How to Compare Mortgage Lenders - Plus a Dose of Reality

I recently provided some input for an article in the Dallas Morning News that explained how to shop for a mortgage loan. The interviewer asked me if home buyers should compare mortgage lenders during the process, or simply compare the rates offered by the lenders. I explained that the interest rate and terms of the loan are the most important factors a borrower should consider, and that the lender was secondary to this.

After the interview, I thought about all the articles I've read on how to compare mortgage lenders when buying a home. Many of these articles talk about finding a lender you're comfortable with, one that will look out for your interests, etc. Then I flipped through my copy of All About Mortgages by Julie Garton-Good, and I came across this little gem: "A good lender will set the stage for a positive win-win loan experience."

This is a good time for some brutal honesty.

There's only one "win" that mortgage lenders are concerned with, and that is their own financial gain. Your long-term financial success is not even on the radar. You are a piece of data on their profit-and-loss statements, and nothing more. So you need to bear this in mind when you compare mortgage lenders and apply for a home loan. During this process, you are your best and only advocate. The lender is not your advocate ... or your friend ... or even your financial advisor. The lender is out to make money off interest payments while minimizing risk. That is the core motivation for every mortgage lender in this country, despite the touchy-feely commercials they often run on television.

Of course, if you've been watching the news over the last year or so, none of this will come as a surprise. You've seen the dark side of the lending industry first hand, so you know (or should know) what you're dealing with. I am not being cynical or jaded here. I'm just fed up with all of the nonsense that is still being written about lenders "partnering" with borrowers, looking out for their best interests, and creating "win-win" situations. It's just not truthful. You have to ask yourself, if mortgage lenders are so inclined to protect their customers' financial interests, then why are they one of the most heavily regulated industries in the country?

How to Compare Mortgage Lenders - In the Real World

In fantasy land, you could compare mortgage lenders based on the level of care and attention they paid to your cause. You would find a lender that worked hard to understand your long-term goals and plans, and did everything possible to help you achieve those goals. In short, you would choose a lender you could trust.

In the real world, however, you cannot trust a mortgage company any more than you can trust a politician's campaign promises. In the real world, you must realize that lenders are looking out for their own interest. You must understand the inner workings of the secondary mortgage market, and how it removes the burden of responsible lending from the primary mortgage market. You must realize that a lender cannot tell you how much house you can afford, and that allowing them to do so is a recipe for failure. In fact, before you even start to compare mortgage rates and offers, you need to have a home-buying budget firmly established. Don't ever let a lending institution tell you what you can afford to pay each month -- it's simply not their job.

If you want to compare mortgage lenders and loans the right way, I recommend the following steps.

1. Start local and leverage existing relationships.

I usually recommend starting at the local level. Locally owned banks (those that operate within certain cities or states) are less likely to make risky loans, when compared to the big national banks. On top of this, you may get a better interest rate and more personal treatment from a bank where you have an existing relationship. So if you currently have a relationship with a local bank or credit union, talk to them about their mortgage loan options.

2. Focus on the interest rate and other terms of the loan.

I would argue that it's more important to compare rates and terms offered by lender, rather than comparing the lenders themselves. I've already explained the relationship dynamic you are dealing with. Sure, you should do some homework to learn about the lender's reputation, but beyond that you should focus on the numbers.

What interest rate is the lender willing to give you, based on your credit score? How much of a down payment do they require? Are there any prepayment penalties if you refinance or sell before the term is up? These are the mortgage factors you need to compare most closely.

3. Establish a budget before talking to lenders.

This is where a lot of first-time home buyers make mistakes. I often hear people say things like this: "We don't know how much we can afford, so we're going to get pre-approved for a loan to find out." But this is a false notion, because it's possible to get approved for a bigger mortgage loan than you can truly afford. Just look at the foreclosure rates in this country, and you'll see what I mean. To safeguard your financial future, you need to determine your home-buying budget before you start shopping for a loan. This article will show you how.

I hope this article helps you compare mortgage lenders and loans, and I wish you all the best with your real estate endeavors. Good luck.

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