Locate a Loan Officer Not an Interest Rate
Many buyers, even experienced buyers, try to use loan rates and loan costs as the basis for this decision. After all, if you’re borrowing money, you naturally want the lowest possible interest rate and you want to keep the fees for obtaining your loan to a minimum. It just makes sense to call around and find the lender with the cheapest rates and the lowest costs, and then set up a meeting with one of their loan officers.
While this strategy would seem very difficult to fault, it actually makes almost no sense at all. Some key points:
Committing to an Interest Rate. Lenders generally won’t commit to a loan rate until after you’ve contracted on a home and have a closing date set. This isn’t part of some evil conspiracy. When the lender commits to a loan rate with you, they are simultaneously committing to take a specific chunk of money from their funding source at a specific interest rate. They can’t afford to do that unless you’ve committed to buying a specific home at a specific price on a specific date. This means that as you call around asking lenders what their rates are, they are not committing to provide a loan at a particular rate. Loan rates change every day, often several times a day. Unless you’ve already contracted to buy a home, the interest rates they are giving you are almost entirely hypothetical.
Rates are Determined by Profit Margin. Since mortgage lenders are generally all getting their funds from the same sources at the same rates, the difference between the rates and fees that lenders actually charge is primarily a function of the margin between their cost and your cost for borrowing the money. This creates a serious problem for the borrower who is calling around to find the lender with the best rates and lowest costs. A loan officer who is ethically challenged may quote you rates that give him, and the mortgage company he works for, little or no profit margin. In principle, he could make a loan at that rate, but when it comes time to lock your loan he’s not going to accept that margin. He can’t afford to. So, if you use this “lowest-rate” technique to find your mortgage lender, you may just be doing a lot of legwork to systematically locate the least trustworthy people available.
Available Rates are Dependent on the Borrower and Loan Program. No lender can really give you serious answers to your questions about interest rates until they’ve decided what type of loan programs you’re likely to qualify for and what types of programs will meet your needs and goals. They probably can’t even give you their best rate on a specific loan type without knowing your credit history and/or credit score. And you don’t want a lot of lenders pulling your credit report and credit score, because this can actually reduce your score and increase the interest rate on your loan.