If you're a first-time homebuyer wondering how to actually shop for a better interest rate (not just get quoted a number over the phone), this post is for you.

I wrote before about why first-time buyers should shop around for a mortgage. This time I want to cover how to do it, because the process is full of jargon and every lender seems to label things differently.

Hopefully this simplifies it for you.

Why early shopping doesn't work

I think it's almost pointless to lock in a lender before you find your home. Getting pre-qualified or pre-approved with a few lenders up front is smart. But comparing their rates at that early stage is hard.

Here's why. One lender will quote a rate with no points. Another says no points too, then surprises you with an origination fee.

Buydown fees. Origination fees. Processing fees. Admin fees. They're all the same thing wearing different name tags.

Some lenders also give you a rate quote in a strange format, and the next lender uses a totally different one. It's apples to oranges.

Once you have a home under contract

So say you got pre-approved with a few lenders, maybe a broker and a local bank or credit union. Once the seller accepts your offer, that's when real shopping starts.

I'd wrap up loan shopping in the first 3 days.

Why 3 days? Because lenders are required to give you a Loan Estimate within 3 days of a complete application. Up until you had a house under contract, you were only missing the property address.

That official Loan Estimate is the key to comparing offers the right way.

Make them quote the same interest rate

Talk to a loan officer and share your goals. Let's say the seller offered $10,000 toward closing costs.

If your goal is to have that $10,000 cover all your closing costs and not much more, this part is easy. Just pick the lender with the lowest rate who can fit all the costs into that $10,000.

But say it's not that simple. Say you just want the best overall deal and you're flexible on how much cash you bring to closing, within a range.

In that case, I'd make each lender give you an official Loan Estimate anchored on the exact same interest rate.

Here's an example.

You call lender 1 and say, "I want the market rate, no points. What's that rate?" They say 6.5%. You say, "Okay, thank you. Please send me your Loan Estimate and I'll review it."

Then you call lender 2 and say, "I'm looking specifically at a 6.5% interest rate. Can you send me your Loan Estimate on that 6.5% rate?"

If they ask why you're being so specific, just tell them straight. Say, "I'm comparing loan offers, and this helps me do that more efficiently." It also helps if you've already told both lenders you're shopping around.

Hopefully you'll get both Loan Estimates the same day. Here's the formula to use once you do:

Section A + Section B, minus Section J = total

Why this works

Loan Estimates all use the same format. You won't get confused about which fees go where, because they're in the same spot on every single one. This form was introduced in 2015 specifically to bring clarity to homebuyers.

Some loan officers will tell you, "I have no control over Section B fees, don't compare those." That's not true. They don't have to charge you that credit report fee. They don't have to charge you that processing fee. Mortgage companies run promotions that cover appraisals all the time. It might be normal business practice at one lender to pass those costs to you, and not at the other.

Section A covers origination fees, which are all the same thing with different labels. "Underwriting." "Origination." "Broker fee." "Discount points." It's all bundled into Section A for a reason.

So add Sections A and B together, since those are the fees most in the lender's control.

Then check Section J. Sometimes a lender gives you a credit there to help offset costs. Subtract that from your total.

If you're comparing two conventional loans at the same interest rate and one lender comes out lower using A + B, minus J, that lender just won the head to head matchup.

What about all the other fees on the Loan Estimate?

There's Section C, which is technically a lender-required fee, but the label says "services you can shop for." That means things like title companies.

You probably won't shop title, since you'll likely go with whoever your real estate agent recommends. If you're using the same title company no matter which lender you pick, then Section C shouldn't be part of your comparison.

Then there's Sections F through H. That covers property taxes, insurance, recording, transfer taxes, and prepaid interest. Those costs will be the same no matter which lender you use.

If a loan officer forgets to include a transfer tax, their Loan Estimate might look cheaper. But forgetting a fee doesn't mean you don't owe it.

So the cleanest way to compare lenders is to isolate Sections A, B, and J on your official Loan Estimate.

If you want to see how all these numbers actually affect your monthly payment and cash to close, our payment and closing cost calculator can help you run the math side by side.

And if you'd rather just talk it through with someone before you're deep in the process, you can grab a free planning session with me and we'll walk through it together.

I hope this helps.

Sam

Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.