For most people, a home is the biggest purchase they’ll make in their lives. In the past several years, home prices have hit all-time highs. It is more crucial than ever to negotiate good deals.
Yet, when buying a home, the price of the house isn’t your only concern. Rather, you also want to make sure you’re signing up for the best possible mortgage. Small differences in your mortgage interest rate can have a large impact on how much you’ll spend over the years.
What’s more, you should also look for a lender who offers great customer service. A mortgage isn’t just a business transaction, but can also mean a long-term relationship between you and your lender.
As if this weren’t enough to think about, it is also important that you apply for mortgages in a way that protects your credit score. Each lender you apply for a mortgage with orders your reports and scores. This is known as a hard inquiry or hard pull, and it impacts your credit score. Too many credit inquiries, if not done properly, could have a serious negative impact.
For these reasons, it’s important to understand how many lenders you should apply for a mortgage with, when to apply for these mortgages, and what to look for in a mortgage lender. If you take a strategic approach to shopping for a mortgage, you’ll be able to ensure that you obtain the best deal possible, with the least amount of headaches.
Different Types Of Mortgage Providers
There are several different types of businesses which provide (or connect you with) mortgages. It makes sense to apply with each type of lender, so that you maximize the odds of obtaining the best rates and service possible.
Non-Bank Lenders
First, you have national non-bank lenders. These are companies which don’t operate like traditional banks. They don’t take consumer deposits for checking and savings accounts, as traditional banks do.
Some of these lenders strictly operate online, while others have local offices, and loan officers whom you can meet with in person. Non-bank lenders have gained a large share of the mortgage lending market, and continue to grow.
These companies tend to offer the same loan programs as other lenders, and often have similar qualification criteria. However, in some cases, they are more flexible in terms of financial requirements (such as how long you’ve been at your current job), and in some cases, even the credit score required to qualify for a loan. These lenders are often a top choice for borrowers with nontraditional work history, and/or moderate incomes.
Perhaps the most well-known non bank lender is Quicken Loans, thanks to it’s massive advertising campaigns, and their Rocket Mortgage platform. Other prominent non-bank lenders include Guaranteed Rate Mortgage, Fairway Independent Mortgage, New American Funding & Movement Mortgage. These lenders tend to operate on a national basis, and offer both conventional mortgages, as well as FHA, VA and other loan products (more on those later).
Large Bank Lenders
Of course, non-bank lenders are far from the only players in the mortgage world. Traditional deposit banks also have a large footprint. These are the same places where you might set up your checking, savings and other deposit accounts. They tend to have lots of branches in major cities and suburban areas, with a mortgage loan officer available in most branches.
These lenders typically work with borrowers who have been at their job (or owned their business) for at least several years, and have well-documented income and assets. While their credit score requirements are often similar to those of non-bank lenders, large banks tend to be more strict in their overall approval standards.
Large bank lenders include Chase, Wells Fargo, Bank of America, and Citi. Each of these lenders operates in most if not all of the country, and participates in most lending programs.
Credit Unions
Credit unions are cooperative financial institutions, which are owned by their members. Their members tend to have something in common, often sharing similar professions or being part of the same workplace. For example, there are credit unions which are dedicated to serving school employees, healthcare workers, and members of the military and/or veterans.
These organizations are designed to maximize benefits to members, rather than to earn large profits, as traditional banks and non-bank mortgage lenders are. As a result, it’s often possible to obtain more competitive mortgage interest rates from credit unions.
Mortgage Brokers
Mortgage brokers help you find a mortgage. They’ll review and assemble your financial documents, & pull your credit reports. The mortgage broker then contacts various lenders they work with, & negotiate potential deals for you.
It is important to understand that mortgage brokers don’t directly fund mortgage loans.Rather, mortgage brokers find a deal for you.
Mortgage brokers can either be compensated by the lender (when you close on a deal with them), or in some cases, directly by you. Before you start working with the lender, you should find out whether they’re being paid by the lender, or if you’re required to compensate your broker.
A good mortgage broker enjoys strong relationships with various mortgage lenders, and can help you find competitive deals. They’ll also save you time and effort.
What Types Of Lenders Should You Apply With? And How Many?
As you can see, there are a variety of lenders to choose from. Ideally, you’ll apply for loans with lenders in all three categories.
This maximizes your chances of not only qualifying for the best deal possible, but also finding a loan officer whom you enjoy working with. We suggest applying with at least 5 lenders, ideally including at least one in each category listed above. If you’re working with a mortgage broker, make sure that you inform them of your strategy, so that you can maximize the benefit of their services.
Applying with 5 lenders might mean applying with 3 traditional banks, 1 non bank lender, and 1 credit union. Or, it could mean you apply with 2 credit unions, 2 non bank lenders, and 1 bank. You can certainly apply with more than 5 lenders if you wish, but 5 is the minimum amount we would recommend.
Now that you know how many lenders you should apply with, and which types of lenders, it is important to better understand the types of approval letters you’ll be seeking from lenders, as well as how to find lenders to apply with. This is where the real work begins.
Pre Qualification & Pre Approval Letters
To shop for homes with a realtor (or place an offer on a home, directly with the seller’s agent), you’ll typically need either a pre qualification letter, or a full documentation pre approval letter. With pre-qualification letters, the lender will ask you for information about your assets, debts and finances.
They usually won’t have you fill out a formal mortgage application, pull your credit reports, or ask for your bank statements, pay stubs, and proof of what you’ve told them. This information won’t be requested unless you upgrade your pre-qualification letter to a preapproval letter.
With pre approval letters, you’ll fill out a mortgage application, have your credit reports pulled, and provide most or all supporting documentation, before the letter is prepared. These include tax returns, bank statements, investment account statements, pay stubs, photo identification, and more. If there are issues with the documents you provide, or more proof is needed, your loan officer will let you know.
A pre approval letter is typically viewed more favorably when offering to purchase a home, since it offers greater assurances to the seller of your ability to close the deal. If you’re ready to purchase, it’s best to obtain a full-documentation pre-approval.
Another advantage of a fully documented pre approval, is that you don’t have to scramble around to pull together documents. Once your offer is accepted, and you’re under a deadline to close the purchase, you’ll be quite busy. It’s best if you can eliminate complications, such as pulling together documents for pre-approval.
What’s more, if you’ve completed a full document pre approval, then if an issue arises with any particular lender, you can simply move on to a different lender, with few hassles. When it comes to purchasing real estate, having backup options is always important.
Once you’ve selected your five lenders, you should go through the process of a full-documentation pre approval with each of these lenders. Let’s look at how you should go about selecting lenders to contact.
Selecting Lenders Whom You Might Work With
First, you should talk to friends and family who purchased a home in the past few years, and find out which lender they worked with. Inquire as to whether the process went smoothly, and whether their loan officer was helpful. If so, you’ll definitely want to add this person to your list.
If you have a realtor you’re working with, they’ll almost certainly have some suggestions for you. These are also worth noting down – though you should still do your own research.
You should do some research online. Websites like Yelp, as well as local reviews with Google, can be good places to find qualified mortgage lenders. While there is room for manipulation of these results, by and large, you can find some good folks to work with.
Nerdwallet, Credit Karma, & Bankrate are all good places to research mortgages. Keep in mind that these websites are paid a commission when you contact a lender. Therefore, while their advice is valuable, you’ll still want to do research on your own.
Lending Tree has become quite popular in recent years. This online mortgage platform asks you a series of questions, about your income, credit scores, and the sort of home you’re looking to buy (such as price and location). Using this information, they’ll match you with several lenders, who will then contact you, and try to get you to apply for a mortgage.
In many respects, Lending Tree is quite a useful service. However, you should keep in mind that Lending Tree often does not select the mix of lenders we suggested earlier. Lending Tree might connect you with all independent mortgage lenders, and maybe one bank, excluding credit unions you might be eligible for. Or, they may connect you with several banks, and no independent lenders.
Also, keep in mind that each lender whom you’re being introduced to paid speak with you. Therefore, they are quite persistent in contacting you, sometimes calling and emailing multiple times per day. This can become quite tiresome, especially when you’re busy with work, family and so on.
Contacting Lenders & Applying For Preapproval
Once you’ve used the steps above to select your five potential lenders, it is time to reach out to each of them. In your initial contact, you’ll mention that you need a preapproval letter to shop for a home, & you would like to know what papers are required for a fully documented preapproval.
Each lender will provide you with a list. In many cases, they’ll have a simple online portal, where you can upload documents. If you have questions about any piece of information requested by the lender, or are unable to provide some type of documentation, you should let the lender know. One advantage of beginning the preapproval process early, is that you have time to work through these issues.=
Applying For Credit
Once you’ve pulled together your required documents, it is time to have each lender order your credit reports. The lender will be ordering tri merge credit reports, which contains information from all three credit bureaus (Equifax, Experian & TransUnion), as well as your mortgage credit score from each credit bureau.
What are your mortgage credit scores? As you may know, there are two major types of credit scores: FICO and VantageScore. FICO is used by the vast majority of lenders, although VantageScore is growing. VantageScore is the score you commonly see on credit monitoring apps like Credit Karma and Credit Sesame.
Mortgage lenders use FICO – specifically, a different version of FICO, for each credit bureau. These versions are FICO Version 5.0 (used for Equifax, and also known as Equifax Beacon 5.0), FICO Version 2 (used for Experian), and FICO Version 4 (used by TransUnion). These versions of FICO can vary considerably from your Vantage credit score, as well as newer versions of FICO.
Before you begin the mortgage application process, it doesn’t hurt to find out where your FICO mortgage scores fall. You can gain access to this information by visiting myFICO, and signing up for a membership, which typically costs $29.99. Once you’ve checked your scores, you can cancel the membership.
At this point, you’re ready to apply with each mortgage lender. To apply, you’ll simply need to fill out a mortgage application, and let the lender know that you’d like them to pull your credit. However, there’s a very specific way in which you need to apply for credit, in order to obtain the best mortgage rate, and to preserve your credit score.
Have Each Lender Pull Your Credit Reports On The Same Day
You should have each mortgage lender order your credit reports on the same day. There are two reasons for this.
First, mortgage loan rates, as offered by any particular lender, often vary from day to day. The rate you’re quoted on Tuesday and Thursday of the same week might vary somewhat – and these small differences can make a big difference in what you end up paying over the years.
Second, it’s important to remember that applying for credit (known as a credit inquiry), ultimately impacts your FICO score. Credit inquiries, as a whole, account for 10% of your FICO score. If you’re going to apply for multiple mortgages, it is important that you do so in a way which protects your credit score.
With mortgage credit scoring models, all mortgage inquiries within a 14 day period will count as a single inquiry. Therefore, if you apply with 5 (or more) lenders on the same day, your credit score will be impacted just once (not 5 times).
Reviewing Your Preapproval Letters
Once you’ve recieved your preapproval letters, it’s time to understand what they actually say. First, you want to review the loan amount you’ve been approved for, and the down payment required.
For example, if you’ve been approved to purchase a home for $500,000, with a down payment of $100,000, then that means you’re borrowing $400,000. If you’ve been approved to participate in the FHA or VA programs, then your down payment might be as low as 3.5% of the purchase amount.
Keep in mind that the interest rate listed on the preapproval letter probably won’t be what you’ll actually end up paying when you buy the home. Remember that interest rates change from day to day. When you buy, you’ll almost certainly be quoted a slightly different rate from what is listed on the preapproval letter.
With your preapproval letters in hand, you’re ready to start shopping for a home. You can present these letters to your realtor (or the seller’s realtor, if you’re working without your own agent) to submit offers on homes you like.
Typically, you will also need to provide proof of funds – that is, proof that you’re able to pay the down payment to buy the home. This might include bank statements which contain the down payment amount, or investment account statements. Once you have an accepted offer on a property, and are ready to move forward, it is time to circle back with the mortgage lenders who provided you with a preapproval letter.
Obtaining An Interest Rate Commitment Letter & Finalizing Your Lender
Remember that the preapproval letter you were given was not for a specific property. Rather, it was a general offer, which makes it clear that you are financially qualified for a loan with that lender. If your offer is accepted, you’ll then enter into the escrow process, which (if succesful) results in the purchase of the home.
When you enter into escrow, you’ll want to contact each lender who provided you with a preapproval offer. Let them know that your offer has been accepted, and you’re looking to move forward with the purchase of the home. Also inform them that you’re seriously considering working with them, depending on the interest rate they offer.
At this point, lenders will need to pull your credit scores again, and offer an interest rate on the exact property which you’re looking to purchase. Typically, they will offer this rate for a limited period of time (say 30 or 45 days), after which the rate will expire. This is known as the rate lock period. After that time, you can extend the rate lock, for a fee (typically a percentage of the amount you’re borrowing).
As when you obtained pre approval letters, you’ll want to have each lender pull your credit on the same day. That way, you can compare interest rates directly, and choose the best offer.
It is important to consider not only the interest rate you’re offered, but also, the ease of working with a particular lender. If you didn’t have a good feeling in your conversations with a loan officer, or have concerns about their approach, you should probably work with someone else. A great interest rate and lower closing costs are of little use, if a lender is unable to help you smoothly get the deal done.
Once you’ve selected a lender, it is time to move forward with the purchase process, and hopefully close on the home of your dreams. By following the steps detailed above, you’ll be able to ensure that you’re being offered the best mortgage deal possible, allowing you to save money, and enjoy peace of mind.
The Final Word
Shopping for a mortgage might feel like a pretty complicated process – and it often is. However, by applying with a good mix of mortgage lenders, in a smart, organized way, you’ll be able to obtain the best mortgage rate and terms possible.
