House On Money

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Many people think they'll have the same experience and pay the same amount of money no matter what mortgage company they choose, but this isn't true. Just like when you decide on a home to buy, a mortgage is something that needs to be comparison-shopped. Here's how to decide which mortgage lender is right for you.

First, see what loan programs are offered
The first step when evaluating a lender is to check out the loan programs they offer. Virtually all mortgage companies offer conventional loans, but not every lender offers programs such as FHA, VA, and USDA rural housing loans, so look into this before filling out any pre-qualification paperwork. Here's a brief overview of these common mortgage programs, in case you're not sure of the differences.

Loan Type Good for borrowers who... Who qualifies? Negatives
Conventional Have a substantial down payment and good credit Consumers with 620 FICO score or higher Higher approval standards than other loan types
FHA Don't have a large down payment or can't meet the conventional credit standards Most borrowers without serious credit issues FHA mortgage insurance is expensive, and may have to be paid for the life of the loan
VA Want 100% financing and no PMI Current military personnel and certain veterans Isn't available to the general public
USDA Want 100% financing and want a rural home  Low- to moderate-income buyers in rural areas  Property must meet USDA's definition of "rural," qualifications can be stricter than FHA or VA

You aren't necessarily limited to this list either, as many lenders have their own unique, specialized mortgage programs. For example, Regions Bank offers its "Affordable 100" program, which provides 100% financing with no private mortgage insurance (PMI) to borrowers with excellent credit. BB&T's "CHIP" program offers 97% financing without PMI to low- to moderate-income borrowers, even without a great credit history.

Many other lenders offer unique programs, so this should be your first shopping activity to narrow down the pool of lenders.

Get quotes from several lenders
Many homebuyers make the mistake of accepting the first mortgage quote they get. This is partially out of convenience, as getting an accurate quote from a lender requires filling out a pre-approval application, which can be rather lengthy. Another reason for this is that since a "hard" credit inquiry is also a requirement for an accurate mortgage quote, many people incorrectly believe that filling out a handful of mortgage applications will damage their credit score.

However, the FICO scoring formula actually encourages people to shop around for the best loans. As long as all of your applications take place within a narrow time frame (14-45 days, depending on which version of the FICO score is used), it will count as one single inquiry for credit scoring purposes. This is true whether you apply with one mortgage lender or 50, so don't let the fear of multiple credit inquiries prevent you from getting the best deal. Additionally, mortgage inquiries that took place within 30 days won't affect your score at all.

Then, make sure you're comparing the correct numbers
Just because you're offered two loans with a 4.00% interest rate doesn't mean they'll cost the same amount. There are many other costs of a mortgage that aren't reflected in this number, such as the lender's origination fee, application fee, and closing fees, just to name a few.

When comparing loans, the number to pay attention to is the annual percentage rate, or APR. Also referred to as the "effective APR," this number takes your interest rate into account, as well as any fees or other expenses added to the loan amount.

When you get a mortgage quote, it will generally list both the interest rate and APR, and these can be significantly different. As an example, I ran a quick search on Zillow for a $200,000 mortgage with 20% down, and here are the first few results.

Interest rate Fees APR Monthly payment
4.125% $69 4.129% $775
4.125% $953 4.175% $775
4.125% $1,016 4.178% $775


So, although the three loans have the same interest rate and monthly payment, the first one has about $900 less in fees than the next cheapest option, which is reflected in the APR. As you can see, a mortgage's APR is a more accurate indicator of how much your loan will actually cost, so it's what you should use when comparing loan quotes.

The bottom line
All mortgage companies are not the same. They offer a variety of loan programs and charge different fees, and doing some comparison shopping won't hurt your credit. So, it's definitely worth your time and effort to do some research, get quotes from several companies with loan products that are attractive to you, and compare the true cost of the loans.

Matthew Frankel owns shares of Regions Financial. The Motley Fool recommends Zillow Group. The Motley Fool owns shares of Zillow Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.