Buying a home is a pivotal moment in everyone’s life; it’s exciting, scary, beautiful, and brings out all kinds of emotions. One of the stressful and critical points of buying a house is finding a suitable mortgage lender.
Before you start house hunting, it’s important to set a realistic budget to avoid financial strain. Make sure to leave room in your budget for unexpected expenses when determining how much you can afford.
Whether you’re buying an old home or a modern home, by the end of this guide, you’ll know the right questions to ask your mortgage lender to get yourself a great deal.
Understanding the Mortgage Loan Process
As a first-time homebuyer, feeling overwhelmed by the mortgage process can be very daunting. There are so many decisions to make, including mortgage types, lenders, and properties, but we will help you understand them all. Let’s begin with the six main mortgage process steps:
- Pre-approval: If you really want the sellers to take you seriously, a pre-approval from a mortgage lender will do just that. It states the maximum amount a mortgage lender is willing to lend you. Ensure your budget is very solid, as it will help determine the best mortgage for you. Lenders will typically request financial documents such as bank statements and pay stubs to verify your income and financial stability.
- Property search: Even if you were window shopping before, with a preapproved mortgage, you are now earnest in your search. You know exactly what you can afford. Once you get the right match, your real estate agent should help you make an offer.
- Mortgage application: With an accepted house offer, you can now apply for a mortgage. You can go with the lender that gave you a pre-approval, but it’s important to shop around to see what else is available. Lenders will review your credit report as part of the application process.
- Complete lawn processing: The mortgage lenders you’ve approached use your financial details to provide a loan estimate within three business days, unless you’re rejected. You’re given 10 business days to accept the offer, after which the lender can change the terms and issue a new estimate.
- The underwriting process: The underwriters conduct an appraisal of the property to ensure the sale can cover the amount of the mortgage you receive. Depending on the findings, your offer might be accepted, rejected, or you might be asked to disclose more information. Underwriters use your financial information to determine risk and decide whether to approve your loan. Once the application is approved, you lock in the interest with your lender. This is the final interest you’ll pay for the remainder of your mortgage.
- Close on the property: If you’ve accepted your mortgage, it’s now time to close. The closing fee will vary depending on the loan type, state, and mortgage lender. If everything looks great, you sign the mortgage, and you get your home keys!
Top Questions to Ask Before Applying for a Mortgage
Before you commit to a mortgage lender, we recommend choosing at least three lenders and comparing them to find the best option. The best way to compare your lenders is to prepare questions; these answers put you ahead of the game.
Be sure to ask each lender about the specific lender offers they provide, such as fixed-rate, adjustable-rate, FHA, USDA, VA loans, and any special financing options. Additionally, consider the lender’s reputation in the community and customer satisfaction ratings, as these factors can significantly impact your overall experience.
1. Which type of mortgage would serve me best?
This will help you know if you’re dealing with a quality advisor or a salesperson. When you inquire about your options, the loan office should discuss each loan type and its pros and cons based on your financial situation.
There are different mortgage types, including:
- Home loans
- FHA Loans
- USDA Loans
- VA Loans
Besides the loan types, ask about the repayment options available; some lenders can customize your repayment terms, which can take some of the pressure off the mortgage payments. For example, some lenders can align your mortgage payment date with your paycheck date.
You should also compare fixed rate loans, which have the same interest rate for the loan’s term, to adjustable rate mortgages (ARMs), which may start with a lower rate that can change over time. Adjustable rate mortgages, including ARMs with terms like 5/6, 7/6, or 10/1, have interest rates that fluctuate after an initial fixed period, so it’s important to understand how rate adjustments work.
The monthly payments for fixed-rate mortgages are typically lower for longer loan terms. If you consider refinancing, remember that refinancing replaces your original loan with a new one, which may have different terms or interest rates.
2. How much do I need for a down payment?
Many mortgage lenders ideally want a 20% down payment, which is great if you can afford it, as it lowers your monthly expenses. However, different loan programs have varying down payment requirements.
For example, FHA loans typically have lower down payment requirements, often as low as 3.5%, making them more accessible for buyers with limited savings or credit issues. VA loans often do not require down payments at all. A good lender will walk you through all your options and explain the benefits and drawbacks of each.
Making a larger down payment can help you avoid mortgage insurance costs, secure better interest rates, and increase your home equity, providing significant financial benefits across different loan types.
3. Do I qualify for any down payment assistance programs?
You may qualify for a down payment assistance program that awards a grant or a loan to help qualifying members cover part of the upfront costs of a home purchase. Some down payment assistance programs have specific payment requirements or may require you to demonstrate reserve funds—such as a certain number of months’ worth of mortgage payments—to qualify.
There are many nationwide programs; individual lenders offer some, while others are provided at the federal level. If you’re eligible for a program, ask your lender whether they’re aware of it; it may save you from having to comb through a mountain of information to find the answers.
4. What is the best interest rate you can offer me?
This is probably the one question you had in mind; it’s the benchmark we all understand in the home-buying process.
While shopping for a mortgage loan, you want to know the interest rates and annual percentage rates (APRs).
- Interest rate: The rate your lender charges you for borrowing money, typically expressed as a percentage of your remaining balance each month.
- Annual percentage rate (APR): This is the annual cost of owing money to your mortgage lender. The APR includes not only your interest rate but also additional fees such as closing costs, origination fees, and mortgage insurance premiums. Comparing APRs helps you assess the true cost of a loan across different lenders.
You can also pay discount points upfront to lower your interest rate; these are sometimes called mortgage points. Mortgage points may be tax-deductible, offering potential tax benefits as part of the overall cost of obtaining a mortgage.
5. What are your closing costs and fees?
Closing costs are lender and third-party fees that include title and appraisal services. On average, the closing costs are 2-5% of your total loan amount (they vary by state, too). A rate lock guarantees your interest rate for a specific period, typically 30-60 days.
Ask your lender about their origination fee, credit check fee, and any other costs. You’ll also need to know what fees and services are legally required in your state. For example, if a state requires a real estate attorney to supervise closings, it means an extra cost.
Knowing the closing costs upfront helps you financially prepare for the final steps of purchasing a home by avoiding surprise expenses.
Before closing, you will receive a Closing Disclosure, which details all the costs and fees associated with your mortgage. Be sure to review this document carefully to understand your financial obligations before finalizing the loan.
6. What are my credit requirements?
When getting a mortgage, your credit score is one of the major factors. Lenders also review your credit history to assess your overall financial reliability. The higher your credit score, the faster and easier it is to secure a lower interest rate. Every mortgage has its minimum credit score requirements, so you need to know whether you qualify. Credit scores, along with your credit history, income, and assets, influence your loan eligibility.
If you want a loan that requires a higher credit score than yours, you can take steps to improve it before applying for the mortgage. Simple practices like paying your bills on time, reducing your credit card balances, and consulting a credit counselor can improve your credit.
Achieving higher credit scores can help you qualify for better loan terms and lower interest rates. The improvement can help lower the mortgage interest rate, and even a slight rate reduction can translate to tens or thousands of dollars in the long term.
7. What will my monthly payments be?
As you compare rates, you can also request an estimate of the monthly mortgage payment based on the provided quote before submitting the mortgage application. As mentioned earlier, once you apply for the mortgage, you’ll receive a loan estimate, and you can set up some time with your loan officer to discuss any concerns you might have.
However, the monthly payment estimate can help you better understand your homebuying budget. It should include mortgage insurance, homeowners’ insurance, and taxes. Your monthly payment may also include contributions to an escrow account, which is used by your lender to pay property taxes and homeowners insurance on your behalf. These payments speak to the home’s affordability.
8. Do you charge for an interest rate lock?
One thing you need to remember when you start house hunting is that mortgage rates change all the time. Many lenders offer a rate lock option to ensure the rate doesn’t go up—it won’t go down either.
Some mortgage lenders charge a fee to lock your interest, while others don’t; some lenders just roll it into your interest rate and other lender fees. In some cases, you may need to pay upfront for a rate lock or for discount points to secure a lower interest rate. The answer you’re looking for when looking for a typical home loan is that there’s no charge for an interest rate lock.
9. Will I have to pay mortgage insurance?
If you make a down payment of less than 20% on a conventional loan, you’ll be required to pay private mortgage insurance (PMI). Private mortgage insurance is a cost that lenders require to protect themselves if a borrower defaults, and it is typically added to your monthly mortgage payment.
Paying private mortgage insurance increases your monthly costs until you reach a certain level of home equity, at which point PMI can often be eliminated. It’s important to know exactly how much the mortgage insurance is costing you, upfront and ongoing.
If it’s too high, making a bigger down payment can bring it down. Alternatively, you can find loan programs that don’t require mortgage insurance.
10. Are there any penalties for prepaying the mortgage?
If someone owed you money, you’d think they’d be happy if you paid them off in the shortest time possible. Right? This, however, is not the case with mortgage lenders and banks, since they earn more revenue when you take a longer loan term, such as a 30-year mortgage.
Some lenders charge a prepayment penalty to discourage borrowers from fully paying off the loan early or from making higher scheduled payments.
Here is how the penalties compare:
- Hard prepayment penalty policy: You’re charged a fee for selling your home, paying off your mortgage early, or refinancing.
- Soft prepayment penalty policy: You can sell your house with no penalties, but you’ll pay a fee if you pay off your mortgage or refinance.
Ask the lender whether they impose these penalties, and, if so, how much they cost.
11. Will you service my loan?
The company that lends you money may hire a mortgage servicing company to handle day-to-day administrative tasks related to overseeing a loan. A mortgage loan servicer picks up where the lender leaves off. The lender transfers the loan, takes payments, generates tax forms, manages escrows, etc.
It’s therefore a good idea to ask if your lender will keep the loan on its books. If the lender services their own loans, you can check customer reviews of their servicing experience.
12. Do you offer prequalification and preapproval?
A mortgage prequalification gives you an idea of how much you might qualify for a loan when you apply. Many lenders are open to offering prequalifications without a hard credit check, but be sure to ask before requesting one.
When you’re ready to house hunt seriously, you’ll need a preapproval to make good-faith offers on homes. A preapproval isn’t a commitment to lend; it’s a good indication you’ll get approved for a loan when you’re ready. For the preapproval, you’ll need to provide financial documentation and undergo a hard credit check.
Don’t Fail to Prepare for Your Loan Officer Meeting
A mortgage payment is a lifetime commitment for most homeowners, and it’s, therefore, critical to ensure you’re getting to bed with the right lender. Before making any mortgage decision, it is wise to consult a financial advisor to help you assess your options and long-term financial health. The first step in ensuring this is to ask the right questions to understand the terms and conditions.
When preparing for your meeting, be aware of the main types of mortgage loans available: conventional loans, FHA loans (insured by the Federal Housing Administration and known for flexible credit requirements and low down payments), USDA loans, and VA loans (guaranteed by the Department of Veterans Affairs, offering benefits such as no down payment and competitive rates for veterans, active-duty service members, reservists, and eligible surviving spouses).
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