Before you commit to a mortgage lender, be sure you ask them these important questions. And remember, if you don't like the answers you receive, continue shopping for a loan until you find a lender with whom you feel comfortable.
1. What Types of Mortgages Do You Offer and What’s Best for Me?
Mortgage brokers work with different mortgage lenders offering different types of mortgages. These loans can differ in the amount offered, interest rates, length, and payment type. Common mortgage types include the following:
- Federal Housing Authority (FHA) mortgages
- Veterans Affairs (VA) mortgages
- Fixed-rate mortgages (FRMs)
- Adjustable-rate mortgages (ARMs)
- Interest-only mortgages
- Reverse mortgages
- Jumbo loans
- Rural Housing
Your mortgage lender should be able to tell you what type or types of loan is best for you once they’ve asked about your employment, income, assets, credit, debt, expenses, down payment, and other financial information. Choose one who gathers enough information from you before they suggest a certain type of loan. Don't be afraid to ask them to explain the pros and cons about each type of loan.
2. What Are the Qualifying Guidelines for this Loan?
Many mortgage lenders require borrowers to meet certain guidelines. Ask about requirements relating to your income, employment, assets, liabilities, and credit history. Qualifications for first-time home buyer programs, Veterans Affairs loans, and other government-sponsored mortgages are typically less stringent. Your lender will be able to tell you which loans you qualify for.
3. What Documents Do I Need to Provide?
Most lenders will require proof of income, such as recent pay stubs, assets, including bank statements, tax returns, W-2 statements, personal identification, and information about your credit history. You may need to show your down payment and your ability to pay closing costs. It can be a lot of paperwork, so start getting your paperwork in order now.
4. What’s the Interest Rate and Annual Percentage Rate on this Mortgage?
Ask your representative for the lender's Loan Estimate (LE). The estimate breaks down the interest rate and the fees and will include the annual percentage rate (APR) which is derived by a complex calculation that includes the interest rate, points, fees, and other charges you will pay for a mortgage. The total amount of interest that you will pay over the loan term is a percentage of your loan amount will also be provided (Total Interest Percentage - TIP). Keep in mind that:
- Some lenders do not always compute APR correctly, and there’s no way to accurately compute an APR rate for an adjustable loan.
- An APR does not account for early payoffs.
- If your interest rate is adjustable, ask about the:
- Adjustment frequency
- Maximum annual adjustment
- Highest rate (Cap)
- Index
- Margin
5. How Many Discount and Origination Points Will I Pay?
Lenders may charge discount points, origination points or both. Each "point" is equal to 1 percent of the loan amount. For example, if you get a $150,000 mortgage and pay one discount point, you'll pay a fee of $1,500, because that's 1 percent of $150,000.
- Discount points reduce the interest rate. They are prepaid interest and are tax-deductible, even if the seller pays some or all of the points.
- Sometimes lenders charge origination fees in addition to points. Origination points are fees charged by the lender to cover the costs of originating the loan.
- Points "buy down" the interest rate, meaning the more points you pay, the lower the interest rate.
6. What Are the Full Costs of My Mortgage?
Borrowers pay fees at closing for services provided by the lender and also other third-party vendor fees for items such as:
- Appraisal
- Credit report
- Lender's title policy
- Owner's title policy
- Pest inspection reports
- Escrow (where applicable)
- Recording fees
- Taxes
- Notary
Don’t be afraid to ask the mortgage lender:
- How do you get paid?
- How much will you make on this loan?
An estimate of these fees constitutes the Loan Estimate or LE. Lenders are required to provide a written line-by-line estimate of these costs within three days of receiving a loan application. Use this as a shopping tool to compare rates and expenses from various lenders. According to the Real Estate Settlement and Procedures Act (RESPA), lenders have three days after you've applied for a loan to give you the LE containing all the costs of your loan. It’s crucial to know, however, that lenders are not required to guarantee LEs. If your lender refuses to stand behind its estimate, go elsewhere. When you are ready to close, you will get a finalized document, called a Closing Disclosure (CD), used to itemize services and fees charged to the borrower. By law, you have the right to receive the CD 3 days before closing or settlement.
7. Do You Offer Loan Rate Locks?
Interest rates change daily. While they fluctuate between the time you apply for a mortgage and closing, you might consider locking your loan rate, and even the points, for a specified period. Lenders typically charge zero to one point to lock a loan rate. Ask your broker:
- Does the lender charge a fee to lock my interest rate?
- Does the lock-in protect all the loan costs?
- For how long will they lock this rate?
- Will they give me the loan lock in writing?
The alternative is to pay the prevailing rate and points on the day your loan documents are prepared.
8. Is There a Prepayment Penalty on this Loan?
Some lenders will charge a penalty if you prepay on the mortgage. Some apply only when you refinance or reduce the principal balance by more than a certain percentage. Still, in some states, prepayment penalties are no longer allowed, so ask: How much is the prepayment penalty?
- What are the terms of the prepayment? Some are in effect only during the first 2 to 5 years of the loan.
- Would the prepayment penalty apply if I refinanced through the same lender at a later date?
Find out what the penalty specifics are and see if the lender will lower the rate on loans with prepayment penalties.
9. What is the Minimum Down Payment Required for this Loan?
A bigger down payment might mean a lower interest rate and better loan terms. If you can’t make a down payment of less than 20 percent, you will probably have to get private mortgage insurance (PMI), which is expensive and can be difficult to remove from your loan.
10. How Much Time Do You Need to Process My Loan Application?
Depending on a mortgage lender's workload and the demand for inspectors, appraisers, and other professionals involved, an average loan-processing time is between 21 and 45 days. Be patient and forward any requested documents as quickly as possible to speed up the process. To properly write a purchase contract, you will need to include a closing date, and that date should be coordinated with your lender. Find out:
- What is your anticipated turnaround time?
- What obstacles could possibly hold up closing?
- How long after final application approval will the loan fund?
11. What Can I Do to Avoid Delaying the Process?
A job change, an increase or decrease in salary, a new debt, a change in your credit history, last minute change in loan amount, sales price, seller credits, or a change in marital status could delay your loan approval. The best way to avoid delays is to put your financial life in on hold until you reach the closing table. Here are some general recommendations:
- Be thorough at completing all required documents.
- Be readily available to answer questions.
- Be prepared to explain any past credit issues.
- Do not take on any new debts or change careers during the process.
12. Who Will Be the Title and Escrow Agency or Attorney?
You don’t have to leave selection of the title company or escrow agency up to the lender or to your real estate agent. See how much the services recommended by your mortgage lender will cost, then shop around and see if you can save money.
13. What Are the Chances My Loan Will Get Sold?
You can never tell but if it does happen, don’t worry – it’s quite normal. If it does happens, the old and new servicing companies must notify you in writing of any changes so you know who to pay and how to proceed.
14. Are On-Time Closings Guaranteed?
A big concern can be closing your transaction on time. At the start of your mortgage journey, talk to your broker and ask them: “Here’s my timeline. Are you certain you can get this done in time for closing?” Your purchase contract will contain a date to close escrow, but that date is generally subject to the lender's ability to close on time. If the lender cannot close on time that could mean extra costs or problems such as:
- Increase of interest rate if the lock expires
- Additional expenses to pay movers to reschedule
- Loss of a home if the buyer's rental lease is over
If your lender does not guarantee on-time closings, consider going with another lender if your timeline is critical. "There are no silly questions when it comes to your home loan," say Wayne Fricke, Mortgage Advisor/Planner with First Priority Financial Inc. "In addition to having all the number for their specific transaction, borrowers should feel comfortable asking any question of their home mortgage lender."
