Will Shopping For Mortgage Rates Derail Your Home Purchase? It Just Might
For homebuyers, it’s natural to want the lowest rate possible, especially since rates and home prices have risen so much in recent years.
But rate shopping during the tight homebuying timeline can be risky.
How and when are you supposed to shop mortgage rates during a home purchase?
Pre-Approval Rates Are Nowhere Near Accurate; Guesses At Best
You’ll hear advice from experts to shop around and compare at least three mortgage quotes before committing to a lender. After all, a small difference in interest rates can save you thousands of dollars over the life of the loan.
But what they don’t tell you is that lenders won’t and can’t give you an accurate quote until you’re under contract to buy the house. This means you’ve made an offer and the seller accepts.
There are a few reasons for this:
Interest Rate Fluctuations: Mortgage rates are influenced by market conditions, and they can rise (or fall) during the time between pre-approval and when you close. If rates increase in the market, your lender may adjust your rate higher.
Credit Score Changes: If it’s been several months since your pre-approval, your lender may need to pull an updated credit report, which could reveal different scores. Lower scores could mean higher rates.
Loan characteristics: Changing your down payment, loan type, or other loan factors can affect your rate.
The Challenge: Comparing Lenders After You’re Under Contract
So you know your pre-approval rate is essentially a guess. So you have to wait to shop lenders until you’re under contract.
But this gets tricky. Obtaining multiple personalized loan offers is a time-consuming and confusing process.
This challenge becomes even more complicated in a competitive housing market where many sellers may not entertain offers outside of a 30-day closing window. When you’re under contract with just 30 days until closing, you’re on the clock, making it difficult to shop around with other lenders for accurate rate quotes.
Another reason is that some mortgage lenders require a full loan application and credit check before providing an offer. Some even want to see a signed purchase and sale agreement, indicating you’re under contract with a property address, as well as a closing date so they know the number of days your rate lock will need.
Keep in mind that lenders are on the hook for the fees they quote – not just the rate. The fees listed on the binding document – the Loan Estimate – can get them in big trouble if not accurate. That’s why they want to see the whole loan file before putting anything in writing.
The Risk of Switching Lenders Too Late
If you start rate shopping after you’re under contract, you’re taking a risk in two major ways. Shopping around at this point could result in delays that jeopardize your closing date and potentially cost you time, money, and stress.
Not Closing On Time
Switching lenders after you’re under contract can make things downright scary, especially if you have a 30-day closing.
In some cases, the cheaper lender may not be able to close on time.
Not Receiving an Approval
Worse than not closing on time is the possibility that your new lender will not be able to fully approve your loan.
Your current lender may have been working behind the scenes for weeks to get your pre-approval. Starting that process over with another lender during a 30-day closing window could be disastrous.
Additionally, to shop around, you need to ask your current lender to delay important aspects of the loan process, such as scheduling an appraisal or loan processing. While appraisals can sometimes be transferred between lenders, it's a risk to have the lender order one before you've made a final decision.
All of this could put meeting your closing date in danger.
Consequences of Missing Your Closing Date
The consequences of missing your closing date could be significant.
You could lose the home of your dreams, along with your earnest money deposit. This can be a devastating blow, especially if you’ve already made plans and invested time, energy and emotions into your new home.
Is it worth taking the risk of switching lenders, knowing that you could lose both the home and your earnest money? For many homebuyers, the answer is no.
Quality vs. Rate: What’s More Important?
Given the risks of switching lenders at the last minute, it’s worth considering whether it’s better to focus on quality rather than rate.
Attempting to secure a better rate may not always be the best strategy if it compromises your ability to close the loan seamlessly and on time.
For example, if you opt for a lender offering a slightly higher rate but known for providing excellent service and a smooth loan process, you might avoid the risk of delays or last-minute hiccups that could derail your closing.
On the other hand, choosing a lender solely based on a low rate could result in headaches if they fail to meet your needs, such as being unresponsive or failing to expedite critical loan processes.
Ultimately, shopping for a lender is about finding a balance between rate, service, and reliability. If your closing date is tight, it may be wise to prioritize a lender that you feel confident can close on time, even if it means paying a slightly higher monthly mortgage payment.
To help you determine the risk vs reward factor of a lower rate, consider the following example:
Lender A’s offer: 7% on a loan amount of $350,000 = $2,329/mo. (P&I)
Lender B’s offer: 6.875% on a loan amount of $350,000 = $2,299/mo. (P&I)
While the difference can certainly add up over time, for some, the risk of missing your closing date may not be worth the savings of $30 per month.
Most people refinance a few years after buying anyway, and with today’s higher rates, there’s a good chance rates may come down in the next five years. That $30 per month for a couple years seems like a small price to pay to finalize the purchase and keep your $5,000, $10,000 or even $20,000 in earnest money.
The Trigger Lead Dilemma: How It Complicates Your Decision-Making
Another challenge that can make it difficult to make an informed decision is the presence of "trigger leads."
When a lender pulls your credit for a pre-approval, the credit inquiry automatically “triggers” an alert to other lenders who can purchase your inquiry data from the three major credit bureaus: Experian, Transunion and Equifax.
These companies use the information in trigger leads to market their own loan products and interest rates to you, with the goal of winning your business for themselves. The result is a flood of unsolicited bombardment of calls, emails, and messages from multiple lenders.
Most buyers don’t even know why they are suddenly getting these calls when they never inquired of a lender or completed an online form.
While these low-ball offers may seem appealing, they often lead to confusion and a feeling of overwhelm. These uninvited offers can make it difficult to focus on the most important factors—like rate, lender reliability, and overall cost—when making your mortgage decision.
Rate Is Just Part of the Story. Check Fees
Also, it’s important to remember that the interest rate is only one part of the equation when you’re comparing lenders. The fees you pay are just as important.
Be sure to pay attention to lender fees and points. If you’re not including these items when comparing, you’re not comparing apples to apples.
Some of these lenders may not be a good fit for your needs, but they could still complicate your decision-making by distracting you with promises of low rates.
Fortunately, there are ways you can help reduce or eliminate the unsolicited contact that results from triggered leads.
Register for Do Not Call. The National Do Not Call Registry was created to stop unwanted sales calls. It’s free to register your home or cell phone number.
Opt out of prescreened credit and offers. OptOutPrescreen is the official website created to accept and process requests from consumers to opt-in or opt-out of these offers. You can choose to opt out for five years or permanently.
How to Rate Shop Strategically
Shopping around for your mortgage is an important step to ensure you secure the most competitive mortgage rate and loan terms. This effort can lead to significant savings both upfront and over the life of your loan.
Research from Freddie Mac shows that comparing rates from at least two lenders can save you $600 a year. So, it’s definitely worth your while to shop and compare.
The key? Start the mortgage process early. Then, give yourself a deadline for comparing mortgage rates.
Rates fluctuate, so have a time frame to compare and negotiate better mortgage rates. If you take too long to shop around, you risk the rates changing, making it more challenging to compare mortgage rates among multiple lenders.
Most lenders won’t provide you with an official Loan Estimate until you’re under contract with a property address. However, most will typically give you a rate quote when you get pre-approved through them.
Get pre-approved with more than one lender. This at least gives you an idea which lender might give you a better deal when the time comes.
To get pre-approved and receive a rate quote, you’ll need to complete a short online application. Lenders will typically request a few supporting documents. Be prepared to show:
A valid ID
Proof of income (tax forms, paystubs)
Proof of assets (bank statements, investment account statements)
Don’t worry about multiple pre-approvals hurting your credit score. Each lender will run a credit check; but as long as you get your quotes within two weeks of one another, the credit bureaus will view them all as a single application, meaning you’ll only have one inquiry that impacts your score.
But secure your pre-approvals before you start home shopping and take the time to research lenders and compare offers in advance. This will put you in a better position to make an informed choice when the time comes to lock in a rate and finalize your loan.
If the lender you prefer doesn’t have the lowest rate, you may be able to negotiate the rate down by showing them a copy of a competitor’s offer and asking them to at least match the other rate. Some lenders may be willing to lower their rate to earn your business.
One important tip: Collect all your estimates on the same day to make apples-to-apples comparisons. Like stocks, rates change every day.
Solutions and Advice for Homebuyers
While shopping for a competitive mortgage rate is important, it’s equally necessary to consider other important factors.
Plan Ahead: The earlier you start the mortgage process, the better. After you’re under contract, time is of the essence. Have a plan and get ahead of the game.
Focus on Lender Reputation Early On: While you may not be able to lock in an exact rate until you’re under contract, it’s a good idea to research lenders ahead of time. Look for reputable lenders known for their customer service, reliability, and ability to close on time. Check online reviews, ask for recommendations, and speak with loan officers to get a sense of how they handle the loan process.
Consider Locking Your Rate Early: Once you’ve found the home you want and are under contract, consider locking in your rate with your chosen lender. This can help protect you from rate fluctuations and ensure that you know what to expect when you close. However, be mindful that rate locks come with expiration dates, so be sure to stay in close contact with your lender to avoid missing any deadlines.
Be Prepared for Trigger Leads: If you’re dealing with trigger leads, consider opting out of receiving unsolicited offers. The credit bureaus offer an opt-out service that can help reduce the number of offers you receive.
Shop Smart: While shopping for a mortgage, be careful not to let the lure of a lower rate distract you from getting your loan closed smoothly and on time. Don’t be swayed by flashy offers if they don’t align with your needs. Reliability and trustworthiness should weigh heavily in your decision-making process.
By doing your homework ahead of time, avoiding trigger lead pitfalls, and weighing both the rate and the lender’s track record, you can make a well-informed decision that helps you secure your dream home, along with a competitive mortgage rate.
