In 2010, homebuyers did not shop before selecting their mortgages, according to a survey on the topic.
Today, five years later, half of all homebuyers still do not shop around before selecting their mortgage, as reported by the Consumer Financial Protection Board (CFPB) and the Federal Housing Finance Agency (FHFA).
When it is time to select a mortgage to fund a home purchase:
- three-quarters of homebuyers apply to just one lender; and
- most homebuyers rely solely on mortgage information provided by just one mortgage lender.
So, why aren’t homebuyers shopping around before committing to the largest financial decision of their lives? It comes down to two main reasons:
- homebuyers have been propagandized to focus on the lender, not competitive mortgage rates and costs; and
- homebuyers are unfamiliar and timid about their involvement in the mortgage process, leaving their fate to others.
Misguided focus on the lender
70% of homebuyers reported choosing a specific lender and their offer, rather than choosing a mortgage based on its rate and costs from the most competitive lender. 42% reported the insular relationship they had with their lender, not an open-minded analysis of life-long costs and savings, most influenced their mortgage decision.
Focusing on a single lender as priority rationale for finding the most advantageous mortgage rate and costs prevents homebuyers from shopping around. They erroneously think their special bond with a particular lender enables them to trust that lender. Homebuyers may feel this is the way to get the best mortgage, but they do not know, due to the focus on one lender, just what the very diverse mortgage market has to offer them. In a word, the “trusted” lender, the one the homebuyer has bonded with, did not compete with any other lenders for the homebuyer’s business.
In reality, the relationship between lenders and homebuyers is thoroughly antagonistic. Lenders have a huge stake in the profit outcome on their resale of the homebuyer’s mortgage after origination. Thus, they do not discuss with the homebuyer the most favorable terms available even from the lender, much less available from another lender. With a pliant homebuyer not willing to shop for themselves, a lender’s job of profit generation is made easy. The lender is effectively given carte blanche to offer the terms most advantageous to itself, since the homebuyer is willing to accept the lender’s opinion as the final word.
The “relationship” the homebuyer perceives they have with the lender lulls the homebuyer hook, line and sinker into abandoning their own best self-interest in a high stakes game. Instead of taking the logical step and making direct person-to-person contact with at least one other lender to ask about available rates and costs, they simply go with the lender they know, with no questions asked about competitors’ rates.
This inability to shop means the homebuyer accepts a mortgage without any investigation or inquiry into whether it is the mortgage with the lowest rate, lowest costs and least risky conditions.
In actuality, the majority of consumer mortgages are made according to a very specific set of rules. The only benefit of going with one lender over another is a difference in pricing. By failing to shop, the homebuyer is paying the equivalent of the MSRP for their mortgage — something homebuyers would never do if they were purchasing a car. “Sticker shock” only exists if homebuyers do not go online and search for “mortgage application” and discover just what other lenders are offering in rates and costs. No search, no shock for homebuyers – until weeks later when they talk to other agents and recent homebuyers.
The lack of familiarity with the mortgage process
Most homebuyers know next to nothing about how to obtain a mortgage. This lack of awareness operates like a mental block keeping a vast majority of homebuyers with a checking account at “their bank” from doing their own research.
As a result, these homebuyers find an easy solution to their need for a mortgage by relying on mortgage advice from personal acquaintances at “their bank.” It is more preferable that they have a conversation – consultation – with “their” real estate agent, not “their bank’s” loan officer. Loan officers are concerned solely about their bank’s profit on the resale of the mortgage. Salary adjustments are involved, and of course, continued employment as a loan officer.
The buyer’s agent is the sole resource a homebuyer has, other than their personal duty to protect themselves, to help encourage them to shop around for a mortgage. Homebuyers may even do so on the web if they do not want to take the time to visit another mortgage lender’s office.
Helping homebuyers to shop for mortgages
“Owning a Home” is an online toolkit recently released by the CFPB. The tool is designed to help agents and their homebuyers shop for their mortgage. One of the features of the “Owning a Home” toolkit is the Rate Checker tool. This tool allows homebuyers to input their specific information to find out what type of mortgage best fits them, see how different rate and cost scenarios impact their mortgage decision. Included is information about how to negotiate a lower interest rate.
The buyer’s agent has an affirmative duty to voluntarily inform their homebuyers about their mortgage options and advise them to shop around when the deal is contingent on mortgage financing. If prudent, the agent will actually get involved to assist them so they can close the transaction. Their guidance is their buyer’s best defense against getting locked into a costly mistake of a rate higher than available from a more competitive mortgage lender and with the lowest upfront and long-term costs. Thanks to their trusty buyer’s agent, savings to be had will directly improve the buyer’s future standard of living.
Agents and their homebuyers need to forget about a lender’s promoted characteristics. Instead, when a mortgage is needed, focus solely on mortgage rates, costs, terms and conditions. Solicit rates and costs from multiple lenders, all of whom are most eager to earn their business.
When a buyer submits multiple applications, additional costs are, of course, incurred. The cost of the additional application is to be considered by the homebuyer to be a premium paid for the assurance they will have the best rates and costs at the time of closing. Best of all, the fees paid will be repaid in mortgage savings throughout the life of the mortgage – if the buyer shops, shops and shops until they know they have located the right mortgage – the long-haul vehicle supporting the purchase of a home.
first tuesday’s Mortgage Shopping Worksheet is used by agents and their clients to compare information from at least two different lenders. The worksheet contains a list of all the mortgage variables such as size of down payment, mortgage term and total origination fees and miscellaneous costs.
When the worksheet is filled out, agents and their clients will be able to see on one form all the different options available. With competitive data, they will most likely make the decision best suited to them instead of the lender. Best of all, the worksheet gives the homebuyer a backup lender in case the first lender backs out of their initially promised deal. [See first tuesday Form 312]