The Mortgage Professor: The best tool for mortgage shopping

In 2015 the Consumer Financial Protection Bureau (CFPB) replaced two incompatible disclosures from two federal agencies with a new set of integrated disclosures. One of them, called the Loan Estimate (LE), was viewed by CFPB as a shopping tool. It advises borrowers to “request multiple Loan Estimates from different lenders so you can compare and choose the loan that’s right for you.”

CFPB doesn’t advise prospective borrowers on exactly how to use the LE to shop, or warn them of the pitfalls. I am going to do that here, comparing that method of shopping to the use of the Quick Mortgage Shopper (QMS) on my website.

Using the LE to shop multiple lenders requires the shopper to submit an application to each lend- er. This imposes a cost on each lender, and each will go all out to convert the application into a loan. Choosing one of them will not stop the others from calling.

Using my QMS, in contrast, will not generate any calls because participating lenders have provided their pricing information to QMS, which provides it to the shopper, who remains anonymous.

Timing: Mortgage lenders reset their prices every morning, and occasionally during the day as well. To assure comparability, therefore, shoppers should apply to all the lenders on their list on the same day, and as close to the same time as possible. Those using LE who stretch out the process endanger the validity of their results.

In contrast, the prices on QMS are always up to date because the lenders update their prices there when they reset them on their own sites.

Document deluge: Shoppers who apply to multiple lenders will receive not only the LE but the entire package of loan documents, usually well over 100 pages of stuff. They need to extract the LE and set the rest of the package aside.

QMS users receive no paper except what they elect to print. Impact on credit score: Each lender contacted by a shopper using the LE will pull the shopper’s credit. Multiple inquiries from different categories of lender (such as finance companies, commercial banks and credit unions) will reduce their credit score, even if they occur within a short period. Shoppers with low scores to begin with must avoid getting dinged in that way. The safest way to avoid it is to shop mortgage banks and mortgage brokers only. Multiple inquiries to them within any 30day period count as only one inquiry.

With QMS the shopper enters the credit score, which she can obtain with one inquiry.

Price variables used to shop: The LE has many but not the one that matters. In addition to the interest rate, lender fees and APR, it shows the total amount of interest the borrower will pay over the life of the loan as a percentage of the loan amount, and total payments over the first five years. CFPB is silent on how to use this mlange of measures to choose one lender over another.

QMS identifies the one variable that best captures the value of a lender’s offer. This is the interest rate at zero lender fees, which I call the “shopping rate.” While the borrower might want to lower the interest rate by paying points, or raise the rate in order to obtain a cash rebate, in both cases the probability is high that the lender with the lowest shopping rate will offer the best terms.

Implementation: Where shopping with the LE requires the shopper to apply for a mortgage with each lender the shopper contacts, the QMS allows the shopper to solicit price bids without applying. The shopper prints out the shopping rate along with all the features of the transaction that affect the rate, and says to the lender, “Give me your bid on a loan with these features, and if it is the best, I’ll be back to apply.”