We’ve all been taught to shop around to find the best deal for the products and services we buy. Whether buying a new shirt or a cell phone, our parents always reminded to do our due diligence of shopping around before buying. That said, you would think that when it comes to buying a home—in most cases, the most significant purchase that we make over the course of their lives, we would certainly compare mortgage offers and shop around for the best loan, right?…
Not so fast! According to the Consumer Finance Protection Bureau (CFPB) nearly half of all mortgage borrowers do not shop around — resulting in wasting thousands of dollars unnecessarily. While consumers tend to shop to find the right property or home, many never even compare mortgage lenders during the home buying process. Merits of comparison shopping lenders are also highlighted in Stanford University's Professor Robert Hall's highly cited research article, Diagnosing consumer confusion and sub-optimal shopping effort: Theory and mortgage-market evidence, where the authors conclude “A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers”. Ironically, most of the costs associated with buying a home have more to do with the mortgage than the property itself.
If you are planning to buy a home, consider the following strategies to shop smarter and obtain the right product for your needs:
Compare Mortgage Options First
In most cases, first-time home buyers get connected with a lender through referrals by their real estate agent after finding a desired property. Although finding the home first intuitively seems logical, it’s smarter to secure pre-approval before settling on a property. By obtaining pre-approval first, you are less likely to waste time looking at properties that exceed your qualifying amount. In addition, early pre-approval can lead to a more targeted home shopping process that helps you get into the right home faster.
Find the Right Mortgage Shopping Partner
Direct lenders only offer mortgage products available in their own portfolio and as a result, they often try to match a diverse group of borrowers to fit into these restrictive products. Mortgage brokers on the other hand, tend to have access to a much broader array of products and programs making them much more likely to help you compare mortgage products' pros and cons for your unique needs. In general, potential borrowers have varying levels of readiness in terms of the “Big 3” categories of obtaining a mortgage; 1) credit, 2) down payment, and 3) debt-to-income ratio or overall affordability. For example, you may have an excellent credit rating, a solid job and income, but are challenged with coming up with a 20% down payment for your new home. Your broker’s portfolio of lenders will often include a suite of programs designed to address many down payment obstacles. Having access to these offerings can be the difference between being approved or denied for a new home mortgage.
Smart Shopping: Educate and Negotiate
While mortgage brokers offer lots of options for borrowers, you still should come to the table prepared to ask the right questions and articulate your needs. Always start by checking your credit reports and FICO Scores so you know exactly where you stand in terms of qualifying. In addition, it is highly suggested that you know the basic types of loans that are available on the market. These will include: Government guaranteed (FHA, VA, USDA) vs. Conventional, Fixed vs. Adjustable, Jumbo vs. Confirming and so on. In addition, the location of the property can also be an important factor as some mortgage types may or may not be available in certain areas.
Negotiating is often associated with a confrontational approach or taking something valuable away from the other party. However, effective negotiating with your broker is more about clearly articulating your preferences and needs and working together to achieve your home financing goal. The best brokers provide value to the equation by listening intently to the borrower and consequently, offering the best mortgage choices. As a well-prepared borrower, you must not only ask questions, but you must ask the right questions which is key to negotiating the best possible mortgage. Remember the lessons that mom and dad taught you…and when you’re ready for that first home purchase, start by shopping the mortgage before the property, find the right shopping partner, educate and negotiate and you’ll be well on your way to making your new home dream, a reality.
There are key resources available online to compare mortgage options. As a MortgageTech firm, we offer online, in-person and over-the-phone mortgage consultations from licensed mortgage experts to home buyers. We serve as the trusted advisor for our homebuyers – bringing offers across top lenders, so that they can make the most rational decision on their mortgage options. Take the first step in saving on your home loan, get started today: