With mortgage rates and home prices as high as they are, getting the lowest possible rate is essential. The question is how you actually make that happen.
This is the three-step process I run with my clients. It saves them up to $50,000 in interest payments on a median California home, and it works everywhere in the United States, not just here.
And my colleagues in lending hate me for sharing this.
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Know Your Lenders
Before we get into the techniques, we'll cover the basics because there are different kinds of lenders, and the differences matter.
I divide lenders into three categories:
A mortgage broker is a middleman, sitting between you on one end and the actual lenders on the other. Brokers connect borrowers with wholesale lenders and take a small piece of the transaction. They're generally excellent because they're flexible and accessible. Whether they work for a large brokerage or run their own shop, brokers work on commission, so they're hungry to get the deal done and will work hard for you. And despite taking that commission, they tend to offer the lowest rates.
A mortgage bank is a large financial institution that makes all of its money writing loans – like a bank, but only for loans. Mortgage banks employ loan officers who write the loans, so you're dealing with an employee rather than a broker. That makes them less flexible. Your loan officer probably clocks out at 5:00 PM and won't be reachable in the evening or on weekends. And although a loan officer isn't taking a commission, they still get paid, so the rate can be a touch higher to cover that overhead. In practice, brokers and mortgage banks offer very competitive rates against each other.
Depository banks and credit unions are the third group. A depository bank is where you also keep a checking or savings account, so think of the big names like Wells Fargo and Citibank. Many of them run loan departments, too. Credit unions sit in the same family but are a slightly different category because of their smaller size, and they're particularly interesting right now because they offer adjustable rate mortgages, which have become more popular as rates have stayed high.
Here's the thing that matters about all three: whether they advertise it or not, every one of them has flexibility in the rate they can offer you. That flexibility is what you're going to exploit.
Step One: Get Pre-Approved
Get pre-approved by at least three lenders.
Being pre-approved means sending a lender your tax returns so they can verify your income and submitting to a hard credit pull. A hard pull does ding your credit score, typically by 6 to 8 points. The points come back in a few months.
Fortunately, the credit bureaus are smart enough to recognize somebody shopping for one specific kind of credit. If you do several pulls for the same product, like a home mortgage, they know you're comparison-shopping and will only ding you once. I believe that window is 45 days. To be safe, get all of your pre-approvals done inside two weeks.
My blanket recommendation is to call your own bank first. Banks will often shave a little off your rate if you set up autopay from a checking account with them, so it's worth asking. Then find a mortgage broker through a referral or a good real estate agent. Then check your local credit union.
Get pre-approved by at least three. If you want to do four, five, or six, that's fine.
What you get back from each one is a pre-approval letter, and you want a letter from every lender who puts you through the process. You need one to accompany an offer.
Here's the part most buyers do not realize: you only need one pre-approval letter for all of your offers, and you're not tied to that lender if the offer is accepted. So get pre-approved by three or more lenders, collect every letter, then use whichever looks strongest on all your offers.
Step Two: Find a Home
Find a home to buy.
This is where someone like me helps, although you don't actually need a Realtor to find a home these days. Redfin and Zillow both syndicate everything from the MLS, and both have great interfaces. You can draw the area you want on a map, set your price points, add your must-haves, and save the search so the site emails you the moment something you'd like comes to market.
That's exactly why, while most agents still charge the usual 2.5% commission, I've cut mine to 1%. 1% covers the part of the process you actually need an agent for, which is the buying.
And when your agent takes less of the deal, more of your money goes into the offer itself. That means you can offer less and save, or make a stronger offer when you're up against other buyers.
Step Three: Pit the Lenders
Pit your lenders against each other.
The timing here is critical. Once you go into contract on a home, you have roughly two days to choose a lender. You're not obliged to use the lender whose pre-approval letter you submitted. On a typical 30-day escrow, you have about two days to pick a lender in order to hit your escrow deadlines. If you agreed to an accelerated escrow to win the offer, your window is shorter still. So start immediately.
As soon as the seller accepts, send the executed contract to every lender who pre-approved you. An executed contract is one signed by both you and the seller.
Then ask each lender for their best loan estimate.
The loan estimate is a specific document, sometimes called an "initial disclosure", and asking for it is not the same as asking somebody to estimate a rate over the phone. You want the document.
Two numbers on it matter, and they let you compare lenders like-for-like.
The first is the interest rate. You don't want to be told a rate; you want to see it printed on the loan estimate.
The second is at the top of page two: the origination charges. This is what the lender is charging you for the loan itself, and it varies wildly. Some lenders will quote a very low rate with an origination charge in the thousands. Others quote a slightly higher rate with a much lower origination charge.
Tell each lender that you have just gone into contract, that you're choosing a lender today, and that you need their best loan estimate in order to decide.
This step takes a little backbone. Some lenders will call you and want to know what the others are offering. You have to be a bit of a shark for one day!
Conclusion
Get pre-approved by three or more lenders inside a two-week window. Use the best letter for all your offers. Then, the moment you're in contract, send the executed contract to all of them and request a written loan estimate from each.
On a median California home, getting your rate down by a quarter of a point saves you $50,000 in interest over the life of the loan. That's worth one uncomfortable day on the phone.
If you would like to work with a California Realtor who arms you with tactics like this, schedule a no-pressure, no-commitment chat.