Myth: When choosing a lender, shop around for the lowest interest rate
Reality: When exploring lenders and mortgage options there are many factors to consider besides the interest rate including:
- A lender can’t offer you an interest rate until you have a property lined up to purchase and they have reviewed your financial qualifications. Those low rates that you see advertised are available to specific borrowers for specific loans, not everyone who uses that lender.
- Different lenders do not all offer the same products. Shopping for a mortgage is not like shopping for a car.
- Many lenders have reputations, some good, some not so good. In a competitive offer situation, submitting a lender letter from a mortgage provider who doesn’t have a good reputation is not going to help get your offer accepted. In fact, it will likely have the opposite effect.
Why do sellers care?
- A seller who accepts an offer from a buyer whose financing is declined can lose a significant amount of money in terms of carrying costs and a potentially lower sales price if the market has changed.
- Yes, real estate agents are partial towards advising sellers to accept offers from buyers who are working with reputable (usually local) mortgage providers. They don’t receive any financial incentives for recommending a specific lender, and don’t want to be in a situation where a deal falls through because of a bad lender.
What’s the risk?
- If you decide to work with a lender, and they don’t have your loan ready by the settlement date, you as the buyer may be in default of the contract. There is no penalty to the lender. The seller can pursue damages for this default.
The lender you choose has a substantial impact on your home purchase. This decision can impact whether or not your offer is accepted on a home and whether you are able to complete the transaction (or if you will face financial penalties as a result of default).
Yes, a lower interest rate will save you money, but only if you’re first able to complete your home purchase. It’s important to consider more than just the interest rate when exploring your financing options and make an informed decision that will set you up for success.
Wondering what questions you should ask prospective lenders? Check out our list here.