“How many lenders must I shop to be certain I receive a
competitive price?”
If you have access to valid price
quotes, 3 is usually enough. If you don’t have access to
valid price quotes, you won’t get a competitive price no
matter how many lenders you solicit.
Valid Mortgage Prices
Valid prices
are prices that the lender would be willing to commit itself
to at the time the price is quoted. Differences in
valid prices posted by different lenders are small, which is
why you don’t have to shop many lenders. The reason is that
95% of all new mortgages today are either sold to Fannie Mae
or Freddie Mac, or insured by FHA or VA, so that the Federal
Government assumes virtually all of the risk. The residual
risk to the originating lenders, that they might be required
to buy back loans or at an extreme lose their right to
originate, is small and does not result in large price
differences between them. Some lenders are more efficient
than others, but prices differences from this source are
also small.
The challenge
faced by mortgage borrowers who want to shop is that most
price quotes are not valid, and soliciting them is a waste
of time. Invalid prices can be quoted to shoppers with
impunity because shoppers can’t say “Yes, I’ll take it”
until the information upon which the price is based has been
confirmed, by which time the market will have changed.
Valid Price Conditions
Valid mortgage
price quotes meet all of the following conditions:
They come from the internal pricing
system of the lender, which I
call their “posted prices”, with no intermediation from loan
officers. Loan officers are not bound to quote posted
prices, and it is common for them to quote prices below the
posted price, called “low-balling”, in order to induce
shopping borrowers to commit to them.
They are fully
adjusted for all loan features that affect the price,
such as credit score, type of property, purpose of loan,
down payment, etc. The list is a long one. If anything that
affects the price is left out, the lender assumes whatever
generates the lowest price, which may or may not hold up.
For example, many lenders price loans without asking whether
or not the borrower wants to escrow taxes and insurance. If
in fact the borrower does not want to escrow, the price will
have to be raised.
They include all
price components. This means not
only the interest rate and points but also other lender fees
that are often left out of price quotes.
They are current
as of the time of the quote, not as of the day before.
The borrower shopping several lenders must do so on the same
day, and to be safe within the same hour of the day, since
prices are sometimes adjusted during the day.
Where to Find Valid Prices
Valid price
quotes are available on the internet if you know where to
look. Every mortgage lender has a web site, but few provide
valid prices on them. Most are designed to entice shoppers
to identify themselves so that they can be contacted by a
loan officer who will give them a sales pitch. But some
lenders provide valid prices on their sites while allowing
shoppers to remain anonymous until such time as the shopper
elects to contact the lender. These include the 7 Upfront
Mortgage Lenders that I identify on my web site. Shopping
them is doable if a bit of a chore because each site is
programmed differently and the shopper must visit each on
the same day to extract the desired price data.
Much the
better way to shop is on a multi-lender web site where the
site maintains valid prices for multiple lenders which it
presents in one single format for easy comprehension and
comparison. There are three of those: mortgagemarvel.com,
zillow.com and mtgprofessor.com, which is mine.
Don’t confuse
multi-lender sites with lead generation sites, such as
lendingtree.com and lowermybills.com, which do business with
hundreds of lenders. These sites do not collect price data
from lenders. Rather, they collect financial information
including social security numbers from shoppers, which they
sell as leads to lender clients. The sites first identify
the lenders who have indicated an interest in the
particulars of a lead, and they sell the lead to the 3 or 4
lenders who will pay the most for it. The shopper then gets
sales pitches from 3 or 4 loan officers who are under strong
pressure to low-ball the price because that is often the
only way to win the deal.
