Shopping for a home loan but not sure who to trust or how to make sure you are getting a good deal?
How Interest Rate Shoppers Sabotage Themselves
One of the biggest misconceptions borrowers have when it comes to how to compare lenders is that the loan with the lowest advertised rate is always the best choice.
There are three major problems with this assumption:
1. Advertised rates may not apply to your loan.
2. The true APR (and cost) could be a lot higher.
3. “Bait & switch” tactics are unfortunately still common, even among the biggest lenders.
Those who simply call around and demand to know, “What is your rate?” aren’t getting the entire picture. No lenders or banks just have one rate. Each lender has an almost identical range of rates on offer. What you receive depends on how much they think they can get away with and the specifics of your individual circumstances and transaction.
How to Accurately Compare Lenders and Loan Programs
What many borrowers fail to realize is that they really ought to be focused on shopping by APR not advertised interest rates. The lender is legally required to list this figure in all advertising. The APR reflects the real effective annual percentage rate when lender’s points and fees are included. Often you’ll find this number far higher. For example, a 3 percent rate with a 5 percent APR means that the lender may be charging a lot of fees and you’ll need additional money at closing. In contrast, a 4 percent rate with a 4 percent APR means no fees and a loan that is actually cheaper.
Savvy Home Loan Shopping: It’s the Person, Not the Institution
Experienced borrowers know that the individual loan officer or mortgage broker you are dealing with, rather than the brand, is often far more important to getting the best home loan.
It’s no secret that some of the nation’s largest lending institutions are also those that have committed the most fraud. Fortunately, their well-insulated CEOs have been able to afford to buy off accusations with a $26 billion settlement while the small brokers in the trenches were set up to do the hard time.
Many individuals believe they will get the best deal by walking into their local bank where they hold their checking accounts. In reality, It doesn’t matter how long you have had an account there, unless you have $10 million in deposit, they probably don’t care who you are. Note that they will normally simply sell your loan and they won’t remain your lender after the first payment anyway.
Tip: If you are really in love with a certain bank, shop around through different mortgage brokers and you’ll probably find they can get you a better rate than going direct because they have access to wholesale rates.
Your Background Check Checklist
It’s smart to want to investigate lenders before settling on one. Regardless of how large and famous a bank is, you should always do your own background checks on both the lender and your individual loan officer. This can be done for no cost, in about five minutes, online and could save you many thousands.
What to look for:
- The NMLS provides instant access to license status and complaint history.
- Each state licensing agency also provides its own online licensee lookup tools.
- Google them.
- Check consumer review sites like Yelp, and look them up on Facebook.
- Check the Better Business Bureau.
What Makes a Great Loan Officer?
Despite automation and advances in technology, mortgages are still complex and still require the hands-on involvement of human beings. More than just a matter of honesty and integrity, how good your loan officer is at his or her job will make all the difference in your loan closing on time or even getting approved at all. Your loan officer is like your personal champion who goes out to do battle for you every day to get your loan closed.
A great loan officer:
- is knowledgeable about loan products and options.
- has connections in underwriting at the executive office and with other industry pros.
- has lots of experience. Lending is so complicated it can only be mastered by years of hands-on experience.
- takes the time to match you to a loan program that best fits your personal goals.
- is happy to answer all your questions (for the tenth time).
- tells you what you need to know, not just what you want to hear.
The Bottom Line
When it comes to comparing lenders, remember that APR may be more important than rate, and size doesn’t really matter, but experience does.