Two-timing your mortgage lender?
When shopping for a mortgage, you’ll compare mortgage rates, select a provider and start your application. But should you apply with more than one mortgage lender? There are several reasons that it might make sense to do so:
- To make sure that you can secure at least one mortgage approval
- You want to have a couple of offers to get the best mortgage rate
- You may discover that you don’t like your lender
Here’s more about the pros, cons and ethics of applying with more than one mortgage lender.Check rates before you apply for a mortgage (Nov 19th, 2019)
Why you should apply with more than one mortgage lender
Okay, you should shop for mortgage financing because you don’t want to leave money on the table – especially your money. Got it. But there are other reasons to scour the market for the best deals.
Will you be approved?
Different lenders have different standards. You might not qualify with Acme Mortgage – but you may qualify with AAA Home Loans. Not all mortgage applications succeed. According to Ellie Mae’s January 2019 Origination Insights report, “Closing rates for all loans increased to 75.0 in January. Refinance closing rates increased to 69.5 percent in January, while purchase closing rates increased to 78.1 percent in January.”
At first, it may seem odd that you can get approved by some lenders but not by others. After all, isn’t a VA loan from one lender the same as another? And the same with FHA financing and conforming mortgages that must meet Fannie Mae and Freddie Mac standards?
In each case, the basic loan requirements are the same, but lenders may impose additional qualification requirements. They call these added requirements overlays. And they are very common.
The VA, for example, explains that it has “no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile.” While the VA does not have a credit score requirement, a lender who offers VA financing might. One lender may accept VA borrowers with a 640 credit score while another requires 660.
The right program
If you’re concerned about mortgage approval because of your credit rating or debt-to-income ratio, you may gravitate toward FHA financing. FHA home loan programs are known to be more flexible. However, the mortgage insurance for these loans can be considerably more expensive than that required for a Fannie Mae or Freddie Mac mortgage.
You may, in that case, want to apply for both programs. if you get the Fannie Mae loan, and it turns out to be less expensive, congratulations. And if not, you still have the FHA loan to fall back on. Kind of like college applicants going after their dream school but also applying to a “safety school” in case they don’t get into their preferred institution.
What about the best rate?
Everyone wants to get the best mortgage rate and terms. That said, a little caution is in order.
The “best rate” depends on a lot of factors. The best rate for Ms. Green may be different from the best rate for Mr. Johnson. This can happen because Ms. Green has a better credit score, is putting more down, has bigger savings and is financing with a fixed-rate loan instead of an ARM. In addition, mortgage rates are always in flux; they change constantly.
Mortgage shoppers need to look for a lender who can deliver the best rate available for the borrower at the time of application. You can’t know the best available rate without checking among several lenders.
What about costs?
In addition to an interest rate, you need to look at loan costs. Some lenders simply charge more or less than others, even when rates are identical. Check the annual percentage rate (APR) on the official Loan Estimate form to compare lender costs.
Float or lock?
Some borrowers prefer to lock-in a rate because they know such interest pricing will be available to them at closing. Others prefer to let rates float, to get whatever’s available at closing.
There are several alternatives.
First, lock with one lender and float with another.
Second, speak with several lenders and lock rate offers that have a “float down” feature. This generally means that if the rate falls at least .125 percent or .25 percent before closing you can get the lower rate. Make sure you know the details of the float down arrangement, they can differ among lenders.
Is it unfair to shop around?
It is sometimes argued that by shopping around you are forcing loan officers to work for free. The opportunity to present a mortgage offer is how lenders make their money, it’s a risk that comes with the business. Alternatively, if you HAD to accept the first mortgage offer you got, you might well get a bad rate and terms.
However, making two lenders do all the work associated with loan origination and then finally choosing one at closing time is not usually worth doing.
For one thing, you’d have to pay for two appraisals, two credit reports, and perhaps other fees. And it will likely make you feel uneasy because there’s a big difference between getting pre-qualified with a lender, which may take a few minutes, and making them go through an entire origination over several weeks for free.
When to shop
If you want to shop among mortgage lenders, ask each to send an official Loan Estimate form for your consideration. This standard form shows what the lender is offering and can be compared with other offers. You are not required to accept an offer – but realize that if you let a good offer pass, it may not be available again.
Alternatively, you can have a broker shop for you. Retail loan officers work for one lender, while mortgage brokers look for financing among many lenders. For some borrowers, the lending process may be made faster and more understandable by working with a mortgage broker, someone familiar with the marketplace and how it works.
If you’re going to check with several mortgage sources, it makes sense to include a mortgage broker in the mix.