Here are lessons that mortgage-shoppers can learn from common mistakes.
While mortgage shoppers can make costly mistakes, the errors are avoidable with a small investment in preparation. Here are six common mistakes homebuyers make when shopping for a mortgage.
1. Selecting a loan provider whose advertisement catches your eye
The more money a mortgage lender spends on advertising, the higher its prices. This relationship was recently confirmed by a rigorously researched study that appeared in the Journal of Finance.
Moral: A shopper will do better by throwing a dart at the Yellow Pages listings for mortgage lenders than by responding to an ad.
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2. Selecting a loan provider quoting the best price over the telephone or in an email.
In most cases, this procedure will identify not the lowest-priced lender but the biggest liar. In the trade, they are called “lowballers.” They have neither the capacity nor the intention of delivering the prices they quote.
Shoppers need to understand the difference between posted prices and quoted prices. Posted prices are those lenders distribute to their loan officers and place on their website. That’s the price the lender would lock to a qualified borrower whose application has been fully processed. Lenders reset their posted prices every morning and sometimes during the day, if secondary-market prices change materially during the day.
The quoted price is the price communicated to a shopper. It may be the posted price, or it may be a lowball price designed to rope you in and move the process along until it is too late to back out. Since posted prices will be reset many times while the loan is being processed, the lowballer always has a plausible reason for not being able to deliver the previously quoted price.
Moral: You can’t shop effectively over the telephone.
3. Shopping lender A today and lender B tomorrow
Because of market volatility, prices obtained on different days are not comparable. One of the important virtues of a multi-lender network is that it allows shoppers to compare posted prices of multiple lenders at the same point in time.
Moral: Unless you shop all sources on the same day, you are probably wasting your time.
4. Accepting partial price quotes
Mortgage prices are multidimensional, and if one dimension is omitted, you don’t have a complete quote. The price of a fixed-rate mortgage is the interest rate, lender fees expressed as a percent of the loan amount (“points”), and lenders fees of a fixed dollar amount. The price of an adjustable-rate mortgage includes those and also the index to which the future rate is tied, the margin that is added to the index in resetting the rate, rate-adjustment caps, and maximum and minimum rates.
Some lenders have a bad habit of leaving out one or more components of the price.
Moral: Don’t deal with any lender whose price quotes are not complete.
5. Allowing your loan to be priced without providing accurate information about all price determinants.
Mortgage prices vary with the following features of loan transactions: loan purpose, property value, down payment, loan amount, property ZIP code, credit score, type of property, type of occupancy, lock period, and escrow waiver.
It is the shopper’s responsibility to make sure that the lender quoting a price is basing that price on accurate information covering the items cited above. This is one more reason to avoid shopping over the telephone. Not many loan officers will take the time to query the shopper while entering the shopper’s information into a computer. More commonly, lenders who quote prices over the telephone usually assume the transaction features that command the lowest price, which almost always generates a lowball figure.
Where does a shopper go to shop fully adjusted and complete prices? Some individual lenders provide this facility on their websites, but most do not. The most efficient approach is the multi-lender network, where prices are fully adjusted and complete for all participating lenders.
Moral: If you don’t provide information on price determinants, you are bound to be lowballed.
6. Changing your mind about the type of loan you want after locking the price.
This can be a serious mistake because locking imposes a cost on the lender and locking a second time increases the cost. Most lenders faced with this situation will lock again at the higher of the prices prevailing on the first lock date and the second lock date. This will be costly to the borrower if rates have increased over that period.
Moral: Make sure you know what you want before you begin shopping.