According to a recent report by the Consumer Financial Protection Bureau (CFPB) in conjunction with the Federal Housing Finance Agency, a significant number of consumers may not be shopping enough to ensure they are receiving the mortgage that best fits their circumstances. Consumers do not shop extensively for mortgages when purchasing a home. Rather, almost half of consumers who borrow to finance a home only seriously consider a single lender or broker before obtaining a loan, the report concluded.
“Almost nobody looks only at one house and decides to stop right there,” said CFPB Director Richard Cordray in remarks to the Brookings Institution in January. “Consumers spend considerable time looking at different neighborhoods and at different homes for sale. The same should be true of choosing among possible mortgage loans.”
Here are some of the key findings of the CFPB survey:
• Almost half of consumers fail to shop around before applying for a loan.
• Three out of four consumers only apply with one lender or broker.
• Most consumers get their information from lenders or brokers, who have a stake in the outcome.
• Borrowers who prioritize the terms of the loan over the characteristics of the lender are more likely to shop.
• Informed consumers are twice as likely to shop around.
“When you are spending a lot of money, you are literally betting the house on the choices you are making,” Cordray said. “The failure to look around can mean real money lost for consumers.”
Greg McBride, chief financial analyst for Bankrate.com, agreed. “Get off social media and stop playing Candy Crush long enough to do some research,” McBride said. “Remember how many people got in over their heads with loans they couldn’t afford? Do some research to determine how much you can afford and which loan is best for you.”
Easier said than done. It is much more straightforward to compare, apples to apples, the cost of a TV than it is to compare loan products.
With a TV, you can compare the cost of the same TV at Best Buy vs. Wal-Mart. On the contrary, there are endless variations on loan terms, rates and upfront costs on a mortgage, and it all hinges upon your personal credit score, debt and income.
And you can ask your friends how they like their TV, but there is no point in asking how they like their loan terms, since the chances are slim that you will obtain the exact same terms.
There are 15-year and 30-year terms. There are adjustable-rate and fixed-rate loans. FHA versus conventional? The amount of your down payment — 3 percent vs. 20 percent — greatly effects your terms. Should you pay mortgage insurance upfront or monthly? What are the lender’s fees?
In addition, all of this is variable as rates and terms change on a daily basis, which makes it even more perplexing and toilsome. With decades of experience in the real estate business, I still would be hard pressed to calculate the best loan product for a client.
So how can a first-time home buyer or, for that matter, someone with a few purchases and sales under their belt, determine what is best for their situation?
How do you unravel all the mortgage options available? “It is always best to talk to an expert,” said Jonathan Okun, senior mortgage consultant with Prosperity Home Mortgage in Bethesda.
“It is smartest to get a referral to a lender from someone they trust, such as their real estate agent or a friend. You want a lender that will educate you and identify the smartest program for you,” Okun added. “It’s not just about the rate. It is important to analyze all products, payments and fees. It is important to get a lender that provides good service.”
Here are some things to consider before approaching a lender:
• How much money can you put down on a loan while still maintaining six months of reserves in your bank account?
• Determine a monthly payment that you can easily handle while still paying other fixed and variable expenses and contributing to savings and retirement plans.
• Estimate how long you plan to live in the home. A 30-year fixed rate may work best if you plan to stay in the home indefinitely while a five-year ARM (adjustable rate mortgage) could be beneficial if you plan to move on within five years.
• When do you shop for a mortgage?
“Talking to a lender six months ahead of time is valuable, to get an idea of how much you can afford to borrow and how much you want to spend each month. But they will quote you a teaser rate below market, in the hopes of getting your business later on,” said Okun. “What matters most are the quotes you get when you are ready to purchase.”
I always recommend to my clients that they ask each lender for a Good Faith Estimate (GFE). The GFE estimates all your settlement charges. You can use the GFEs from each lender to compare fees and rates.
Don’t feel bad about sharing an estimate from one lender to another lender. It helps to ensure that you are comparing apples to apples.
“I suggest to my clients that they talk to different lenders and I would say 90 percent of my clients get a better rate when they shop,” said Martin Signore, associate broker of Keller Williams Capital Properties.
Borrowers don’t need to fear allowing multiple lenders to check their credit report. Provided they are made within a compressed period of time, multiple credit checks to shop mortgages will not chip away at your credit score.
Lastly, know what you are signing up for. One in seven mortgage holders are “not too confident” or simply have no idea of their mortgage rate, according to a recent Bankrate.com report.
I highly recommend visiting the below Web sites to learn more about mortgages and mortgage shopping.:
• www.consumerfinance.gov/owning-a-home
• www.bankrate.com
• www.consumer.ftc.gov/articles/0189-shopping-mortgage