If you’re a first-time home buyer, you may be unsure of the best questions to bring up in your conversation with a mortgage lender. So that you can rest easy knowing you’re ready for the road ahead, we’ve compiled 14 crucial questions, plus a few others, to ask your mortgage lender or broker before you sign on for your home loan.
What Are the Costs and Payments?
One of the first considerations you must make as a home buyer is your budget. Your home search can be made more focused and your expectations kept in check if you are aware of your financial capacity. Your mortgage lender will examine your income, assets, and credit when you inquire about the size of the home you can afford.
Your mortgage lender will give you the estimated cost of your monthly payments and a breakdown of the expenses involved after reviewing your financial records. The interest rate, closing costs, property taxes, and other fees that are included in your payments will all be disclosed to you. Your mortgage lender will also assist you in calculating the amount of the down payment that you’ll require.
Use the Rocket Mortgage® mortgage calculator to quickly determine the answer for yourself if you’re looking for a simple way to do so. By calculating the cost of your monthly payments, you can estimate the size of the house you can afford. Your understanding of your budget will improve the more you experiment with the mortgage calculator.
What Sorts Of Mortgage Term Options Do You Provide?
There isn’t a single mortgage loan type that is better than the others or appropriate for everyone. It’s imperative that you go over your options with your mortgage lender because several programmes might be suitable for you. Make sure to enquire about the following loan types with your lender:
Fixed-Rate Conventional Mortgages
The most typical kind of mortgage loan is a 30-year conventional fixed-rate loan. Due to the lengthy term and fixed rates, your interest rate will not change over the course of the loan, resulting in lower monthly payments. However, the more interest you pay on the loan, the longer the term of your mortgage. Therefore, if you can afford higher monthly payments, going with a 15 or 20-year term might be worthwhile.
Loans with Adjustable Rates
ARM interest rates fluctuate over the course of the loan, in contrast to fixed-rate mortgages. If you opt for an adjustable rate mortgage, your interest rate will fluctuate with the market after the initial fixed period has passed.
This implies that your mortgage payments may vary each month, which can make creating a budget a little difficult. The good news is that this loan type has caps that place restrictions on how much your interest rate and monthly payment can rise both sporadically and over the course of the loan.
Those borrowers are more likely to be approved for Federal Housing Administration loans if their credit scores, incomes, and savings are lower (FHA). In comparison to most conventional loans, FHA loans have lower minimum credit score and down payment requirements. However, there are restrictions on FHA loans, and the amount you can borrow is capped. You’ll also have to pay a premium for mortgage insurance.
VA loans are only available to veterans, active service members, and their surviving spouses because they are backed by the U.S. Department of Veteran Affairs. VA loans typically have lower interest rates and no down payment requirements. These mortgages do come with some limitations and costs, though. Those who qualify must have reserve funds on hand and be prepared to pay funding fees.
What Credit Requirements Do You Have?
A credit score is a three-digit number that tells potential lenders how likely it is that you will be able to repay any loans you make. A mortgage loan is easier to obtain the higher your credit score is. Even so, there are ways to buy a house with bad credit; you may just have to pay more for your loan.
Each lender establishes their own criteria for what constitutes a satisfactory credit score. It is crucial that you inquire about credit requirements from your mortgage lender at the beginning of the process. Ask your lender if you qualify for any special offers or lower interest rates if you have a good credit score.
Do You Provide Points for Mortgages?
You can choose to pay mortgage points (also known as “discount points”) at closing in order to “buy” a lower interest rate and reduce the overall cost of the mortgage loan. Each mortgage point costs one percent of the total amount of your loan.
For instance, you might have the choice to purchase mortgage points at closing for $1,500 each if you take out a $150,000 loan. Homebuyers who intend to stay in their home for a considerable amount of time benefit the most from mortgage points because they can save tens of thousands of dollars over the course of their loan.
Make sure to ask your lender how many points you can buy, when it makes sense to buy mortgage points, how much each point will reduce your interest rate, and when it makes sense to buy points at all.
Is An Escrow Account Required?
Escrow accounts are a type of neutral savings account that are used to store funds for prepaid insurance and property tax obligations. Escrow accounts, which are typically created at closing, are frequently necessary for loans with government backing but optional for loans without.
If you require an escrow account, ask your lender. Ask what options you have for paying for shortages if you are required to have one, as well as whether you can get a refund if you overpay. Make sure to ascertain the amount of money you will be required to hold in escrow.
How Much Does The Interest Rate And APR Cost?
Asking your mortgage lender about your interest rate is crucial if you want to learn how much interest you’ll be paying on your loan. Your credit score, the location of the home you buy, the amount of your down payment, and the type, term, and size of your loan are just a few of the variables that affect your interest rate.
However, you should also inquire about the annual percentage rate (APR) from your mortgage lender because it offers information on the total cost of borrowing money. The interest rate and the costs incurred by the lender to originate the loan are both included in the APR.
Asking your mortgage lender about the frequency of adjustments is also beneficial if you intend to obtain an adjustable rate mortgage. You can predict how frequently your interest rate (and consequently, the size of your monthly payment) will change by understanding your adjustment frequency.
Do You Provide A Rate Lock For Mortgages?
You and your lender enter into a mortgage rate lock agreement, which states that regardless of changes in the market, your interest rate will remain the same until closing. Rate locks are crucial because they maintain the predictability of your loan costs. You won’t have to worry about looking for a home right away if you get a rate lock because you will know that your interest rate won’t go up.
Regarding rate locks and their duration, inquire with your lender. Determine whether you should lock in your rate and what the current market rates are (are they high or low). Be sure to check with your mortgage lender because some will reduce your interest rate if market rates fall after you lock your rate.
Can I Purchase A Home Alone Without My Spouse?
Though it’s not as simple as applying for a loan and leaving your partner off the paperwork, it is possible to purchase a home without your spouse. If your state has a community property law, you and your spouse must split ownership of any assets you acquire while you are married.
If you reside in a common-law state, you are permitted to omit your partner’s financial information from your home purchase documents. Even in states where common-law relationships are legal, certain government loans mandate that your lender take your partner’s debt and income into account when you apply for a loan.
If you live in a community property state or a common-law state, ask your lender if it is possible to purchase a home without your spouse. Additionally, find out about quitclaim deeds, which let you add your spouse’s name to the deed at a later time if you so desire.
What Sorts of Mortgages Do You Provide?
Mortgage loans can be divided into two main groups: conventional loans and loans with government backing.
Anyone can apply for a conventional loan, and lenders are free to set their own standards regarding the required down payment and credit score.
Loans backed by the government have less stringent credit and down payment requirements. Since they are federally insured, if you have trouble making your monthly payments, the government will work with you to try to avoid foreclosure. To be eligible for government-backed loans, you must adhere to certain requirements. For instance, to qualify for a VA loan, you must have served in the U.S. military, and to qualify for a USDA loan, you must reside in a rural area.
It’s not always legal for lenders to provide both conventional and government-backed loans. As a result, find out what kinds of loans your mortgage lender provides. They ought to be able to describe the various specifications for each government-backed loan.
Does Buying A House Have Income Requirements?
There is no minimum income requirement in dollars to purchase a home. Your ability to purchase a home, however, is significantly influenced by your income. When evaluating your application for a loan, lenders take into account all of your income sources, including commissions, military benefits, child support, and more.
Ask your lender how much income is required to purchase a home and what sources of income they take into account when determining your total earning capacity. Finally, find out from your lender what proof of income they require, such as W-2s, pay stubs, bank account information, and more.
Do You Provide Prequalification Or Preapproval?
Prequalification and preapproval are two procedures that are frequently mixed up. Let’s dissect each:
Prequalification: During a prequalification, a lender will inquire about your assets, credit history, and income in order to estimate the size of the loan you are eligible for. The number you receive during prequalification, however, can easily change if you report false information because they don’t verify any of this data.
Preapproval: During a preapproval, your lender confirms the accuracy of the information you provided about your income, assets, and credit by requesting official documents like your W-2s, bank statements, and tax returns. As a result, your lender can provide you with an accurate mortgage loan amount.
Preapproval and prequalification don’t always mean the same thing, so ask your lender for clarification. Ask which one is best for you after that. Depending on how committed you are to purchasing a home at the time you apply, the answer may change.
How Much Down Payment Is Required To Purchase A House?
You might believe that a 20% down payment is required to purchase a home. A home can sometimes be purchased with as little as 3% down, though. Some government-backed loan programmes even let you purchase a home with no money down.
Private mortgage insurance (PMI), which safeguards your lender in the event that you default on your loan, is related to the frequently cited 20% figure. When you reach 20% equity in your home with a conventional loan, you can stop paying PMI; when you reach 22% equity, your lender will do so automatically.
Find out from your lender how much of a down payment you must have on hand for the closing. Find out if you are eligible for a loan with no down payment and about government-backed loans. As a final question, find out if PMI is required and when you can cancel it.
What Are the Closing Costs?
Closing costs are processing charges that you must pay to your lender in order to complete your loan. Appraisal fees, origination fees, legal fees, and title insurance are a few examples of typical closing costs. Your down payment, the size of your property, and where you live all affect the specific closing costs you’ll have to pay. Closing costs typically range from 3 to 6% of the total loan amount.
Find out from your lender what the typical closing costs are in your state. Additionally, find out which inspections and fees are required by law, which ones are optional, and which ones you can choose on your own.
Is There A Penalty For Prepayment?
You might discover that you have more access to money than you initially thought once you start paying off your mortgage and are able to pay it off early. This choice could save you thousands of dollars in interest if you can afford it. Although not all mortgage lenders permit customers to do this, so you should ask your lender in advance.
In the event that they do let you pay off your loan more quickly, you should find out if there are any prepayment fees. These fees are frequently assessed by mortgage lenders to deter borrowers from making extra loan payments, refinancing their loans at a lower rate, or selling their homes before the loan is due.
Mortgage lenders can recoup some of the money they would have made off your loan if you had stayed current on your monthly payments all the way to the end of your loan term by charging prepayment penalties. For instance, there are no prepayment penalties with Rocket Mortgage.
Prepayment penalties come in two varieties: soft and hard. Let’s dissect them:
- Soft prepayment penalty: Borrowers are not charged if they sell their homes, but are if they refinance or pay off their mortgage in full.
- Borrowers are subject to fees regardless of whether they sell, refinance, or make a sizable payment to pay off their mortgage early.
- Ask the cost of any prepayment penalties if your mortgage lender imposes them. Different lenders have different policies regarding prepayment fines. Early payoffs may become costly due to their high cost.
Other Common Questions Regarding Mortgage Lenders
When choosing a mortgage lender, you can start by asking yourself the 14 questions we just discussed. The following inquiries are useful to have even though they may not be as crucial as the ones before them.
Is mortgage insurance necessary?
For the majority of loans requiring less than 20% down payments, mortgage insurance is usually necessary. Each loan has a different type of insurance, and each lender has a different set of fees. For instance, PMI may cost 0.5% to 1% yearly.
How can a mortgage lender be located?
Even though it might be simple to locate a lender, you should do so only when you’re prepared and ready. You should follow these steps when looking around for a mortgage lender:
- improve your credit
- Establish a budget.
- Know your available mortgage options
- Rate comparisons
- become pre-approved
- Actual the small print
A mortgage lender vs. a mortgage broker: what are they?
To know whose assistance you need, you should be aware of the differences between mortgage lenders and brokers before applying for a loan. A mortgage lender qualifies potential borrowers and disburses funds on their behalf on behalf of a bank or other financial institution. To help borrowers compare lenders and choose the best one for their needs, a mortgage broker works with them.
Mortgage brokers do the work for you rather than you having to independently research various loan types and lenders. They assist you in gathering the data you require to complete your mortgage application after locating the best loan and lender for your financial situation. You pay brokers a commission, which is a percentage of your final mortgage amount, in exchange for the services they render.
You should comprehend how mortgage brokers function before deciding to work with one. Some mortgage brokers promote lenders they have a history of working with and exclusively work with certain financial institutions.
Given the distinctions between their roles, you would ask a mortgage broker a different set of questions than you would a lender. The following are crucial inquiries to put to a mortgage broker:
- Why should I choose to work with you as opposed to contacting a lender directly?
- How will you bargain on my behalf to ensure that I receive better mortgage terms?
- How will you identify the best loan option and lender for my situation?
- How much are your services going to cost?
- Do you work with any particular lenders frequently?
- Would you feel confident endorsing a lender you don’t frequently deal with?
- When will you be able to find a lender?
The Verdict: Research Mortgage Lenders and Have Questions Ready
Making the process of buying a home simpler and less stressful for you can be accomplished by asking your lender a few questions in advance. Ask your mortgage lender or broker as many questions as you can about the types of loans you are eligible for, the income requirements, and the amount of money you need to save for a down payment and closing costs.
In the interim, you can get going right away by getting in touch with one of our mortgage experts. They are prepared to respond to your inquiries and guide you toward the best loan.