How about 2%?
November 12, 2009 8:13 AM   Subscribe

How exactly does one negotiate a lower rate on a (new) mortgage?

My partner and I may be buying a house sometime soon. Neither of us has ever bought a home before, so the whole process is new and a bit daunting. I've been reading up a lot on all different aspects of home buying, and one thing I've learned is that the rate that the bank offers you on your mortgage loan is negotiable. But how and when do you negotiate?

We were pre-approved back in late August, and in our pre-approval packet there was a rate listed, but it's my understanding that since the rates change each day, the actual rate we will be offered will depend on when we find a house we like (which has not happened yet) and actually apply for a loan.

So how and at what point during the process do we ask for a better rate? Should we try to get pre-approval from a few different lenders and then use that as bargaining power? I'm somewhat reluctant to do this because 1) handing really personal financial documents (tax returns, bank statements, etc.) over to a bunch of different people makes me nervous, and 2) if I understand right, a mortgage lender pulling your credit report can negatively impact your score.

We are in California, if that makes a difference.

Thanks in advance!
posted by kitty teeth to Work & Money (8 answers total) 6 users marked this as a favorite
Are you really looking for a 2% loan? Can you be more specific about the rates? If you are already at 4.25%, for example, you might not be able to get a lower rate (depending on your credit score). If you have a 8% loan and good credit, then yes, you should be shopping around for a lower rate, from a different lender.
posted by mattbucher at 8:22 AM on November 12, 2009

One thing I was told when buying a house is that multiple mortgage applications don't negatively impact your credit score as long as they are within the same 30 day period. I don't have a source for this, but I've seen it repeated in other communities and I'm sure someone here can confirm or deny this.
posted by tommccabe at 8:28 AM on November 12, 2009

When we bought this house a few years ago, we sought deals from two brokers and one lender (Sallie Mae), and then shuffled the rates and terms among the three until two dropped out (Sallie Mae bailed first).

You can continue to negotiate right up until you sign the paperwork.
posted by notyou at 9:13 AM on November 12, 2009

As of about 10 minutes ago, we just finished bargaining for the best possible rate with different lenders. This is what we did (disclaimer: this applies to New York):

1. Contacted one lender, requested information about pre-qualification (not pre-approval) for a mortgage to figure out what our price range would be for housing. This paperwork was sent to our realtor (the buyer's agent) to show we were serious.
2. Found a house, negotiated the price, signed a sales contract, and moved forward to pre-approval.
3. Before deciding on a lender for our pre-approval for our closing, we contacted multiple lenders. We asked each of them what rate they would offer (multiple credit checks within 20-30 days do not affect your score negatively aside from the initial credit check).
4. We made a spreadsheet of ALL of the rates, points, closing costs, good faith estimates and asked each and every lender, after we made it through the pre-qualification process, what all of the numbers would be.
5. We then picked the best two lenders, and played them against each other. Again, bear in mind this is AFTER we've chosen a home, placed a bid, the bid was accepted, and we signed the sales contract. If your credit is really good, you will have them almost literally fighting over you. We heard the phrase "our bank definitely doesn't want to lose you to (competitor name)." We then told them what each were offering in terms of rates, concessions, and closing costs. It actually got to a point where one of the lenders finally just said "We'll match whatever they offer you, we'll give you the lowest interest rate we can, and we'll cut parts of the closing costs to keep your mortgage and move forward."

This process is a little terrifying (you're going to be on the phone or email A LOT. Not just a lot, but a WHOLE lot), but it's also very gratifying to have banks climbing over each other to get your business. My understanding so far from all of this is that it's difficult to get them to fight with each other and negotiate until you have an actual property in mind and are moving forward with negotiations with the realtors.

This is all very fresh in my memory as we're just now finishing all of the minor paperwork details, so if you have any further questions, feel free to mail me via mefi and I'd be happy to answer them.
posted by DiamondGFX at 9:15 AM on November 12, 2009 [7 favorites]

Getting pre-approved by more lenders isn't likely to be helpful. Pre-approval does two things:
1. Demonstrates to the seller of the house that you are a serious buyer, who will most likely be able to get some kind of mortgage
2. It gives that lender a chance to hook you! Since you already have formed a (tenuous) relationship with them, it's more likely that you will throw up your hands at the whole process and accept whatever they offer.

When you're shopping around for lenders, they don't care much about other preapprovals; why should they trust some other lender to have qualified you correctly?

I suggest reading all you can at The Mortgage Professor -- he does a pretty good job of explaining how the process works, how to decide what parameters to shop for in a mortgage, and all the possible things that can happen. DiamondGFX's is also right on the money.
posted by xil at 9:28 AM on November 12, 2009

I can't say enough good things about working with my credit union. Good rate, low fees, local loan processing.
posted by theora55 at 9:38 AM on November 12, 2009

Response by poster: Thanks for the responses so far. To answer the questions that were asked: No, I'm not looking for a 2% loan and I know that I would be laughed at if I asked for that. I believe the rate in my pre-approval was 5.125%, and another lender I have been in touch with said that (on that particular day) I could get 4.75% with one point. Both of us have credit scores in the high 700s, so hopefully this will make us seem attractive to lenders.

Any more insight anyone has would be great!
posted by kitty teeth at 12:58 PM on November 12, 2009

The only way you'll be able to negotiate a rate with any kind of seriousness is if you have multiple lenders competing for your business. In general, we found (this was in June of this year, so recently) that lenders were feeling very hamstrung by new regulations and the fact that there are a lot fewer players who buy mortgages than there used to be. As such, they were less willing to negotiate on rates themselves than they would have been a couple of years ago, so where we saw the most wiggle room was in points.

Your good credit will help you. Another thing that will help is stability. We were in a kind of bad situation because my husband was about to finish grad school and start a job, and one lender absolutely refused to consider us because he didn't have 2 pay stubs at his quoted annual salary. If you work where you're buying and you have great credit, you are in an excellent position and should have no trouble finding several lenders who are willing to spot you a mortgage.

4.75 with one point is a great rate. If you can make them go even lower, more power to you. It's like a job, really: you're in the best place for negotiation if they know you have other options.
posted by crinklebat at 5:58 PM on November 12, 2009

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