1. What type of loans do you offer? What are the qualifying guidelines for each?
There are many different types of mortgages, including:
- Fixed Rate
- Adjustable Rate
- Federal Housing Administration (FHA)
- Veteran’s Association (VA)
- U.S. Department of Agriculture (USDA)
It’s important to know which type of loans the lender can offer you. Don’t be afraid to ask them to take the time to explain each one to you and their pros and cons. Ask why they think a specific loan would work best for you.
2. What is the interest rate and Annual Percentage Rate (APR)?
The interest rate is going to be based on the size of the loan and on your credit score. Interest accrues over the life of your loan and over a 15-30 year span, can add up considerably. If the interest rate is adjustable (as in an Adjustable Rate Mortgage or ARM), ask how long the rate will remain fixed, the maximum annual adjustment, highest rate (cap), index and margin. The APR includes both the interest rate and all other lender fees, divided by the loan’s term.
3. What’s the monthly payment going to be?
As you’re trying to develop a budget after your home purchase, you’re going to need to know what your monthly expenses are going to look like. Make sure you include taxes and insurance in their calculations. Remember that your monthly payment shouldn’t be so large that you can’t also budget for unexpected expenses and a retirement fund.
4. How large of a down payment do you need?
This is important. Interest rates, and therefore monthly payments, vary considerably depending on the size of your down payment. This also factors into whether you’ll be required to pay mortgage insurance. Usually, companies will waive PMI (Private Mortgage Insurance) if your down payment is 20% or more of the purchase price. Some loans, (like those offered by the VA, FHA and USDA), will allow for a down payment of zero to 3.5%, but depending on the program, they will require insurance premiums for the life of the loan. Although it’s certainly possible to obtain a conventional loan with less than 20% down, the interest rates could be higher.
5. Is there a prepayment penalty?
If you think your economic situation might change in the future or you’re saving up to make some extra mortgage payments, it’s important to make sure your lender won’t charge you for paying off your loan early. Some lenders charge an additional processing fee for each overpayment, while others ask for six months of unearned interest. Others only charge a penalty if you pay off your loan before the first two to five years. Verify if your monthly payments will adjust in line with any additional payments you make and if the penalty applies if you decide to refinance later on.
6. What fees and costs will I have to pay? Can you estimate and explain them?
Every lender will charge differently for this and you’re entitled to know. Costs generally include an appraisal, credit report, title policy, pest inspection, escrow if applicable, recording fees, and taxes. Many of these fees will be included in closing costs, once the transaction is ready to be finalized. Some companies also require you to pay points (1% of the total loan) or origination fees. You can ask if you can waive paying those points in exchange for a higher interest rate. In any case, all costs and fees should come itemized in the Loan Estimate (LE), which must be provided to you within three days of your application, as required by law.
7. Do you offer Loan Rate Locks? If so, how much do you charge for them?
Loan rates change every day, sometimes every hour. If you feel there is an upwards trend you might want to lock in your rate at whatever it currently is before it rises more. Some companies will charge you zero to one point for the lock. Before you finalize the rate and ask your lender to lock it in, take into account that most locks last between a few weeks to 60 days, and if the loan doesn’t process during that time, you lose the rate. To help you determine when to lock in your rate, ask your lender how long their processing period generally takes and try to get them to lock in the rate for as long as possible. Usually, you should try to get as long a lock-in period as possible, but be aware that may result in a higher rate than if it were shorter.
8. How long does it typically take for a mortgage to close?
While this varies from lender to lender, a top-rated company should be able to close in less than 30 days from application. In order to expedite this process, it’s a good idea to have all the necessary documentation ready beforehand and stay in constant contact with your lender.
9. What are mortgage or discount points and how do they affect my loan?
One way to get a lower interest rate is through mortgage or discount points. These are fees the borrower can pay the lender in exchange for a reduced interest rate and, consequently, lower monthly mortgage payments. Using this system, buying one point costs 1% of your mortgage amount (or $1,000 for every $100,000). If you plan to own your home for the long term, it’s worth asking your lender whether this is an option for you. If it is, make sure it’s cost-effective by comparing how much you’d be saving each month against how much it costs to buy points.
10. What are closing costs? How much will mine be?
Some of the largest expenses involved in the purchase of a home are closing costs. Closing costs are fees that are paid at the end of the transaction, once the home is ready to be transferred from one owner to another. These costs can be paid by the seller, the buyer, or shared by both. It’s important to ask your lender for an estimate of closing costs up front, as many of the fees associated with closing the transaction can be negotiated or vary from lender to lender. Although the final bill might differ from the estimate the lender provided, there are limitations to how much fees can change. If you find any major discrepancies, be sure to discuss them with your lender.