How Many Mortgage Lenders Should You Apply To?

When you’re ready to apply for a mortgage loan, you’ll likely hear that you should shop around for multiple mortgage offers.

It’s often left unanswered how exactly you should do this. Shopping for a mortgage is not like comparison shopping for a new home appliance or car. You’ll be weighing offers from lenders who might not make it easy to sift through comparisons on a short timeline.

Here’s a look at why getting multiple mortgage offers is important, and how to select the best one without spending too much time and money.

[Read: Best Mortgage Lenders.]

Why Should You Get Multiple Mortgage Offers?

You’ll want to get the best possible mortgage deal because you can save thousands of dollars over the life of a loan through fewer fees or a lower interest rate.

“For most people, it’s the biggest investment they’re going to have in their lives,” says Bryan Owen, an executive vice president at AmeriSave Mortgage Corp. “It can also be your most expensive bill every month. That’s why you need to shop.”

It’s possible that the first lender you contact will offer the lowest interest rate and best fee structure. But if you have time, it’s often beneficial to look around.

You will find that:

— Fees often vary by lender, with different titles and charges.

— Some lenders allow you to negotiate fees, such as when you bring up other lenders’ offers.

— There are other aspects of the mortgage loan offer — such as whether you have to pay an application fee for preapproval and if it will cost you money to lock in an interest rate — that you’ll want to consider.

Preparing to Shop for a Mortgage

Before you start researching and contacting lenders, figure out how much of a mortgage you can afford.

Make sure to include house-related costs like:

— Property taxes.

— Utilities.

Private mortgage insurance.

— Homeowners association fees.

— Moving, furnishing your new home and associated expenses.

Also, find out your credit record, credit score and how much money you can put down, which will all impact the interest rate a lender offers you.

“Pricing for your mortgage loan is dependent on your qualifications as a borrower,” says Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America. “How much money are you putting down? What do your credit score and income look like?”

[Read: Best Mortgage Refinance Lenders.]

How to Shop for a Mortgage

Now it’s time to engage with lenders. You can do one of three things: Get a prequalification letter, apply for preapproval or do both.

Lender prequalification is quick, easy and free because it’s based on information you provide to the lender, not a credit check or review of documents. A lender will simply take your reported income, estimated down payment and other information, and match it to an interest rate and give you an idea of what you can afford. You might get results the same day you apply, depending on the lender. The prequalification letter is good for 30 to 60 days and will typically include an expiration date.

There are limitations with this approach, however. Since lenders aren’t conducting a full review of your financial information, they will not commit to providing a loan to you for any particular amount. That also puts you at a disadvantage when bidding for a home, because someone who is already preapproved for a loan that’s large enough to cover the price of the home will be seen as a more serious buyer than someone who just has a prequalification letter. You also might not get a full view of all the costs, such as fees, that would be part of a mortgage.

“They’re not verifying your income, not verifying your assets and don’t know where you’re getting the cash to close,” Haynie says. Also, no rate is locked in — it’s all based on the information the lender has so far. “It doesn’t bind the lender to anything — it gives you an idea,” he adds.

A lender preapproval, on the other hand, is more thorough. During a preapproval, the lender pulls your credit report and reviews documents such as pay stubs and tax returns to verify your income and assets. The loan offer will include an interest rate and estimated fees, which can give you a full view of the costs at closing and each month following. A preapproval can take one to three days, depending on how quickly you can turn in the required paperwork and how busy the lender is with other applications.

“You want to be organized,” Haynie says. “The lender is going to want information from you. The quicker you can provide that information to them, the faster the process will go.”

You could start your search by obtaining multiple prequalification letters to get as much information as you can from the lenders without fully committing to a preapproval. Then, you could pick two or three of those and apply for preapproval. The preapprovals will likely be good for about 90 days.

If you apply for a mortgage and are preapproved, you don’t have to get a mortgage from that lender. But you might have to pay the lender to process your application, such as a credit check fee, which is about $30 and would be paid at closing if you get the loan with that lender. However, some lenders might ask for an application fee that could cost hundreds of dollars, which means you’ll pay even if your application is rejected or if you choose not to take out a loan from that lender.

If the lenders you are reviewing don’t charge mortgage application fees, you might want to put in three or more applications with potential candidates. If there are costs associated with one or more of the applications, you could apply to those lenders and pay the fees, while adding one without an application charge. Apply to at least two or three mortgage lenders to find the best mortgage for your situation.

What to Review in Mortgage Loan Offers

When you get mortgage preapprovals from a few lenders, you should look at several factors to determine which offer is best:

Fees. A lender will have several types of mortgage fees. Here are some you might see:

Application fee. You might have to pay this to cover the credit report charge and possibly more.

Appraisal fee. The lender will select the appraiser, and the buyer is required to pay for the appraisal report.

Origination or underwriting fee. This is to pay for the work that the mortgage team does to prepare the loan, although some lenders don’t charge for this.

Rate lock fee. Not all lenders charge to lock in your interest rate. Check to see how long the rate lock lasts, and whether you might need to pay for an extension if it’s needed.

Title-related costs. A lender usually selects the title company it’ll work with on the transaction, but you might be able to recommend a company that costs less than the lender’s choice.

Mortgage points. These should be discussed with a lender, as they can help you get a lower interest rate and/or roll some of the fees into the loan.

If a lender won’t let you know the fees when you’re preapproved, “then don’t do business with them,” Haynie advises.

Interest rate. Low interest rates rightly grab attention, but you won’t know your actual rate until preapproval. Sometimes a lender will need to adjust the fees to get you the lowest rate possible.

“You need to shop and not just for price,” Owen says. “Most companies can offer similar interest rates. The question is: What does it cost to get that interest rate?”

Annual percentage rate. APR is the combination of the interest rate with fees, which makes it a more accurate barometer of what your ongoing mortgage costs will be. The closer the APR is to the quoted interest rate, the fewer fees there are in the application.

“What the APR tries to do is capture the total cost and express it in terms of an interest rate,” Haynie says. “You can use that to compare one lender to another.”

If you plan to stay in a home less than seven years, however, the interest rate comparison is more important than the APR because you might not pay off all the fees and charges if you sell your home in just a few years. The APR takes into account the costs over the life of the loan.

Service. Another consideration is the service the lender provides — like how quickly you get your questions answered and whether the lender understands your needs. For example, a lender might specialize in a certain type of mortgage product (such as Federal Housing Administration loans) and try to steer you toward that and away from other loans that might actually be more suitable for you.

“The best thing to do is ask,” Owen says. “Be very curious. If the answers don’t feel right, you haven’t found the right institution.”

[Read: Best FHA Loans.]

What Is a Good Timeline for Mortgage Shopping?

You could take one of two approaches: Wrap up the mortgage lender search before you bid on a home, or wait until you have a sales contract in hand and then start looking for a lender.

Although waiting for an actual sales agreement would provide you with a loan offer that’s an exact match for the cost of the home, it can be a bit of a scramble to choose a lender and close on your mortgage in time to satisfy the terms of the contract.

That’s why it might be advisable to follow a timeline like this:

Year before home search. Review your credit history from all three credit reporting bureaus and make corrections as needed. Also continue to pay down credit card debt, build your down payment amount, and make arrangements for any gifts or grants you might need, such as down payment assistance.

Three to six months before. Review lenders, looking at interest rates and other factors. Reach out for prequalification information — if needed – and find out as much as possible about fees, timing and process.

Month before. Get preapproval from two or three lenders and review their rates, fees and APRs.

Just before or after starting home search. Commit to one lender by locking in an interest rate and giving the lender all it needs before a possible home contract.

After agreeing to sales offer. Work with the lender to complete the loan underwriting process and set a closing date as quickly as possible to satisfy the terms on the contract.

It’s best to start your search for a mortgage early, so you’ll have time to prepare your finances and paperwork, and compare offers. By taking the time to find and commit to the lender you want, you can avoid a last-minute scramble and be satisfied that you’ve made the correct choice.

“When you find the right lender, you can close with confidence,” Owen says.

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