It seems diligent to shop for a mortgage loan but without understanding the relationship between lenders and the rate you get; you are almost worse off shopping for a mortgage than not shopping for one. This sounds crazy so let me explain.
Rates (mortgage securities) are traded on the secondary market much the same as Tesla or Apple. The prices for these change continuously going up and down, not only every day but throughout the day. Once a borrower has applied for a mortgage loan by either completing an application for a refinance or being in contract to buy a home, the buyer can request to “lock in” their rate.
This means that the lender can secure that rate at that point in time. So, whatever the cost is on the secondary market, is what the borrower can get. The lender is securing that money for the borrower and locking in the current price so that the borrower is not at risk of the rates worsening.
It costs lenders to lock this rate in because they are committing to taking this money and lending it out to a borrower, covering that commitment. Since the lender is ultimately on the hook, they will only lock in a rate on a purchase after the borrower has gotten into contract to purchase a home.
You can now see that if you ask a lender what the rate is, and you are not actually in contract, the lender or broker you are speaking to can’t even lock the rate in for you. All they can do is tell you what the rate costs that day. They have no way of delivering that to you or even proving they are telling you the truth.
As you might imagine, if you ask 20 people what their rate is and none of them have to show you they are telling the truth, all it takes is one liar to ruin this shopping effort. Most often they tell you what you want to hear and use the next month to reinforce this sales tactic.
Continuing with this lying scenario, a month later, you have gotten into contract to purchase a home. The unscrupulous lender might use fear tactics about others rerunning your credit, not closing on time, or not to do anything that will ‘mess up’ your file. If a lender operates this way you can bet, they have many ways of creating guilt or fear about shopping around or using anyone else.
So how do I get the best mortgage rate? To start it is wise to get a referral from the real estate agent, if you already have one. The buying process has quite a few players in it so if there is already some people connected, that is great. A Realtor will not use a bad lender, if they can help it.
Besides a Realtor referral ask for referrals from your Facebook friends. If you get many referrals, keep all the ones who actually did a loan for the person who referred him/her to you. Weed out the others. It is not helpful to you that the lender is the brother of the referral source or their neighbor, only if they have performed for that person previously.
Call or meet a few of the referred lenders and have a conversation with them.
Important: Ask them to send you 2 or 3 names of Realtors they most recently closed purchases with and possibly the home address (if you aren’t the trusting type, lol). This will weed out those who don’t have recent experience and give you a chance to talk to a couple agents. If the loan process didn’t go well, the Realtor will be happy to tell you, lol.
At this point just pick the lender you like best. Ask that person if they are competitive in rates/fees?
If they say yes, then ask them if they are ok helping you while you shop with the understanding that once you are in contract you will want to compare their estimate to 1 or 2 others to verify you are getting a fair deal.
Now, since you picked someone you like, the next month or 2 (while you shop for a home) the process should go nicely. You aren’t stuck with someone because they told you a lower rate. The odds they will close on time and be competitive should be in your favor because they will have a month or 2 invested without ever getting paid. Once in contract they should be competitive because they will not want to lose you after doing all that work.
The only other thing that will increase your odds of having the best rate is to weed out anyone who isn’t a broker. I will break that down in my next post.
Casey Knowles, Ticket Mortgage
