a credit check on me. All 5 of them provided me with a “good faith estimate” on the phone and via email. I compared their rates, fees, and estimated closing dates.
If any of this information was missing in the good faith estimate, I asked for it.
I called the banks listed on the Zillow marketplace, and soon had 10 quotes sitting on my table. I shortlisted two, both from Lending Tree: WestStar Mortgage and Discover Home Loan.
WestStar was offering a 4.125% APR loan with an appraisal fee, credit report fee, and discount rate point fee of $1,308.
Discover quoted initially a 4.2% APR with over $1,900 of fees, mainly loan originator fees and appraisal fees.
I conducted a healthy competition between the two. I sent Discover the quote I received from WestStar, and within a few hours, Discover came back with a counteroffer. They offered me the same APR of 4.125 and waived all fees except the appraisal and credit report fees. Upon negotiation, they gave me an account credit to waive those fees as well.
I sent Discover’s revised quote to WestStar to match or beat Discover’s offer. Unfortunately, WestStar gave up and Discover Home Loans secured my loan. Discover also guaranteed the earliest closing date.
How is my credit score affected due to mortgage Loan shopping?
Smart mortgage shopping doesn’t have much of an impact on credit scores. Credit reporting agencies have coded mortgage shopping credit inquiries in such a way that multiple credit inquiries within a short span don’t significantly affect your credit score. They understand that you are shopping for a loan, not actually borrowing money from all of the lenders.
Your credit score will only be affected once in a 30-day period. I will soon report the actual drop in my credit score. As soon as I have the number, I will update it here.
During the mortgage underwriting process, the lender asked me to explain as many as seven hard inquiries in my credit report. They wanted to know if I was applying for multiple mortgages. I provided satisfactory answers. All those seven hard inquiries will count as only one loan inquiry in a credit report. They will show up, but the drop in score will be equivalent to a drop with one hard inquiry.
In summary, you have 30 days to shop for a mortgage, or else your credit score will be impacted more. Within 30 days, you can shop at as many banks as you wish without worrying too much about your credit score.
As per this Equifax article, they specifically asked for three behaviors, while you shop for a mortgage loan
- Shop for the same amount of loan everywhere
- Do not combine any other type of loan, and do not combine a mortgage with an auto loan or revolving credit (credit card)
- Even though the shopping period is 30 days, try to finish shopping as soon as possible
What went right for us in Mortgage Loan Shopping
There are numerous benefits that we got from this way of mortgage shopping.
I shopped for only one hour and was able to secure the best loan available that day. We chose the banker on day 2, just because I took the counteroffer. Otherwise, we could have started our mortgage process on the first day itself.
A faster process meant that we could enter our dream house sooner. There was no manual work involved, and it was just another day in the office. I stayed an extra hour at the office to finish my work for the day. There was no wage loss due to running around the banks for home loans.
We did not have to negotiate in person or shake hands. The entire shopping process was done online and over the phone, which resulted in less headache for us.
When you have printouts in front of you on your computer, it helps in visualizing and comparing quotes, including fees and rates.
You are aware of current market rates and also any potential competitor’s rate. You can create competition and secure the least rate.
All lenders sent me a soft copy of the good faith estimate. Once you get the quote, you can create healthy competition between lenders to match and surpass each other’s rates.
In my case, although Discover was the second-best initially, they competed and went ahead to secure the loan. I became the ultimate winner for getting the lowest rate with no fee.
What could have gone wrong in Mortgage Loan Shopping for us?
A barrage of phone calls could have been annoying. However, if you think you are in a market (have you seen the markets in less developed countries?) to buy vegetables and all the shop owners are asking you to visit their shop at the top of their voices, it’s the same feeling. Stay calm and be steady. Don’t permit lenders to run a credit check before you shortlist them based on a good faith estimate.
When you need to lock the rate, the lender will have to run a credit check. I locked the rate with West Star too soon, and they ran a credit check. I could have avoided that and only let Discover run a credit check on me. After all, it was my first-time experience.
This is a very short time to shop for a mortgage if you’re not prepared and familiar with the concepts. You could sign a document without reading it fully or could give consent to something you didn’t listen to properly. Here’s the step-by-step mortgage process that every home buyer should be familiar with.
There was a big miss on my part. Once Weststar declined to better Discover’s offer, I could have taken that quote to all other lenders whom I rejected in round 1. That would probably have brought my rates down. Now I regret not spending an hour more.
Overall, that was my story. I was well-prepared, and things went on smoothly. All the best for your shopping. May you get the best deal!
Kevin @ Credit Bureau Insider says
There are a lot of hidden fees that surface in that truth in lending statement. The cost of borrowing money can be very high, and it sounds like you did a great job leveraging the modern tools to get the best rate and closing costs.
I wouldn’t have the patience to field all those calls, but an hour of hassle saved you months of work to earn back the interest costs you saved.
I think this is biggest financial decision one could make in his life time. And for that spending a couple of hours on phone is very logical, no?
About fees, when you loan shop at so many different places, you can see the difference in fee structure and find out all the hidden fees associated with a particular offer.
Deb @ Saving the Crumbs says
We just bought our first house last year and did a bit of mortgage shopping too. For us, we found that the best option was a credit union. Not only was paperwork a breeze, they were extremely accommodating because they were small, and their mortgage rate was lower than everyone else.
Deb, I forgot to mention in the article. The way I inquired about interest rate with the banks I had accounts in, I checked rates on local credit unions too, at the time of pre-approval. Which included our employee credit union as well. Credit unions had a very high closing cost. Although mortgage rate was same as others.
I still have few more days before closing. Hopefully Discover will stick to their commitment of closing within 30 days.
When my sister was looking for loans, there were all of these advertised on television. But they sounded a little too shady and a little too good to be true, We really had to sit down and read the fine print.
None of my friends or colleagues go through the route I chose. My point was, being a technician and by living in a tech era, why shouldn’t I be using newest tools?
If We can invest online, buy stocks online and buy all other things online, then we should be able to get mortgage online, no?
debt debs says
Congratulations on buying your first home! We will be renegotiating our final mortgage renewal this fall. We are targeting to have our mortgage paid off in four years from now. We’ve been with the same bank for many years and I would hate to move our mortgage, because it’s convenient to have all in one spot, but I will shop around and I will move if I have to. The mortgage doesn’t expire until March 2015, but I hope to renew up to 6 months early to lock in a good rate.
I will be very glad if you search for refinance through Lending tree link on this post. 🙂 ok on a serious note. See if you get better rates else where. All banks are same in terms of ease of communication. I bank with 3 banks in all now and they all pay high regards to customer care.
Congratulation on your home. We were mortgage shopping too and ended up going with our credit union. They had the best fee and rates, but there is a balloon payment after 15 years. I think that’s fine.
Thank you Joe. In my case local credit unions had high one time fees although they had same APR rate as other lower rates we were getting. So, I excluded them during pre-approval process itself.
In our area, I don’t think I heard anyone not paying money towards fees. We got our mortgage at no cost upfront, except normal title cost from our title company.
Lance @ Healthy Wealthy Income says
Way to go, your home looks amazing. Thanks for the detail and explanation of the process. It can get pretty intimidating on what usually turns out to be your largest purchase in your life. Nice job.
Lance its a great feeling when someone says good things about your choice, so thank you very much! Largest purchase does call for largest negotiation and effort, isn’t it?
Great article! I’ve never heard of playing one mortgage lender against another but if I ever get another mortgage, I will do it. Fortunately for my current lender, I had a friend who was doing refinancing and he did all the legwork for me. Last year, I got a 30 years fixed, no points, no fees, no appraisal charge, no credit check, no nothing. It was nice to see an escrow closing showing all zeros, except for the mortgage.
You got a good deal it seems. Getting a mortgage without fee feels awesome. My closing is this week and we are excited. I’ll have to pay title cost and insurance on top of down payment.
I tend to play one lender against another in other areas too, I did the same thing for home owners insurance. That post is coming up soon.
casey cole says
Practical article – I learned a lot from the details , Does someone know where I could possibly access a sample HUD-GFE document to use ?