Save Thousands - Mistakes Homebuyers Make When Finding a Lender

In my years as a real estate agent I have seen first time and experienced home buyers alike make very innocent, yet highly detrimental mistakes. Chief among them are the mistakes they make in picking a lender. 

Unfortunately these are not obvious mistakes, they are mistakes made prior to me being involved as their real estate agent, are hard to undo, and may end up costing them tens of thousands of dollars over the tenure of their loan. 

In this article, I’ll share the top three costly mistakes I see prospective home buyers make when choosing a lender, why buyers make them, and how to maneuver around them. 

They don’t go to their agent first

There’s a reason that step one in my ebook is to find an agent. Yet for many home buyers, especially first time ones, they do steps 1 and 2 - finding an agent and finding a lender - in reverse. They find a lender, and then find an agent. 

At a psychological level, it makes sense as to why they do this. You want to first see what you can actually afford before you go “bug” an agent. 

Take it from me - you are never bugging your agent by coming to them before you are ready to officially initiate the search. Especially if by coming to your agent first, they can save you tons of time, money, and frustration. 

Why is going to a lender first instead of an agent first a huge mistake? The first reason is because your agent is going to be able to refer you to a lender that they know and trust, and have successfully worked with before. 

You want to work with a lender who is going to work with you, look out for your best interests, and most importantly, one who is determined to close the deal. The best way to ensure that all three of these are true is to leverage a recommendation from your real estate agent. 

Your real estate agent should also be able and willing to introduce you to multiple lenders that they know, trust, and have worked with before. They should be able to articulate why you’d want to work with one lender over the other. 

The second reason why going to your lender first instead of your agent is a big mistake is covered in the following section.

Hard credit pull with hard expiration

When most prospective home buyers talk with a lender before their agent, they usually go to some local bank. Going to a local bank first, in my opinion, is not a good idea. Here’s why:

From a psychological perspective, you go to the bank to see what you can afford. The lender will insist that they can’t give you an answer on what you could reasonably afford unless you get prequalified. 

To get prequalified at the average bank, you will submit a lot of information. Your income, assets, liabilities, how long you’ve worked at your job, personal information, and oh yeah this other huge one called your CREDIT SCORE. 

Yes, the average lender will hit your credit report to do their initial pre-qualification. What’s worse, the pre-qualification letter will have an expiration date - usually 90 days - whereby if you don’t get an accepted offer on the property within that window, the lender will have to do another hard credit pull to re-issue the letter. 

This, in my opinion, is just plain wrong. The average prospective home buyer when they come off the street to chat with a local bank is almost never in a position to move this quickly. Buying a home is a major life decision that usually takes much longer to come to terms with. 

As a personal example, when I bought my first home (prior to being an agent), I talked with three different banks over the course of 2 years prior to submitting a single offer. 

The result? I received three hard inquiries on my credit score, which dragged my score down, and ultimately hurt me as a borrower. 

The alternative? Your agent should be able to refer you to someone who can give you a reasonable understanding of your purchasing power prior to doing a hard credit pull. 

Obviously, the lender needs to get some information on you, because the lender wants to make sure that whatever prequalification letter they put their name on is something they can stand behind. They’ll still want to get income, assets, etc., but they can do a soft credit pull as opposed to a hard one that shows up on your credit report. 

Eventually you will need two hard credit pulls - one to qualify for the actual mortgage (after offer acceptance) and another prior to closing (to make sure you didn’t take out a bunch of loans that materially change your strength as a borrower). We want those two hard credit pulls to be the only ones you receive throughout this process. 

Lenders in the past have told me that it doesn’t really impact your score if the credit pulls are close together. I have not really found that to be true. Hard credit pulls materially impact your credit score, and it seems they stay on your credit score for upwards of two years. 

These are mistakes prospective home buyers make prior to their offer even being written, let alone accepted. The last one on our list is a mistake home buyers make once they are deep in the mortgage approval process.

This is where getting a lender referral from your real estate agent can be a double edged sword. A lender who is referred to a buyer by their agent may think they have this business in the bag and that they don’t have to put their best foot forward from a loan price perspective. 

Taking a step back, when I say loan price perspective, I am referring to the interest rate on the loan as well as any points/fees charged by the lender. 

Prospective home buyers, myself as a first time homebuyer included, sometimes mistakenly believe that the price offered by one lender is the same that any other lender will offer, and therefore, the term sheet put in front of you is the best you are going to get. 

This is not true on so many levels that it could be its own ebook. Mortgage pricing is part strategy, part cost structure, and part competition. Meaning - how risk averse is the institution who is lending to you? How risky are you as a borrower? What is your loan type (e.g. 30 year fixed vs 15 year fixed vs VA, etc.)? Are you working with a small institution, a large one, an online one, or a mortgage broker? How competitive is the institution you are working with? 

Some lenders have higher overhead costs that get passed onto borrowers. Others have less overhead costs because they are more of an online shop. Some specialize in specific types of loans. Some are paid salaries and others are paid commission.

There are many other reasons why one lender’s price/terms will differ from the others. But the one thing that ALL lenders have in common is that the terms are always negotiable.

You should always try to negotiate. You should push your real estate agent to negotiate the best home sale price and terms possible. You should similarly push your real estate lender to give you the best price and terms possible. 

You won’t always get something - for example, the lender I most frequently work with knows my clients are going to ask, so they just always lead with their best foot forward - but you’ll never get something you do not ask for. 

Conclusion

In this article we outlined the most common mistakes prospective home buyers make when selecting a lender. 

To review, there are two categories of mistakes:

1. Mistakes before the offer is written, which are the hardest to undo

2. Mistakes after the offer is accepted, which are easily undone with the right real estate agent. 

With mistakes before the offer is written, we covered not getting a referral from your real estate agent, and getting a hard credit pull with a hard expiration from the wrong lender. These mistakes seriously impact your credit score, which makes you less competitive as a borrower, and may actually increase your loan costs. 

After the offer is accepted, be careful blindly accepting whatever term sheet is put in front of you. You should always negotiate for the best price and terms possible, as you would with buying your home to begin with. Not getting the best interest rate possible, or paying more in fees than you have to, is just plain losing money. 

Interested in buying a home someday? Reach out to me so I can point you in the right direction.