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I have already been prequalified with 3.8% (but I am sure I can do better :)). Now, I am about to make an offer on a house. So, once the seller accepts my offer, how do I rate shop ?

  1. Do I need to do the rate shopping before making an offer, or after the seller accepts my offer ?
  2. When the seller accepts my offer, then I will go to a banker and submit a full application, so will it be legally binding for me to go with the approved mortgage application ?
  3. Or, once the seller accepts my offer, may I simultaneously apply for a mortgage with 3-4 bankers, and then choose the lowest rate ?

I asked my realtor, but she recommends to go with just one banker (her friend), and not to do any rate shopping. Is it the right way ?

(I live in a state of Arkansas, so I am thinking of going with the local bankers)

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"I asked my realtor, but she recommends to go with just one banker (her friend), and not to do any rate shopping."

You need a new realtor. Anyone who would offer such advice is explicitly stating they are not advocating on your behalf.

I'd do the rate shopping first. When you make an offer, once it's accepted, time becomes critical. The seller expects you to go to closing in so many days after signing the P&S. The realtor is specifically prohibited from pushing a particular lender on you. She should know better.

In response to comment - Rate Shopping can be as simple as making a phone call, and having a detailed conversation. Jasper's list can be conveyed verbally. Prequalification is the next step, where a bank actually writes a letter indicating they have a high confidence you will qualify for the loan.

  • Joe. Thank you for the answer. So, my understanding is Prequalification is the same as Rate shopping. Before making an offer, i need to get prequalified by 3-4 banks, right ? – user3191304 May 9 '15 at 19:49
  • see my updated answer – JTP - Apologise to Monica May 10 '15 at 13:14
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    Clark Howard states that 70% of people do not rate shop and its one of the biggest drains on people's savings in their life. Your realtor has a real conflict of interest there. It's making me very mad. – Mark Monforti May 10 '15 at 14:46
  • @MarkMonforti - The realtor may very well be in violation of the regulations real estate agents must adhere to. A client who wishes to push the issue can send a note via email, asking for advice, and if the realtor responds as indicated, she is subject to discipline and potential fine. There are strict rules agents must follow. In practice, they can break the rules every day, it's just a question of getting caught. – JTP - Apologise to Monica May 10 '15 at 15:00
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    The realtor is his own friend first (his fees!) and if you come second, its a keeper. related reading: freakonomics.com/2008/02/26/real-estate-agents-revisited (take the article with a grain of salt). – Mindwin Nov 18 '16 at 19:28
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You can shop for a mortgage rate without actually submitting a mortgage application. Unfortunately, the U.S. Government has made it illegal for the banks to give you a "good faith estimate" of the mortgage cost and terms without submitting a mortgage application. On the other hand, government regulations make the "good faith estimates" somewhat misleading. (For one thing, they rarely are good for estimating how much money you will need to "bring to the closing table".)

My understanding is that in the United States, multiple credit checks within a two-week period while shopping for a mortgage are combined to ding your credit rating only once.

You need the following information to shop for a mortgage:

  1. A realistic "appraisal value". Unless your market is going up quickly, a fair purchase price is usually close enough.

  2. Your expected loan amount (which you or a banker can estimate based on your down payment and likely closing costs).

  3. Your middle credit score, for purposes of mortgage applications. (If you have a co-borrower, such as a spouse, many banks use the lower of the two persons' middle credit score).

  4. The annual property tax cost for the property, taking into account the new purchase price.

  5. The annual cost of homeowners' insurance.

  6. The annual cost of homeowners' association dues.

  7. Your minimum monthly payments on all debt. Banks tend to round up the minimum payments. Also, banks care whether any of that debt is secured by real estate.

  8. Your monthly income. Banks usually include just the amount for which you can show that you are currently in the job, with regular paychecks and tax withholding, and that you have been in similar jobs (or training for such jobs) for the last two full years. Banks usually subtract out any business losses that show up on tax returns. There are special rules for alimony and child support payments.

  9. The loan terms you want, such as a 15-year fixed rate or 30-year fixed rate.

  10. The amount of points you are willing to pay. Many banks are willing to lower your "note rate" by 0.125% if you pay 0.5% up-front. The pros and cons of paying points is a good topic for another question.

  11. Whether you want a so-called "no-fee" or "no-closing cost" loan. These loans cost less up-front, but have a higher "note rate".

Unless you ask for a "no-fee" or "no-closing cost" loan, most banks have similar charges for things like:

  • appraisals
  • title insurance (this varies from place-to-place, and with the value of the property)
  • escrow and settlement services
  • checking whether the house is in a flood zone.
  • credit report fees
  • recording fees
  • how many months of taxes and insurance you need to pre-pay into an escrow account.
  • et cetera.

So the big differences are usually in:

  • Origination and underwriting fees
  • Points
  • Note rate
  • How good the bank is at explaining your options, and letting you keep track of the status of your application.
  • How good the bank is at closing loans before the "rate lock" expires.
  • Whether you have to pay if the bank screws up the loan application. For example, KeyBank charges $ 500 if you apply for a loan and they turn you down because they screwed up the appraisal.
  • Whether the bank has competent underwriting and appraisals. Do not trust any mortgage lender who outsources their underwriting to PHH.
  • Whether the bank usually keeps the mortgage "in their own portfolio", or usually sells the mortgage.
  • The bank's reputation for servicing loans, and for how they handle loans if, down the road, you have trouble making payments. Bank of America has a particularly bad reputation.

As discussed above, you can come up with a simple number for (roughly) comparing fixed-rate mortgage loan offers. Take the loan origination (and similar) fees, and divide them by the loan amount. Divide that percentage by 4. Add that percentage to the "note rate" for a loan with "no points". Use that last adjusted note rate to compare offers. (This method works because you have the choice of using up-front savings to pay "points" to lower the "note rate".)

Notice that once you have your middle credit score, you can ask other lenders to estimate the information above without actually submitting another loan application. Because the mortgage market fluctuates, you should compare rates on the same morning of the same day. You might want to check with three lenders, to see if your real estate agent's friend is competitive:

  • A local bank (perhaps your real estate agent's friend). In many states, Washington Federal is worth considering.
  • A local mortgage broker (perhaps your real estate agent's friend is a mortgage broker, instead of a bank loan officer).
  • A national bank with call-center based mortgage lending. Bank Rate Monitor's list of lowest priced lenders often includes call-center based mortgage lenders.
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Pre-qualification is only a step above what you can do with a rate/payment calculator.

They don't check your credit history and credit score; they don't ask for verification of your income; or verify that you have reported your debts correctly. They also don't guarantee the interest rate. But if you answer truthfully, and completely, and nothing else changes you have an idea of how much you can afford factoring in the down payment, and estimates of other fees, taxes and insurance.

You can get pre-quaified by multiple lenders; then base your decision on rates and fees.

You want to get pre-approved. They do everything to approve you. You can even lock in a rate. You want to finalize on one lender at that point because you will incur some fees getting to that point. Then knowing the maximum amount you can borrow including all the payments, taxes, insurance and fees; you can make an offer on a house.

Once the contract is accepted you have a few days to get the appraisal and the final approval documents from the lender. They will only loan you the minimum of what you are pre-approved for and the appraisal minus down-payment.

Also don't go with the lender recommended by the real estate agent or builder; they are probably getting a kick-back based on the amount of business they funnel to that company.

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