When homebuyers prepare to buy a home, knowing what to ask a mortgage lender upfront is crucial. Whether a client is a first-time homebuyer or an esteemed real estate mogul, the best practice for any borrower is to ensure they understand all the financial aspects of lending and homeownership. It is true that the realm of financing can be very intimidating, especially considering the endless options available to borrowers.
For example, lenders and brokers are often mistaken for the same profession. When, in fact, there is a distinct difference between a mortgage broker and a mortgage lender. In a nutshell, mortgage lenders work directly with a financial institution that offers direct loan products to potential homebuyers. Whereas a mortgage broker works independently and shops multiple lending institutions to find the best loan options for their client’s specific needs.
What is the old adage from Carl Sagan? There is no such thing as a dumb question. Expressed simply, mortgage lenders couldn’t agree more. When a potential client comes in prepared and ready to conduct business, naturally, a lender will be impressed and ready to meet the challenge.
Here are ten questions to ensure buyers know what to ask a mortgage lender before committing to a mortgage.
1. Which type of mortgage is right for me?
Considering the variety of loan options available in today’s lending market, the right one will vary depending on a client’s needs, situation, and goals. Ask them to explain various loan types and eligibility requirements. A few popular mortgage options to ask about are conventional loans, FHA loans offered through the Federal Housing Administration, VA Loans provided through Veterans Affairs, USDA loans, and Jumbo Loans. By asking the right questions, borrowers begin to understand their loan options. Nothing simplifies a home purchase and eases uncertainty more than making an educated and purposeful decision.
2. Please explain how interest rates affect each loan and the annual percentage rate for the types of loans I qualify for.
Naturally, mortgage interest rates fluctuate daily and vary from lender to lender and from one loan to the next. Consequently, many borrowers seek fixed-rate loans that provide stable and reliable payment options. However, adjustable-rate mortgages (ARM) often offer lower interest rates than fixed-rate mortgages. For example, if a borrower is looking to move within a few years, an ARM loan may save them a bundle in interest since the plan is to sell the property before the ARM loan matures. As a result, knowing what to ask a mortgage lender about interest rate options is vital. Borrowers need to understand how interest rates work throughout the life of the loan, not simply the initial rate availability.
The annual percentage rate (APR) is different (usually higher) than the loan’s interest rate. Often, borrowers look at APRs as the quickest option to compare mortgage offers. The APR represents all fees and costs associated with the loan, from interest rates, brokerage fees, and loan origination costs.
3. What are the points and origination fees?
Buyers can pay down interest rates with points equal to 1% of the loan amount. The more points purchased, the lower the interest rate. In some cases, origination fees or lender’s fees are also charged in addition to the points themselves, so ask for clarification. Mortgage points, also called discount points, are upfront fees that homebuyers can pay to reduce the interest rate on their loan.
4. Can I lock the loan rate?
Because interest rates change so frequently, it can be a savvy decision to lock a loan. Brokers and lenders often call this practice a rate lock. The idea is simple: homebuyers lock in a great rate if interest rates increase during the buying process. Rate locks typically lock the interest rate for 30-60 days. Additionally, ask about fees to lock the loan, how long it lasts, and whether it covers all the loan costs. Lastly, secure the lock in writing to avoid confusion later in the loan process.
5. What’s the minimum down payment requirement?
Overall, down payments can vary from nothing to the standard 20%. Frequently, homebuyers leverage their savings to provide the best lifestyle they are seeking through homeownership. For example, the potential property is in dire need of new appliances or a bathroom remodel upon move-in. In this case, a home buyer may opt to put in less money as a downpayment and pay for these upgrades outright.
Sure, the homeowners will likely pay a higher interest rate; however, instantly improving their quality of life. Remember that a down payment below 20% will likely require private mortgage insurance premiums (PMI) on the property— another cost to factor in. PMI is different than homeowners insurance. PMI protects the lender; homeowners insurance protects the buyer. When homebuyers educate themselves on what to ask a mortgage lender regarding down payment options and down payment assistance programs, they have a leg up on the home-buying process, and lenders appreciate that.
6. What are the estimated fees and costs?
Often, lenders will offer an estimate of all of these costs when they provide the loan estimate, but it’s a good idea to get an idea of these costs early on in the loan application process to minimize surprises down the line. A loan has many additional costs, from the initial mortgage application and prequalification and preapproval process to escrow, title, and closing. While many of them are from third-party vendors — things like credit reports (for proof of credit scores and credit history), closing costs, appraisal fees, title policies, escrow accounts, recording fees, and property taxes may require upfront payment. Correspondingly, borrowers must ask about all included expenses of acquiring each type of loan.
7. Is there a penalty for paying off the loan early?
Who wouldn’t want to pay off their loan early? Am I right? Sometimes, homeowners make monthly payments higher than the required monthly mortgage amount. As a benefit, they pay down the principal faster. Since principal payments quickly tick away at the overall loan amount, many homeowners prioritize this monthly investment. Ultimately, lenders make their money off of the interest payments received long-term. As a result of their loss of interest payments, some lenders charge a prepayment penalty for unearned interest payments for early payoff before the loan term ends. With this in mind, buyers must ask about prepayment and how it works with each loan, specifically regarding any kind of penalty.
8. What’s your loan processing time?
Altogether, processing a loan takes between three and six weeks typically. Given that the market isn’t booming beyond reasonability. Knowing what to ask a mortgage lender is easy regarding loan processing time. Indeed, buyers need to know specifically about a lender’s typical turnaround. Keep in mind that loan processing and closing dates are different. Subsequently, lenders require a closing date to write a purchase contract.
9. Do you approve loans in-house?
Some lenders manage their own underwriting, while others outsource this stage. Of course, underwriting is a step in and of itself, as It’s the process of reviewing a loan and issuing certain conditions before approval or rejection. All in all, lenders must ensure their investment, so they employ underwriters to check a buyer’s financial history and continuity. For this reason, borrowers need to prioritize every financial decision they make as they approach the mortgage application process. Ultimately, underwriters look for timely payments of credit cards and any other loans.
Borrowers need to provide bank statements that prove their monthly income versus their monthly expenses, known as debt-to-income ratios (DTI). In essence, underwriting fulfills two purposes. Firstly, they protect the lender’s investment. Secondly, they answer the essential mortgage questions: how much money can this buyer safely invest into a monthly mortgage payment without defaulting on the loan, and is this the right loan to protect the investment the banking institution is considering? In brief, by asking lenders how they approach underwriting, buyers can open lines of communication and rest assured that their lender is working to get them approved.
10. Do you offer guaranteed on-time closings?
Time is of the essence, and a loan that closes on time is critical. It is paramount to know what to ask a mortgage lender specifically about their ability to guarantee an on-time closing. Ultimately, the quicker the lender can streamline the home buying process, the more money they earn, the happier their client is, and the more likely that client is to refer friends and family their way. Therefore, when loans close slowly, no one is more apt to move things along than the lender.
Now you know what to ask a mortgage lender, let’s connect you.
Getting specific answers to these ten questions is a great starting point, but don’t limit yourself. If you’re unclear, ask for clarification. Just as with a real estate agent, a suitable lender will have no problem answering your questions, and the more information you have, the more likely you are to enjoy a successful transaction. After all, transparent communication between lending and homebuyers is essential. Mortgage lenders work with every type of homeowner, from buyers looking to refinance their property by capitalizing on home equity for refinancing opportunities to first-time homebuyers who may not know what purchase price they even qualify for. The most significant step is knowing what to ask a mortgage lender to achieve your dreams.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
