The easy way and the hard way to get a mortgage: the hard way is better

Most homebuyers who need a mortgage place themselves in the hands of a loan officer or mortgage broker referred to them by their real estate agent, or by a friend, relative or business associate. This is the easy way, and I understand its appeal. It is the approach I often use to purchase anything complicated, which a friend or colleague understands better than me. It saves me from having to invest time acquiring knowledge for which I will have no further use.

The easy way works best when the quality of referrals is high, and the cost of making a mistake is low. In the case of mortgages, however, these conditions don't hold. Mortgage referrals are generally poor, for a variety of reasons I have written about in the past (See "Which Mortgage Referrals Can You Trust? on my website). And the consequences of a mistake can bedevil a borrower for years.

The hard way to get a mortgage, in contrast, can be viewed as an investment that will pay dividends for years to come. The hard way has five steps.

Step 1: Make sure you qualify

If your credit is good, you have enough cash for a significant down payment, and you can document adequate income for the past two years, this step can be skipped. If you are not sure, you should check it out so that in the event you don't qualify, you will know why and can start to fix it. Time spent on steps 2 through 5 will be wasted if you can't qualify.

Any loan officer or mortgage broker you consult will qualify you, but they will also expect you to get your loan through them - which is the easy way you want to avoid. As far as I know, my website is the only place where you can qualify yourself without being beholden to anyone. If you don't qualify, it will tell you why, and indicate the remedy.

Step 2: Find your price relative to the best price available

That you qualify for a mortgage does not necessarily mean you qualify for the best price available in the market at that time. For example, if your credit score is below 740, or you withdraw cash on a refinance, or you plan to rent your house instead of occupying it, or you put less than 20-percent down, your mortgage price will be higher than the best price.

This is information you want before going further, because there may be some simple things you can do that will lower your price.

The financial interest of a loan officer or mortgage broker is getting the deal done ASAP, not in finding a way to lower your price because that could delay the process. Some will do it but many will not.

My website has a calculator that shows every factor that increases the price above the best price, and the total of such adjustments. (See The Factors That Affect Your Mortgage Price Today.) This allows potential borrowers to see exactly why their price is higher than the best price available. This is particularly useful to borrowers who are on the cusp of a price adjustment - for example, they have a credit score of 739 or a down payment of 9 percent.

Step 3: Select the mortgage type that best meets your needs

Compare prices by choosing between fixed- and adjustable-rate mortgages; if fixed, you select the term (15 years, 30 years); if adjustable, you select the initial rate period. You should select the mortgage that minimizes your total cost over the period you expect to be in your house, provided that the payment is affordable, and the risk of future rate and payment increases is acceptable.

My website is one of the few that pulls together all the data that are relevant to this decision, including worst-case scenarios for adjustable-rate mortgages.

Loan officers and mortgage brokers have no financial stake in whether the type of mortgage selected by the borrower turns out well in the future or not. Some do a decent job in advising borrowers looking for advice because they are professionals who take pride in their work, but there is no easy way to learn which mortgage professionals are most helpful.

Step 4: Select the combination of interest rate and upfront lender fees that best meets your needs

Once you know your preferred mortgage type, you can select from among a variety of combinations of interest rates and fees paid to the lender upfront. As with the mortgage type, you should select the combination that minimizes your total cost over the period that is your best guess of how long you might be in your house.

Borrowers who expect to have the mortgage a long time find that low-rate/high-fee combinations have the lowest cost, while borrowers with short time horizons find that low-fee/high-rate combinations have the lowest cost.

Mortgage shoppers will find schedules of interest rate and fees on many websites, including all those I have certified as Upfront Mortgage Lenders. Only my site, however, displays the total cost of the different combinations over different time periods specified by the user.

Shoppers who complete Step 4 will have identified one combination of interest rate and upfront fees as best for them. This interest rate can be viewed as their "shopping rate," which they will use in Step 5 - the objective of which is to find the lender charging the lowest fees at that rate.

Step 5: Find the lender with the lowest fees on your preferred type of mortgage at your shopping interest rate

As an example, you might ask "What are your total lender fees on a 15-year FRM at 3.5 percent?"

This looks like the easiest step in the process, but in fact it is the hardest. The reason is that, with the exceptions noted below, you can't hold any lender to their answer. Prices are reset to the market every day and the only price to which a lender is committed is the interest rate that is locked.

This situation attracts "lowballing," which is the practice of quoting a price below the actual price on that day in order to snare the borrower. When the time comes to lock, the price is usually higher but it is too late for the borrower to back out.

The only sure way to avoid this trap is to shop on multilender websites that allow users to monitor the prices of multiple participating lenders. When I surveyed multilender sites a year or so ago, I found only two that provided this service (they are found on my site by reading How Effectively Can You Shop at Multi-Lender websites?) If any others have added it since then, they should let me know and I will update the table.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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