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Rate shopping, the act of seeking out multiple lenders or financial institutions to compare rates and terms for a loan, is a common practice among borrowers looking to secure the best possible deal. However, it is important to approach rate shopping with caution. One primary reason for this is the use of low quotes to induce clients to switch, which can change later.
01 of 09
When Rate Shopping, Do This First
Go to Mortgage News Daily and see what they show as “current mortgage rates”
Get 3 mortgage quotes
When you receive mortgage quotes from a lender or broker, check them against the rates shown at Mortgage News Daily.
If the quote is lower than Mortgage News Daily, ask why?
There can be valid reasons why a mortgage quote is lower.
And there can be invalid reasons why a mortgage quote is lower.
02 of 09
Can You Beat This Quote?
If you ask a mortgage broker or mortgage lender “can you beat this rate that XYZ mortgage broker sent me?” What do you expect their answer to be?
If the answer is “yes” then follow up “Why is your rate quote lower?”
If the answer is “no” then follow up “Why is your rate quote higher?”
A higher rate quote from a reputable mortgage lender with valid reasons could end up with the lowest actual rate when you close on your mortgage loan.
7 Valid reasons for differences in Mortgage Quotes
- Company overhead costs
- Credit score assumptions
- Market rate trending
- Mortgage loan type selected for the quote (for example a lower rate FHA or VA loan)
- Debt-to-income adjustments
- Loan to Value adjustments
- First-Time Buyer Loan Programs
5 Invalid reasons for differences in Mortgage Quotes
- “We’re a better mortgage company than the others” (ask for specific reasons why)
- “We have special programs that others don’t have (if they say this, make them show proof)”
- “We have better investors (again, make them prove it)”
- “We’re the seller’s preferred lender so they get special deals”
- “We have a special relationship with the agencies that others don’t have”
03 of 09
How Mortgage Rates are Determined
Conforming mortgage rates relate to the prices of Mortgage Bonds and the supply and demand for mortgages during a specific time period.
FHA and VA Loans also relate to mortgage bonds and have their own insurance and lender guarantees with rates determined over a specific time period.
Other factors can also impact a mortgage rate quote. For example, staffing shortages and “too much volume” can cause lenders to raise their prices to “throttle (slow down)” incoming loan files. This is usually temporary (a few days) so not always worth ruling out a rate quote if too high due to temporary throttling. If it’s a mortgage lender with lots of great reviews and reputation, they’re still worth considering.
*Remember that a rate quote isn’t a rate lock and is non-binding.
04 of 09
Non-Binding Rate Quotes
Low quotes can be used by mortgage lenders and mortgage brokers as a way to attract new customers or to induce them to switch from their current mortgage lender.
Think of them as an advertisement, not as a binding quote.
Often these quotes aren’t sustainable and can change later in the process.
This can result in the borrower ending up with a higher rate or less favorable terms than originally anticipated.
Initial rate quotes are provided prior to the lender underwriting the loan file.
Often, that information changes during the underwriting review process.
For example, simple items like the income a borrower represents can be recalculated upon review to meet underwriting rules.
Common examples are bonus income, self-employment income, and overtime income.
A reduction in income calculations can increase the debt-to-income ratio which can increase a mortgage rate.
05 of 09
Disclaimers
If you look at the mortgage rate quote, you’ll see legitimate disclaimers such as “subject to underwriting” and “subject to market conditions”
Bad actors also use those disclaimers to their benefit.
You’ll need to check the lender’s references and history to determine the quality of the initial rate quotes.
Determine whether you can trust they were prepared in good faith.
06 of 09
Fake Reviews
Even online reviews can be manipulated through “review farms” often located in other countries.
A small amount of money can buy a lot of reviews.
Fake reviews are sometimes easy to spot due to the use of similar language in multiple quotes, heavy use of adverbs, and other standout fraudster tactics.
There are many youtube videos that talk about fake reviews. Saw one recently that demonstrated how easy it is, he set up a fake restaurant with fake reviews and became the “hottest restaurant in Prague” almost overnight…and it didn’t exist.
07 of 09
Rate Shopping and Credit Scores
When a mortgage lender checks a prospect’s credit report, it results in a “hard inquiry,” which can have a negative impact on the prospect’s credit score.
However, the exact number of times a lender can check a prospect’s credit report without negatively impacting their credit score depends on the credit reporting agency and the type of inquiry being made.
For Experian, TransUnion, and Equifax, the general rule is that multiple inquiries for the same type of loan, such as a mortgage, within a 14- to 45-day period will only count as a single inquiry and have a minimal impact on the prospect’s credit score.
This period is commonly known as a “rate shopping” period, during which borrowers are encouraged to compare loan offers from multiple lenders. However, it’s important to note that if the prospect has multiple hard inquiries on their credit report for different types of loans, such as a mortgage, car loan, and credit card application, each inquiry may impact their credit score
Lenders don’t share credit reports. A Lender that pulls a later report could still have a better mortgage quote for you even if the score changes a little.
With FHA loans, the score isn’t as critical anyways.
Credit reports are only valid with the lender for a limited period of time (90-120 days…the number of days links to the loan closing date).
If during the process, you decide to cancel your purchase agreement due to a poor inspection report or low appraisal, by the time you find another house, new credit reports could be required.
Often a credit report is “pulled” again just prior to closing to look for undisclosed loans or undisclosed applications for credit.
08 of 09
The Low-Ball Quote Can Look Enticing
Another factor to consider is the potential for hidden fees or charges. While a lender may offer a lower interest rate, they may also include additional fees or charges that are not immediately apparent.
Until you receive an actual Loan Estimate as part of your signed loan application, you won’t know if the costs shown on the original estimate are correct.
Loan estimates can change due to a “change in circumstance.” When that happens, your mortgage provider will communicate with you to discuss with you exactly the reason for it so there won’t be any surprises.
09 of 09
Smart Mortgage Rate Shopping
Home Buyers and Borrowers should approach rate shopping with caution. Thoroughly research each lender before making a decision. It is also advisable to limit the number of lenders that are approached to minimize the negative impact on credit scores.
Be aware of the potential risks and take a measured approach
With Smart Rate Shopping, borrowers can secure the best possible loan terms without falling victim to the potential pitfalls of the”win at all costs” mortgage broker or mortgage lender
Contact Steve Silver at Silver Mortgage, at 1-800-920-5720.
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