- August 16, 2017
- Posted by: Liam Dai
- Category: Uncategorized
11 Questions You Should Ask Your Mortgage Lender Before Buying a Home
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If you’re looking to purchase your new home, there’s a number of different facets involved in the process before closing the deal. While you should follow the best practices for selecting an attorney, [ADD LINK TO “pamphlet ATTORNEY tips”] questions to ask your realtor, [ADD LINK TO “pamphlet REALTOR tips”] and things to consider that impact your future insurance rates, [ADD LINK TO “pamphlet INSURANCE tips”] probably the most important decision for potential home-buyers is to find a mortgage lender that fits their budget and qualifications.
In this article, we’ll look at eleven important questions to ask your mortgage lender before deciding to purchase your next dream home.
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What will be the interest rate on my mortgage?
It is in your best interest (pun intended) to find out the lender’s loan estimate, which should include the interest rate and included fees. This should include your APR (Annual Percentage Rate), comprised of points (see below), fees, interest rate, and other charges that you’ll be required to pay after closing.
Bear in mind that interest rates can fluctuate between the time you first put in your application and close on your home. Therefore, ask about locking in the interest rate (and points) during a specific period. Fees may apply, but it may end up costing you significantly less years down the road, so it’s worth your time. To keep an eye on the current rates that bankers use as a reference, refer to Bankrate’s mortgage trends here.
How many origination points and discount points will I be paying?
Origination points are fees that the lender charges to cover their costs for originating a loan, while discount points reduce the interest rate (essentially, they’re prepaid interest and can be deducted from your taxes). By asking your lender, you can determine whether they charge origination points, discount points, or even both.
Every point is equivalent to 1% of the mortgage. As an example, for a $200,000 mortgage with 1 origination point, you’ll end up paying $2,000 upfront. Consider the amount of points offered as part of your financial strategy as well as a way of avoiding sticker-shock when it comes time to pay fees at closing.
Are there any prepayment penalties for the loan?
As a home buyer, you should be aware of how prepayment penalties work in relation to paying back your loans in bulk (in excess of 20% of your mortgage) instead of payments with interest. Some lenders make this mandatory for mortgages, while others only require prepayment penalties for refinancing. A typical formula for figuring this penalty out is 80% of six-month’s payments (the interest-only portion) of the mortgage payment.
Essentially, this penalty is in place to ensure that lenders are compensated for the risk of issuing a loan. This can influence your long-term financial strategy, so it helps to know if your lender charges prepayment penalties.
What will be my minimum down payment for the loan?
Typically, lenders require a down payment that is a percentage of the entire mortgage. Some lenders require 5%, 10%, or 20%, while an FHA mortgage only requires 3.5% upfront. As a rule of thumb, a larger down payment can mean lower interest rates and better terms and conditions for your loan. Bear in mind that paying less than 20% of the mortgage usually comes with taking out a mortgage insurance policy, which increases your monthly payments.
What qualifications do I have to meet for the loan?
Every lender has their own requirements for those seeking a mortgage, so be sure to ask for their minimum requirements to qualify. This can include documents (see below) that provide the lender with your income, assets, employment, credit history, and so forth.
If you’re a first-time home-buyer or seeking loans from a government-sponsored mortgage, the qualifications are typically less stringent.
What types of mortgages do you offer?
Simply put, different lenders offer different types of mortgages. Because there’s a wide variance in how these loans can differ, it pays to explore your options from different sources. Even similar loans can vary in the interest rates, length of payment, the amount of the mortgage in total.
As a reference, there are a number of common mortgage types, which include:
- Adjustable-Rate Mortgages (ARMs)
- Assumable Mortgage
- Convertible ARMs
- Federal Housing Authority (FHA) mortgages
- Flexible Payment Option ARM
- Fixed-Rate Mortgages (FRMs)
- Jumbo Loans
- Interest-only ARMs mortgages
- Reverse Mortgages
- Veterans Affairs (VA) mortgages
Each type has their own set of advantages and disadvantages, so be sure to discuss each in detail with multiple mortgage agents.
What are the costs associated with my mortgage?
Lenders are required to provide an estimated cost of your mortgage costs before closing. This is called a Good Faith Estimate (GFE), which details the costs line-by-line and can help you ultimately pick the most affordable lender and compare rates from different lenders. Your potential lender is required to provide a GFE within 3 days of receiving your loan application.
Generally, a three-page GFE is comprised of the following sections:
- Important dates: This includes how long the quoted interest rate is available and how long the estimate of settlement charges is valid before fluctuating.
- Summary of your loan: This indicates your loan amount, terms of the loan, interest rate, and whether the interest rate is locked or not.
- Escrow account information: This lets you know whether you’re required to pay your property taxes directly to the lender or through an escrow account.
- Summary of settlement charges: This states your total estimated settlement charges.
- Understanding estimated settlement charges: On the second page of the GFE, this area provides details about fees associated with various settlement services.
- Tradeoff table: This table illustrates the amount you can reduce your interest rate by paying more at settlement.
- Shopping chart: This chart provides a list of points (origination and discount points) to compare different loan options from various lenders—or even from the same lender.
The GFE will contain an explanation of which charges may change by the time of the actual closing and by how much. While some of the fees are locked in, others can increase by up to 10%, so be sure to use an estimate as a tool to ballpark the cash you’ll need available upfront.
After picking a lender with a reasonably priced GFE, you can proceed to close, where upon you’ll be issued a HUD-1 settlement statement or a Closing Disclosure form that includes all locked-in costs. By law, you have the right to receive either document a day before closing/settlement.
Who determines which title company will be assigned to my closing?
While your mortgage lender may select a title company for you, it is within your rights (unless explicitly stated otherwise) to find a title company that may potentially be cheaper for you. This also extends to your escrow agency and any attorneys assigned to your home purchase.
What financial documents will I need to provide?
There’s a number of financial documents that show proof of your assets and income you’ll have to provide to your mortgage lender before you will be considered for a loan. These include:
- Bank statements
- Tax returns
- Pay stubs (ie. W-2s, 1099s)
There may be other required documents depending on the loan’s requirements, which demonstrate your ability to pay the costs of the closing and your ability to pay the down payment.
What’s the typical wait for processing the loan application?
The typical wait for a loan varies depending on how busy the lender is to process it. The process can be as short as 2 weeks or as long as 2 months, but during busier parts of the month when loan officers are finalizing loans-in-progress, you may have to wait longer. The workload of the professionals associated with purchasing your home (ie. appraisers, inspectors, etc.) also can increase the wait time until they have time available for your home purchase.
As a tip, try to begin your loan application during the beginning of a new month when the lender is hungry for new business and commission-based loan officers are looking to make their quotas. In addition, make appointments with professionals as soon as possible to speed up the process of your loan being approved.
Is there anything that might delay the approval of my loan?
It’s important to note that changes—even minor ones—in your financial life can delay your loan approval, as mortgage lenders have to consider these new parameters in relation to your ability to pay back the loan. Some life changes that can affect this are:
- a change of job
- a decrease or increase in salary
- a change in your marital status
- new debts
- a change in your credit history and/or credit score
To avoid these delays, avoid making any significant shifts in your finances, keeping a “holding pattern” until you close on your new home. Also, make sure to be available for any questions that the lender may have for you in the interim. And, while it goes without saying, double-check the documents you’ve submitted for the application and make sure that all the information is filled in adequately.