Ten Questions to Ask Your Mortgage Lender
One of the greatest of life’s lessons is – YOU DON’T KNOW WHAT YOU DON’T KNOW. Most individuals walk through this lesson in their twenties – as they exit the ‘you can’t teach me anything I don’t already know’ teen years.
Homebuyers will find that it is critical to learn to make decisions based on well-researched facts – especially in the realm of finance and money. And because one’s home purchase is likely to rank among the largest financial decisions in a typical American life, it is important to obtain enough information to make a qualified and educated decision regarding what is a tremendous commitment.
FYI – THESE QUESTIONS ARE PRESENTED IN NO ORDER AS BORROWERS HAVE UNIQUE NEEDS
1 HOW MUCH IS THE MONTHLY PAYMENT? CLOSING COSTS?
Unless one is independently wealthy, homeowners must be financially vigilant and budget conscious. As a result, it is essential to understand the costs associated with the following –
Either way, it is critical to remember that one’s home is an investment.
- The monthly payment to maintain the home purchase or being refinanced. A borrower’s monthly housing expense typically includes –
- The Principal and Interest
- The Prorated real estate taxes and homeowner’s insurance
- The Private Mortgage Insurance (PMI), if applicable
- The costs involved in the purchase of the home –
- The Down Payment on the purchase
- The Closing Costs
- The Upfront escrows, if applicable
Having this data and information is critical to setting realistic expectations. This information will help clarify how much of a house a borrower can comfortably afford, which ultimately narrows those homes you choose to tour.
Mortgage lenders can help you review the information that will determine how much of a home you can afford. Want to check out a few options for yourself – use this online mortgage calculator to help estimate monthly payments.
2 WHAT MORTGAGE PROGRAMS ARE OFFERED?
The mortgage market offers many types of loans to meet the needs of a variety of borrowers. There is no solitary mortgage product that is superior to another because each financing scenario is unique. Speaking with a mortgage professional can assist you in deciding which of these mortgage types may fit your situation best.
In 2020, Forbes reported that the conventional mortgage market accounted for 64% of mortgage loan originations, which is quite significant, as the graph below notes. In 2020’s third quarter, the total dollar amount of mortgage originations in the country was more than $1 billion. As the graph denotes, this is the highest quarterly reported figure since 2002. More than 60% of these originations were refinance transactions.
A conventional fixed-rate 30-year mortgage is perhaps the most well-known and often used of all mortgage products. Conventional mortgages are also offered in 10-, 15- or 20-year terms. The 30 -year option offers –
- A fixed rate and certainty regarding the payment in the future
- A timeframe that creates reasonable monthly payments for borrowers
And while the 30-year may offer the lowest monthly payment, the total cost of the mortgage – when all is said and done, will be the highest given three decades of interest payments. Many borrowers consider shorter-term loans if they can afford the higher monthly payment.
Adjustable-Rate Mortgages (ARM)
Conventional mortgages are offered with mortgage rates that may change during the loan term, known as ARM’s or adjustable-rate mortgages. The adjustment periods will differ and reflect the current interest rate environment at predefined intervals. Note, however, payment or interest rate caps in place to protect payment over time.
The Federal Housing Administration insures mortgage products known as FHA loans. The FHA offers lenders the insurance they need that allows lenders to take on larger risks in terms of the loans that are issued a loan approval. FHA loans tend to offer lower minimums in terms of a down payment and credit scores compared to conventional loans.
But note that FHA loans are restrictive with respect to loan amounts and other pertinent issues.
VA loans are offered with the backing of the Department of Veteran Affairs. As a result, only veterans and active service members (as well as their surviving spouses) are eligible. VA loans offer highly competitive rates and offer zero down payment options. Like the FHA, VA loans are required to follow strict VA guidance.
3 What are the Credit Qualifications?
Each lender sets forth their lending guidelines – which include what the lender considers an acceptable credit score. A credit score (represented by a 3-digit number) indicates your creditworthiness as calculated by industry algorithms. Be certain to –
- Check your credit on a regular basis while saving for your home. Consumers can obtain a free credit report each year from each repository.
- Ask your mortgage lender about the credit qualifications as early in the mortgage process as possible.
Stellar credit borrowers may qualify for special programs, so it pays to ask the mortgage lender about these options. Borrowers who have less than perfect credit can often find a mortgage product – usually for additional fees or a higher rate, to compensate the lender for the additional risk taken by a borrower with a lower credit score.
4 What Is The Interest Rate & APR?
Most homebuyers will likely first ask about the best interest rates for their situation, as this rate is an essential component of how your monthly payment is calculated. By law, lenders must include an Annual Percentage Rate (APR) with an interest rate, as the APR provides financial insight into the true/full cost of the money being borrowed. The APR was developed to help borrowers compare loans – from an apple-to-apple perspective.
Interest rates can be determined by a number of factors –
- Creditworthiness/Credit score.
- The size of the down payment.
- The loan type.
- The loan size.
- The loan term, among others.
The rate will also depend on the number of discount points you choose to pay – if any. Each discount point is equal to 1% of the loan amount. In general, paying points will lower the interest rate. The number of points one should pay depends on available funds and how long the borrower intends to live in the property. A mortgage professional can help explain how this financing nuance works.
5 Can I Lock-in my Mortgage Rate?
Homebuyers and homeowners typically have the option of locking in a rate, which is helpful for borrowers who can’t manage market fluctuations without experiencing stress. A rate lock is created when a borrower signs an agreement with the lender, although the rate lock period might differ among lenders. Some rate locks offer a unique flow-down feature that allows for the downward movement of rates but protects on the upswing.
6 Do I Need An Escrow Account?
An escrow account is a savings-type account where a lender maintains funds that have been prepaid towards upcoming due dates for insurance premiums and property taxes. Established at closing, an escrow account may be a requirement, depending on the type of loan selected by the borrower. Some borrowers prefer to have an escrow account as it offers a process that removes the hassle of having to make sure you have saved enough when due.
7 ARE THERE INCOME REQUIREMENTS FOR BUYING A HOUSE?
Most mortgage applicants need to provide paperwork that documents the source and amount of income. There are not set income amounts required as every purchase and borrower will offer a unique combination of factors. Lenders consider all sources of legitimate and provable income, which may include salary, overtime, commission, bonuses, child support, and military or social security benefits, to name a few.
Income is used to calculate a borrower’s debt-to-income ratio, which may be as high as 43% (or higher), depending on the transaction and the relevant compensating factors.
8 Does the lender Offer a Preapproval letter?
With a real estate market on fire, the best way to gain an edge in the market is to include a preapproval letter from a lender at the time your offer is presented to the seller or seller’s agent. A preapproval letter is the document issued by a lender after they have verified your income, credit, and assets – using verification that is typically required for full-blown mortgage approvals.
Essentially, the preapproval offers a borrower written verification that the lender has reviewed all available information – except for the property, which has yet to be chosen. A preapproval indicates that the lender stands ready to issue a mortgage approval when a property is chosen and meets the lender’s property requirements.
9 How large of a Down Payment is Needed?
Many borrowers assume that they need a 20% down payment to purchase real estate. And while many borrowers may choose to put 20% down, there are a variety of loan products that only required 3% – with VA offering 100% financing for qualified borrowers.
The advantage to putting 20% down when purchasing a home is that it helps borrowers avoid the need for Private Mortgage Insurance – PMI, which is insurance the borrower pays to help protect the lender by lowering their calculated risk.
If a mortgagor/borrower is required to pay PMI, you can cancel the insurance when you have at least 20% equity (by a licensed appraiser) in your property.
10 Is There A Prepayment Penalty?
Many borrowers choose to pay down their mortgages ahead of the amortization schedule, as this is a smart technique that will save borrowers thousands of dollars over the life of the loan.
A prepayment penalty is the bank’s way of dissuading borrowers from paying their mortgages ahead of time – even if the borrower is just refinancing to lower the rate or the loan term. Note, however, that lenders may use one of two types of prepayment penalties, which work as follows –
- A hard prepayment penalty is a prepayment penalty paid by the mortgagor (the borrower) independent of whether they choose to sell the home or refinance the home.
- A soft prepayment penalty is a prepayment penalty that allows mortgagors to sell their home without incurring a penalty; however, if the borrower refinances the mortgage, they will incur a prepayment penalty.
So, if the lending institution charges a penalty for prepayment, be certain to ask about the amount of the penalty and the time the potential penalty period remains in effect. Prepayment penalties vary from lender to lender but can be pricey and make paying off a mortgage a poor financial choice – in the long run.
Most lenders steer clear of prepayment penalty clauses in their mortgage documents, although it may show up – depending on the lender. That is why it is essential to understand if there is a penalty for paying a loan off early before signing any paperwork!
THE BOTTOM LINE
Choosing to ask your lender relevant and pertinent questions before you begin the home purchase process is a great way to simplify the homebuying process. It is also a smart way to alleviate the stress caused by the unknown! There are no questions off-limits, and as we all learned in kindergarten – there are no bad questions.
Remember to ask about the many loan types which will ultimately decide the borrower’s loan requirements with regard to income, credit scores, and assets (down payment & reserves, etc.).
Are you ready to get started by speaking with one of our mortgage professionals? They can be reached at 866-696-7578 and are ready to help you determine which loan will best fit your needs.
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