Do I need to shop around for pre-approval?

Question

I've heard that I should shop around for mortgages, but do I need to do this at the pre-approval stage?  And am I correct that I'm not tied to use the lender who pre-approved me?

Russell Brazil · Answer

@Mindy Jensen....you just about proved my point here.  You have found a lender that you have now used for your last 7 loans, as well as referred family to him. :)

One of the most common things I think the novice is unaware of with lenders is how much things actually cost. There are a number of lenders out there who underestimate the closing costs, (or leave off some costs entirely) in order to under bid to bring in business. (Contractors do this too). Then there are lenders who over-estimate the closing costs to give their clients the worst case scenario, then the costs actually drop from the initial estimate.   So if someone is looking at 2 estimates from 2 lenders in this scenario...the one with the higher fees in the estimate, may actually be cheaper in the end.  Someone like a retail buyer doing 1 transaction every 7 years, or even the small investor doing 1 or 2 a year may not be aware of this (Or be aware of what lenders can actually get the deals closed on a timeline).  Someone doing many deals a year, or an agent involved in a lot of deals per year already knows what lenders have the best rates, fees, who underbids the closing costs, who over-estimates, knows what lenders are going to have a delay which can make the deal fall apart, what lenders are going to be right on the timeline, what lenders give pre-approval to corpses, and what lenders fully underwrite a pre-approval.

So it might be easier for someone who knows what they are looking at to shop around as you suggest, but I think for the novice, which is most of the population, they are safer getting a referral. Also the lender I primarily use...he will tell me, or my clients whether he can match a competitors offer.  If he cant, he will tell me or my client.  There are a number out there who will claim they can match, then do not actually do so....but by the time you are that far into the transaction, you just have to follow through since you cant back out without putting your EMD at risk.

Glen Woshnak · Answer

I agree with @Keith Pentz, ESPECIALLY on #2.  Use that time frame to shop several lenders, not only to see who has the best rates and terms, but also which mortgage bankers are most responsive and knowledgeable.  Just like all other professionals, they are not all created equal!

From your meeting at the first bank, you should get a great idea exactly which documents you will need to bring for a prequal.  Take advantage of that information and begin setting appointments at several institutions and bring that paperwork with you to the first meeting with all the additional bankers.  This should help you get a great rate and find a great banker.

Keith Pentz · Answer

Few things:

1. It isn't a preapproval until the bank has looked at your credit, tax returns, paystubs and bank statements. Get all of these to an experienced Lender up front. If they don't ask for them then use another Lender because you are dealing with someone that could care less about a smooth transaction/wasting your time. There's 100 things that can pop up (you have unverified deposits in your bank account, you have unreimbursed expenses that they deduct from your gross income, your income went down from the previous year and they have to use the lower amount, and on and on). Better to know up front.

2. You aren't tied to use who you get the preapproval from but all credit pulls for mortgages in a 14-21 day period (depending on the credit bureau) count as a single credit pull and affect your credit as 1 credit pull. Outside of that timeframe they will count as additional pulls and have additional impact on your credit.

3. For timing purposes it makes zero sense to shop for your mortgage after you find the house. You put undue strain on the Lender in terms of time to perform and undue stress on yourself.

In short: shop for your mortgage lender upfront, decide who you are using, get them all your documentation now and save yourself time, stress and frustration later.

Good Luck!

KP

Chris Mason · Answer

@Colette B.listen to these realtors. @Russell Brazilis never wrong, and that part about overestimating v underestimating closing costs is spot on.

Without knowing the title company, subject property, closing date, etc, we really have no option to estimate "accurately" the cash to close number.

For example do I estimate 29 days of prepaid interest, or 4? I can make my cash to close number a few grand more or less appealing just by making up an assumption there, to either bring business in the door and have a 'bad news' conversation later, or I can estimate 29 days, hope I don't lose your business because of ignorance, and have a 'good news' conversation later. (I typically assume 15 days, splitting the difference)

What title company do I assume, given that I don't actually pick the title company but you want a quote now? Do I pick the cheap one to bring business in the door and have a 'bad news' convo (this will feel to you like a bait and switch), or do I get cynical and pick the most expensive one in the county to set myself up for a 'good news' convo later (you're not going to be upset at this)? (I typically assume a more pricey title company and set myself up for the 'good news' conversation)

And so on. Property taxes, rate, discount point, lender credit, appraisal, exact loan amount, up-front property taxes due if any, what you negotiate for closing costs, etc, etc. There is a LOT that borrowers want at the preapproval stage, that we simply can't accurately estimate until you are in contract.

Colette B. · Answer

Thanks, this is all really helpful!  As a first time buyer, I'm not exactly even sure where to start my search for a lender/pre-approval provider.  That's a great point about getting a referral to someone, but I don't have anyone to ask for that referral... Any suggestions on where to start?  I've read it can be smart to start with the banks I already use...

Russell Brazil · Answer

I actually think it is a good idea to get a referral to a lender, and to sit down with  a lender who can discuss the different ways that you can structure the loan. I find that the people who shop around for either the cheapest interest rate, or the cheapest closing costs,...in the end get neither since they often end up with a lender who is a little shady. I cant tell you how many times I have clients who use lenders, and they think they are saving hundreds or thousands on closings costs lets say...but end up paying tens of thousands more in interest, simply because they do not understand loan structuring.  So get a referral to a trust worthy lender.

Colette B. · Answer

Chris MasonThanks - that makes a lot of sense, and I figured as much, but wanted to make sure there wasn't something wrong that I was getting quoted higher.

Chris Mason · Answer

You're comparing marketing to reality. Maybe 5-10% of homebuyers actually get the advertised rate. Have you ever read through the assumptions and fine print associated with that is advertised?

I've seen it as silly as "assuming" that you purchased the place within the last 18 months and have 40% equity, and advertising that rate. Think about that for a moment, what % of people will actually meet that criteria? The point of advertising is to get you in the door. It's scammy, but unfortunately standard.

Jeff B. · Answer

You're not REQUIRED to use that leander, but as an expediency you should.  If you go elsewhere and get denied, then the pre-approvial letter is worthless, misleading and can be considered fraud, as you've failed to get the financing that was available to you.

You might try then to go back and use that bank, but likely would need to ASK for an extension in the closing, which I am not bound to grant.

Do this to me with this result and I would KEEP your earnest money deposit.

So what the Heck, do it right on the first pass and celebrate at COE !!!

Mindy Jensen · Answer

@Colette B.rates vary from lender to lender. 20% down, excellent credit and work history, no foreclosures sounds like a good candidate for a loan.

Do I need to shop around for pre-approval?

Most Popular Reply