Shopping for a Home Loan

 Keep in mind

  There is more to a mortgage than shopping for the lowest interest rate. Don't be tempted to shop on interest rate alone. You may end up paying more money. Be sure to compare loan terms.

Shopping for a mortgage is not an easy job, but it is an inescapable part of the home buying process. By now, you may have done some preliminary research as to the current interest rates, and gone through the process of pre-qualifying for a loan before you start house hunting. If you also requested a credit report and resolved any problems in your credit record, or if you assembled documentation on your non-traditional credit history, you can now shop for a mortgage with confidence.

Getting started

Your challenge, however, is to select a loan with terms that are most favorable to your situation. For example, if you anticipate that you will be living for 10 years in the house you are buying now, the interest rate may be your primary consideration. If you anticipate keeping the house for only 2 or 3 years, the closing costs and whether there is a pre-payment penalty (a charge for repaying the loan early) may be more important to you.

By the time you have signed a sales contract, you should have a clear idea of what kind of financing you will need. Shop around for the lender that offers the best terms. You may be surprised at the range of interest rates quoted, as well as the considerable variation in the fees charged by lenders for origination and processing a loan application. Even if you have already been pre-qualified by a lender, you should satisfy yourself that the rates and loan terms offered by that lender compare favorably with those of other lenders. It's definitely worth your time to shop around.

Mortgages are available from a number of sources including:

• Savings and loan associations
• Commercial banks
• Mortgage companies
• Federal credit unions
• Financial companies

Where to look

You might do well to start your search for a mortgage with the bank where you have your personal checking or savings accounts. Call them up and ask whether they offer home mortgages, and if so, whether they grant favorable terms to their own account holders. If you are a member of a federal credit union, you should investigate whether the credit union also makes home loans.

Your real estate professional may be quite knowledgeable about which lenders in your area offer the best terms. And if your friends and co-workers have bought homes recently, by all means find out where they got their mortgages.

Look also in the real estate section of your local paper. Many city papers run comparative mortgage rate charts each week, and there may even be a mortgage rate hotline in your area. For additional sources, look in the Yellow Pages under mortgages.

Shopping by telephone
To begin with, plan to contact six or more lenders of different types that offer home mortgages in your area.

Shopping via the internet
Many lenders have websites allowing borrowers to shop for mortgages online. In addition, mortgage brokers' sites may allow you to choose from a number of lenders.

It is important to remember that filling out a loan application — online or otherwise — is a serious step. We strongly recommend that you avoid making multiple applications to "test the market" until you know you are really ready to buy. Why? Unfortunately, some borrowers have made many applications for mortgages over an extended period of time and have found that doing this has had a negative effect on their credit score, reducing the amount of money a lender would let them borrow when they actually needed it.

The advantages of a mortgage broker

A mortgage broker will "shop around" for you. A mortgage broker has access and connections to various banks and lenders around the country, many of whom are only available to professionals in the industry. Be sure that you clearly understand and agree to whatever fees may be involved in such an arrangement, however. Most mortgage brokers are paid a percentage of the final mortgage amount, so understand what his or her fees will be.

 This may help

  We can help you shop for the home loan that best suits your needs. As a licensed mortgage broker, we can compare more than 40 major lending institutions at one time.

We Have Your Loan™

Nevertheless, the peace of mind that a mortgage broker provides is well worth his or her fee, and you only pay at closing what the broker does for you. By working with someone who knows the marketplace, you can avoid financial institutions who have developed "reputations" in the business. You may have heard some of the most common scenarios. Sometimes, a bank can be late in processing the paperwork, delaying a closing. Or sometimes, a lender might increase an interest rate just days before the closing, forcing you to accept their new terms or you will have to jeopardize the closing — and face the liability of a broken contract with the home seller.

Instead, it is in the best interest of a mortgage broker to avoid lenders and banks that have a reputation for certain practices, because ultimately a mortgage broker has just as much at stake at closing as you do. That's how he or she gets paid.

The value of "dirt time"
You don't learn about lender reputations from television commercials. And you don't learn much from online forums (what exactly is the author's agenda?). A professional mortgage broker who makes his or her living by knowing the "ins and outs" of the mortgage industry knows how the business works. In the army, they call it "dirt time". In business, they call it experience.

Insider tools of the trade
If you spent most of your time on the floor of the Stock Exchange, you would learn how to buy and sell stocks. You would know what kinds of tools you would need, how to get attention, and how to complete the transaction. Likewise, a mortgage broker who spends most of their day conversing with bank managers, underwriters, and approval officers, knows what kinds of connections it takes to make a successful transaction. A mortgage broker has the computer subscriptions, the wire feeds, and a portfolio of tools to ensure that they are updated to market activity by the hour. These resources are expensive to the average person, but not to a professional who uses these them every day.

Wholesale mortgage rates
Retail websites and TV advertisements present information for consumers who wish to purchase one mortgage. By responding to retail mortgage lenders, consumers are given the choices available to someone who wants just one mortgage, and that's all. It's called the retail rate. Mortgage brokers, however, are offered special incentives and wholesales rates to distribute through their office. Instead of one mortgage, the banks and lenders hope that the mortgage broker will facilitate many mortgage closings through their office. Often, the wholesale rates can be significantly less than what these same banks advertise to retail consumers.

The incentive of a mortgage broker, then, is to provide their office with the best deals in the marketplace, and these deals can only be obtained by someone who works with wholesale rates.