How to Compare Home Loans
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Before you start searching for your dream home or a home loan to fund that purchase, you should get your financial house in order first. Finding your best mortgage can be a daunting journey, but by doing your research and making advance preparations, you can successfully navigate this process and emerge with the optimal results – closing on your new home.
As with any big purchase like a car or your next vacation, the first rule of shopping for a home loan is to do your homework. Research lenders and compare home loan offers. Homebuyers need to identify reliable lenders and should explore all available options. Finding your best rate is only one piece of the puzzle. To be successful, residential mortgage experts suggest buyers should speak to at least two or three potential lenders, and then compare those offers. Doing so increases your chances of both getting your best terms and finalizing your home purchase.
The reality, however, is that most potential buyers don’t take the time to shop around.
To see just how important it is to compare loan offers, LendingTree.com, a loan comparison site, offers a mortgage competition index. It is a great way to shop for multiple loan offers at once and shows side by side ow much you can save by considering multiple offers. So far this year, the average savings on a mortgage totaled $28,000, compared with $21,000 in 2017.
LendingTree.com’s mortgage comparison index shows that best offers available on LendingTree relative to the least competitive and, in May, the index was 0.62. If you can get a lower rate, that can equal big savings. For instance, if a lender offers a rate that’s 0.62% lower than a competitor on a 30-year, $300,000 mortgage, that could add up to nearly $30,000 over the life of the loan.
When you’re ready to begin your search for a home loan, industry veterans say borrowers should be prepared and patient. Here are some tips to guide you through the process:
Getting mortgage offers from multiple lenders
Step 1: Identify multiple lenders to shop with
Consumers have more choices than ever for their home loan, including financial institutions, credit unions, mortgage companies and federal programs. Thanks to mobile apps and next-generation websites, in just minutes, consumers can obtain loan quotes and compare two home loans or more.
Start with your current bank or credit union. You may already work with a local bank or credit union, and that’s a good place to start. If you’re an existing customer of a bank or credit union, you may qualify for special rates and terms.
Consider nonconforming loan options. Trade and professional organizations may also offer some preferred terms for their members. Active members of the military, veterans and eligible spouses may be able to obtain loans through the Department of Veterans Affairs. The agriculture department offers loans to qualified buyers in rural areas. The federal government also runs several programs, including the Federal Housing Authority, which offers loans with lower down payments and lower closing costs to eligible applicants. These types of programs can potentially help homebuyers secure loans with preferential terms and discounts.
Ask for references. Another reliable way to find a respected lender is to mine your personal network. Reach out to your neighbors, co-workers and family members, and ask them to share their experiences. Firsthand referrals are often the most reliable source for lending. Experts say it is critically important to have a trusted partner to guide borrowers through the entire homebuying process.
“They shouldn’t just ask about credit and income. They should ask about goals. Is this your first home? Is this your last home? Do you plan to move in the next five or ten years? That helps determine the options,” said Mike Power, branch manager for Schaumburg, Ill.-based BBMC Mortgage, a division of Bridgeview Bank Group.
To help guide consumers, Elysia Stobbe, a Jacksonville, Fla.-based loan officer at NFM Lending created a checklist to interview and compare lenders. Her questions include asking about a loan officer’s or mortgage broker’s license; obtaining references, online customer reviews, video testimonials and third-party reviews; and even asking if they have a direct phone number, as opposed to a toll-free number that goes to a call center. She also recommends asking lenders about their performance in the closing process, including the percentage of loans that they’ve closed, how loan applicants close on time and if the lender will be present at the closing.
“Everyone wants a great rate — and that’s really important — but finding the best lender empowers the consumer much more,” said Stobbe.
Consider working with a broker. For some homebuyers, working with a mortgage broker can help simplify and streamline the process. Mortgage brokers have relationships with multiple financial institutions and can quickly assemble several options for you to consider. As a bonus, they’ll help you assemble your application and walk you through the process. In return, these mortgage brokers receive a fee that is usually a percentage of your mortgage. LendingTree, for example, is an online mortgage broker, and borrowers can fill out a short online form to potentially be matched with multiple lenders.
Step #2: Get pre-qualified and/or preapproved
Once you’ve interviewed potential lenders and selected a few candidates, you’re ready to start the application process. Consumers need to provide a potential lender with information before they can even get a quote, and even more is required to lock in a rate and get preliminary approval.
Pre-qualification vs. preapproval
In order to initiate the mortgage process, lenders may ask you submit a pre-qualification form. This pre-qualification can often be done online or by phone, and typically requires personal basic information, like the amount you wish to borrow and your down payment. The lender will then perform a soft pull of your credit report. This won’t impact your credit score, so it’s a good way to start the loan comparison process. They may be able to give you a quote of your rate at this stage but nothing is set in stone.
If you’re serious about putting in an offer on a home, you’ll want to ask for a formal preapproval instead of a soft pre-qualification, however.
The terms sound similar, but the differences are significant. Typically, pre-qualification initiates the loan process and allows a lender to verify your information, but it is not a guaranteed commitment to fund your loan. Preapproval, meanwhile, is a more in-depth process that allows a lender to review and submit your loan application to an underwriter, who may then commit to funding a future purchase up to a certain amount.
Preapproval requires borrowers to submit significantly more documentation, including a copy of photo IDs, bank statements, pay stubs, tax returns and W2s, and possibly additional information depending on personal and financial particulars.
When possible, mortgage experts say borrowers should pursue preapproval, as it strengthens their position to bid on a house and close in a timely fashion.
“With preapproval, the borrower signs an application on a to-be-determined property, the full file is compiled and our underwriter issues a commitment to lend. It is a much stronger position,” Power said. “The path to closing is much shorter.”
To obtain preapproval – or proceed with any home loan quote down the line — homebuyers need to get their paperwork in order and organized. Most lenders will ask for your last two years tax returns and W-2s, along with recent pay stubs and bank statements for checking, savings, retirement and investment accounts. If you’re currently renting, it can be helpful to get a letter of recommendation from your current landlord.
A comprehensive application can strengthen a homebuyer’s position relative to other contenders. “The more information we have, the easier it is for you to go to closing quicker, which gives buyer more bidding power,” Stobbe said.
Step #3: Compare loan estimates side by side
Once your applications with lenders are accepted and you receive preapproval, the lender should then be able to tell you how much you’re approved to borrow, at what rate and the fees that are included. This should be delivered in the form of a Loan Estimate. The amount of your Loan Estimate will depend on how much money you have to put as a down payment and the term of your loan. The most common mortgage products are 10-, 15- and 30-year loans, but there are many other programs and options on the marketplace.
Loan estimates are dependent on interest rates, which fluctuate daily and even within a single day. If you intend to shop for loan with several institutions, industry veterans suggest borrowers submit all their applications on the same day, so the loan offers are based on the same-day market conditions.
When comparing offers between multiple lenders, the interest rate on a loan is an obvious place to start, but there are additional factors to consider. The amount of down payment required for loans can also vary. These factors include application fees, private mortgage insurance and closing costs, all of which can vary between institutions. Individual lenders may suggest different programs or products that could improve your loan or rates, and that may not be available from other sources.
Shoppers need to try and line up similar quotes to accurately compare, including rate, down payment and loan terms.
Additionally, some considerations have nothing to do with rates, but rather the capabilities of the lender and the financial institution. These variables include percentage of closing, timeliness of closing, customer satisfaction and referrals. Hopefully, you’ve done your homework on lenders already and can compare these factors at this stage in the process.
Step 4: Don’t be afraid to negotiate
Some lenders offer price matching or can even beat a quote, so don’t hesitate to communicate if you’ve received a better offer from another institution. Not every institution or loan officer is empowered to match or beat offers, but it can’t hurt to ask.
What to compare when shopping for a mortgage
Before you begin starting the search for a home loan, it’s advisable to understand the language of home lending. Lenders will start talking in terms that you’ll need to understand. Here is a quick guide:
Mortgage rate: The rate of interest charged by a lender on your home loan. This can vary based on multiple factors, including daily interest rates, term of the loan, size of the loan and your down payment amount.
Origination fee: Sometimes called an application fee, this charge gets your home loan application started and may cover credit checks, and document processing and review. These fees also vary based on your candidacy and total loan amount, and generally vary between lenders.
Points and discounts: Also called “buying down a rate,” borrowers can pay a fee to the lender to lower the rate for their mortgage, and therefore take down monthly payments. Points differ between lenders and loan programs.
Down payment required: To secure a home loan, lenders require potential homebuyers to produce a percentage of their purchase price in cash. The amount differs based on terms of the loan and price of the property. Many loans will require a percentage of the purchase price to be paid upfront. Borrowers looking to lower their monthly payments may elect to put down a larger sum. Those funds could come from their personal savings or as a gift from another individual. Another way to bridge the gap is down payment assistance, which can be obtained from some financial institutions or government agencies.
Private mortgage insurance: Many lenders require this to protect the lender in case the borrower defaults on the loan. There are ways to eliminate PMI, and loan officers or mortgage brokers can advise borrowers on the process and if they can qualify.
Customer service and time to close: Your experience with a lender will determine both your satisfaction and ability to close on your home. Borrowers should evaluate customer service based on recommendations and testimonials. Lenders can provide also data on their average time to close and the percentage of borrowers that successfully closed; but mortgage experts say borrowers should tread carefully with these stats, as they vary greatly depending on the size of a financial institution, their customers and the types of loan programs they offer.
The path to closing
Once you’ve selected a lender, and confirmed your rate and program, you’re ready to proceed with your home purchase. Be sure to stay in touch with your lender throughout your buying process, including when you bid on a house, when you enter a contract and as you approach closing. They should also be in regular communication to update you on the status of your application, approval and confirmation. Together, you and your lender can make your mortgage and buying experience successful, and lead to moving day into your next home.