How Many Mortgage Lenders Should You Apply to? (FICO)
Applying to multiple mortgage lenders allows you to compare rates and fees to find the best deal. Having multiple offers in hand provides leverage when negotiating with individual lenders. However, applying with too many lenders may result in score-lowering credit inquiries, and it can trigger a deluge of unwanted calls and solicitations. Find out how to strike the right balance of options.
Reasons to Apply to Multiple Lenders
It's difficult to know you are getting the best deal if you have not compared it with other offers. With new laws limiting how mortgage companies are compensated, there is less variance in rates and fees from company to company than there was among mortgages in the 2000s. However, subtle differences remain, and what looks like small interest rate savings now could translate to a large dollar amount over 15 or 30 years.
Moreover, different lenders structure loans in different ways with regard to rates and closing costs, which carry an inverse relationship. Some lenders ramp up closing costs to buy down your interest rate, while others that advertise low or no closing costs offer higher interest rates in exchange.
Looking at multiple good faith estimates (GFEs) side by side lets you compare rate and closing cost scenarios to pick the best one for your situation. It generally makes sense to pay higher closing costs for a lower interest rate when you plan to keep the mortgage for many years, as your interest rate savings eventually surpass the higher closing costs. If you plan to sell or refinance after a few years, it is better to keep closing costs as low as possible, since you are not paying on the mortgage long enough for interest rate savings to add up.
You can even play one lender against another when you have multiple offers. Suppose lender A offers you a 4% interest rate with $2,000 in closing costs. Then lender B comes along and offers 3.875% with the same closing costs. You can present lender B's offer to lender A and try to negotiate a better deal. If you are really good, you can take lender A's new offer back to lender B and do the same thing, and so on.
Drawbacks of Applying to Multiple Lenders
For a lender to approve your mortgage application and make an offer, it has to review your credit report. To do so, it makes a credit inquiry with the three major bureaus. Credit analysts believe that too many inquiries can lower your numerical credit score, since most scoring models, such as FICO and VantageScore, take inquiries into account. These models are closely guarded, so few people know the exact extent to which inquiries matter. Fair Isaac Corp. (NYSE: FICO), the creator of the FICO model, states that multiple mortgage inquiries that occur within 30 days of one another do not affect your FICO score.
Another nefarious secret that many borrowers do not know is that credit bureaus make additional revenue by selling your information to mortgage lenders to which you have not applied. This is known in industry parlance as a trigger lead. Submitting a mortgage application triggers a credit pull, and mortgage companies pay the credit bureaus for lists of people whose credit was recently pulled by mortgage companies. Knowing that these people seek mortgages, the companies' salespeople call down the list and pitch their services. The more lenders you apply with, the more likely it is that your information will be sold as a trigger lead, which can lead to a barrage of sales calls.
The Goldilocks Number
Too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls. Unfortunately, there is no Goldilocks number that represents the right number of mortgage lenders to which you should apply. Some borrowers apply with only two, feeling certain that one or the other can provide the ideal loan, while others want to hear from five or six banks before making a decision.
Perhaps the best approach to getting a mortgage is to start by conducting market research to get an idea of what constitutes a great deal in the current lending climate. Next, contact two or three lenders and challenge them to match or beat the terms you have established. If you review their offers and still believe a better deal exists, apply to additional lenders as necessary, but understand the established drawbacks of doing so.