Homebuyers pay more when they don’t mortgage shop

Homebuyers who don’t mortgage shop are leaving a lot of money on the table. Just how much money could they save?

A recent Zillow report examines the wide variance in mortgage quotes provided by different lenders. The average variance in quoted annual percentage rate (APR) varies depending on mortgage type, credit score and where the applicant is located.

Depending on mortgage type, the average quoted rate can vary by:

• 1.09 percentage points for U.S. Department of Veteran Affairs (VA)-guaranteed loans;
• 0.97 points for conventional loans without PMI;
• 0.86 points for jumbo loans without PMI;
• 0.75 points for jumbo loans with PMI;
• 0.71 points for conventional loans with PMI;
• 0.70 points for Federal Housing Administration (FHA)-insured loans; and
• 0.58 points for jumbo VA-guaranteed loans.

Higher-cost markets tend to see a larger gap between rate quotes. In fact, the largest gaps in the U.S. are found in San Francisco, Seattle and Los Angeles. Credit scores also play a huge part, with lower credit score borrowers seeing greater variance than high credit score borrowers.

For example, a borrower in Riverside with a credit score below 680 will see their rate quotes vary by about 1.2 percentage points, compared to the 0.9 percentage point variance for a borrower with a credit score above 680.

Why don’t buyers shop around?

Homebuyers spend years saving up for a down payment and months searching for the perfect home, but for so many homebuyers, applying for a mortgage is an afterthought.

Beyond Zillow’s slice of the market, the Consumer Financial Protection Bureau (CFPB) reports that 30% of mortgage borrowers did not comparison shop for mortgage lenders. Much worse, 75% of borrowers only applied with one lender. The CFPB estimates borrowers’ lack of shopping around ends up costing the average borrower $300 a year due to the less competitive rate and terms they receive. In high-cost California, the average cost for not shopping around is even higher.

first tuesday recommends applying with at least three lenders to find the lowest rate, lowest fees and best terms. But too often, homebuyers feel daunted by the mortgage process and home in on anything that makes the process easier and less complicated. With the numerous documents and forms to be submitted with each application, it’s not surprising that many homebuyers stick to just one application.

But the numbers show quite clearly that a few minutes or hours of inconvenience is worth it when it comes to saving money. Different lenders offer different closing costs and interest rates, which can save — or cost — a homebuyer thousands over the life of the loan.

How to educate homebuyers and ensure no money is left on the table? All can be solved by a wise word from their trusted real estate agent.

Agents: counsel your homebuyer clients to apply with multiple lenders from your first meeting. Have a list available with lenders you recommend and encourage them to reach out to more than one. To spur them on, tell them about the different rates and costs available. Most homebuyers are unaware that interest rate quotes will vary so significantly between lenders.

Once they have applied to multiple lenders, have them fill out a Mortgage Shopping Worksheet to quickly compare the rates and terms of each lender. [See RPI Form 312; Form 204-5]

Applying to multiple lenders will not negatively impact their credit scores, as long as all applications are submitted within a 45-day period.