By Erica Sweeney
Mar 2, 2022
Taking on a mortgage to finance buying a home is a major milestone, and it’s a critical moment to use your consumer savvy to nab the best deal possible. This is particularly true in today’s market. Given interest rates are rising fast—and you will likely be paying your lender for the next 30 years—you’ll want to lock in an affordable monthly payment.
So how exactly do you make that happen?
The key, according to experts, is to shop around. Much like you’ll tour many houses before deciding between that cute Colonial and a modular modern, you’ll want to check out various mortgage lenders to find the best one for you.
Different loan providers, after all, offer different interest rates, loan types, and fees. Exploring what several have to offer will help you land the best deal.
“Just like you may shop around to find the lowest price on a car, you can shop around for mortgage lenders to find the best pricing and options available,” says Lauren Bringle, accredited financial counselor at Self Financial, a financial tech company. “At minimum, it’s good to get three quotes from three different lenders. You can then compare options.”
What’s more, once you compare what a few lenders are offering, you can play them against one another to get an even better deal. Things like closing costs, loan origination fees, underwriting fees, and interest rates may all be negotiable, and it really pays to haggle.
“It’s not about playing games to negotiate,” Bringle says. “It’s just a simple question of ‘Is this a good deal based on the other options that are available to me?’ Yes or no. Then you can sign or walk accordingly. The informed homebuyer who has shopped around is usually able to negotiate better than a homebuyer who hasn’t done their research.”
Not sure how to negotiate? These tips below will show you the ropes on how to bargain your way to a great mortgage, with a low interest rate, affordable closing costs, and more.
Know where you stand financially
Are you afraid to check your credit rating? It’s time to get over that.
Lenders look at a variety of factors when approving someone for a home loan and determining the specific interest rates and terms offered.
“In general, a relatively high credit score and good debt-to-income and loan-to-value ratios will help borrowers secure the best terms,” says Kevin Parker, vice president of field mortgage originations at Navy Federal Credit Union.
Allow us to translate: Debt-to-income ratio refers to the amount of your monthly income that goes toward paying off debt. Loan-to-value ratio compares the mortgage amount to the home’s appraised value—that is, whether you are hoping to finance, say, 50% or 80% of the purchase price. A higher loan-to-value ratio is a riskier proposition for a lender.
Knowing your credit score, income, and total monthly bills puts you in a better position to find the best lender. Homebuyers with excellent credit scores and a healthy savings account are sometimes in the best position to negotiate. But simply knowing your numbers is a step in the right direction.
Reasons to get pre-approved for a home loan
In a red-hot seller’s market like the one we’re in, you need to be able to jump when you see a house you love. Mortgage pre-approval will help you do just that. It also helps you secure the best deal before you start bidding. When you get pre-approved for a mortgage, you complete a mortgage application. The lender will perform a credit check. Next, you’ll receive an offer outlining the interest rate, closing costs, and loan terms. Ta-da, you’re pre-approved!
The pre-approval process also lets you know what you’ll qualify for based on your finances. You’ll see the required down payment in black and white, too. With this paperwork in hand, you can negotiate with other banks. It’s a good idea to get pre-approved with more than one lender so you know upfront where the best deal lies.
“Based upon the property you’re purchasing and your financial profile, the loan programs that you qualify for from different lenders can vary widely,” says Robert Heck, vice president of mortgage at online mortgage brokerage Morty. “It’s very important to evaluate that and shop around with different lenders. The goal is to feel confident when you sign on the dotted line at closing.”
Have lenders bid for your business
Once you know what interest rate one lender is offering, see how it compares with others. If you have a preferred lender but the rate being offered is higher than another bank’s, ask if your lender can match the rate. Share that another bank has already offered you a lower rate.
Lenders might be willing to lower the rate to get your business. Or you might negotiate a slightly higher down payment for a lower rate.
For example, Parker says, Navy Federal Credit Union will match a better rate that a customer finds at another bank. It just needs a loan estimate from the other financial institution. If it can’t match the competitor’s rate, there are often other incentives. For instance, it’ll deposit $1,000 into the customer’s account after the mortgage closes.
“Consumers can jump back and forth from lender A to lender B. They have those conversations and see if they can get better rates based on what others are offering,” Heck says.
Scrutinize your closing cost statement
Closing costs are what you pay the lender to process the transaction. They include loan origination fees, appraisal fees, title insurance, taxes, and other costs. The total can be hefty, usually about 3% to 4% of the whole loan amount. Sometimes, however, you can negotiate them.
Parker suggests first asking your lender for an estimate of closing costs. Since they vary from bank to bank, “make sure to itemize those fees so you know exactly what costs to expect at closing,” he says.
Even before you apply for a loan, request an estimate. This will give you a general idea of what the lender might charge.
“When shopping around with multiple lenders, ask for specifics regarding interest rates and closing costs,” Parker says. “Having all rates and fees itemized will strengthen your position in the homebuying process.”
Find a better deal on closing costs elsewhere? Simply ask your loan officer to lower or waive some of these fees. Loan origination or application fees and title insurance are most likely negotiable. Others, like property taxes and credit check costs, are less likely to be changed, according to Rocket Mortgage.
When negotiating, don’t be afraid to be direct.
“A consumer shouldn’t be scared of hurting someone’s feelings,” Heck says. “It’s a huge financial transaction. Ask the questions you need to: ‘Is this my best option?’ ‘Do you have any other programs or deals that you think might be better?’”
Being proactive in this way will ensure you get the best possible deal on your mortgage.