Always ask questions of your potential mortgage lender before you commit to a loan. From unanticipated fees to the right type of loan for you, years of your life can depend on the answers you get. Continue shopping for the right loan until you find a mortgage broker or lender you feel comfortable with if you don't like the answers you receive. Keep in mind, too, that the more your broker knows about you, the better advice, assistance, and accurate information they can give you. Don't hesitate to share your personal information, including permitting the lender to run your credit report.
Which Type of Loan Is Best for You?
Reputable lenders will especially want to find out more about you before throwing out loan options. You wouldn't expect a doctor to suggest surgery before assessing your medical situation, so choose a broker who gathers enough information from you before recommending a particular type of loan. Ask the lender to thoroughly explain the pros and cons of fixed-rate loans, adjustable-rate loans, interest-only loans, and negative amortization loans, and find out how each would fit in with your personal circumstances.
The interest rate never changes with a fixed-rate mortgage, so you'll know what your monthly payment is until you make the last one. An adjustable mortgage rate depends on the market, so it can fluctuate, but typically not within the first five years. An interest-only loan comes with a "balloon payment" of the entire principal balance at some point—all at once. You'll pay only interest in the meantime. A negative amortization loan defers some portion of interest for a period of time. Talking to your lender and questioning these options can help you determine which is right for you and your personal financial situation.
What Is the Interest Rate and Annual Percentage Rate?
A loan's annual percentage rate (APR) is derived through a complex calculation that includes the interest rate and all the other related lender fees divided by the loan's term. Not all brokers compute APR the same, and there's no way to calculate an APR rate for an adjustable mortgage accurately. An APR also does not account for early payoffs. Ask your mortgage lender about pinning down the adjustment frequency if your interest rate is adjustable, as well as the maximum annual adjustment, highest rate, index, and margin.
How Much of a Down Payment Is Required?
The commonly accepted answer to this question is 20%, but that's not always mandatory. If you're well-qualified, you might can pay as little as 3% with some types of loans, but there are pros and cons to this, so ask about all your options. One downside is that you'll most likely have to pay for private mortgage insurance if you put less than 20% down. This can mean more closing costs and an increased monthly payment until you reach the magic 80% loan-to-value ratio. Lenders tend to offer the lowest interest rates when you have at least 20% equity in your home.
What Are the Discount Points and Origination Fees?
Each discount point is equal to 1% of the loan amount. For example, two points on a $100,000 loan would cost you $2,000. Points, which are tax-deductible, buy down the interest rate, so the more points you pay, the lower your interest rate. Sometimes, lenders charge origination fees, which are upfront fees charged for processing a mortgage loan application. These fees are sometimes referred to as "lender fees," and they are generally between 0.5% to 1% of the loan amount. Ask your lender about the specifics of both discount points and the origination fee percentage.
What Are All the Costs?
The cost of a loan includes lender fees, as well as related third-party vendor fees—including appraisals, credit reports, the title policy, pest inspection reports, escrow where applicable, recording fees, and taxes. An estimate of these fees should be accurately included in a document called the "loan estimate," which the broker must give you under federal law.
Lenders are required to deliver the Loan Estimate when an application has been completed, and it should include the name of the borrower, their Social Security number, the property address, an estimated value of the property, the loan amount, and the borrower's income. You should ask for an estimate of these costs upfront, however, before you apply for the loan.
Can You Get a Loan Rate Lock?
Interest rates fluctuate and change daily, so you might want to lock your loan if you have reason to believe that interest rates are moving up. Lenders typically charge up to one point to lock in a loan rate. Before doing this, find out whether they charge a fee, whether the lock-in protects all the loan costs, how long the rate will be locked in, and whether they'll give you the lock-in in writing. The alternative is to pay the prevailing rate and points.
Is There a Prepayment Penalty?
Prepayment penalties are no longer allowed in some states, so it's important to ask about this. These penalties let the lender collect an additional six months of unearned interest if you pay your loan off early—either through a refinance or sale of the property. Some penalties are only in effect during the first two to five years of the loan, so get clarification. Ask about the terms of the prepayment, and whether the prepayment penalty would apply if you were to refinance through the same lender at a later date.
Is the Lender Equipped to Approve Loans In-House?
Underwriters review loans, then issue conditions before approving or rejecting them. Find out if your lender can handle its underwriting, or if this critical job is assigned out. VA and FHA loans typically take longer to process, but some lenders meet government requirements to automatically approve or disapprove a loan without sending it to the VA or FHA.
How Much Time Do You Need to Fund?
The average loan processing time is around 43 days. You must include a closing date to write a purchase contract properly, so you'll have to coordinate this date with your lender. Ask about the anticipated turnaround time. Find out whether any anticipated obstacles could hold up closing, and how long after final application approval the loan will fund.
Do You Guarantee On-Time Closings?
Closing your transaction on time is a big issue. Your purchase contract will include that date to close escrow, but it's generally subject to the lender's ability to close on time. It can mean extra costs or problems for you if the lender can't do that for one reason or another. Ask about any increase in the interest rate if your lock-in expires, and what happens with any additional expenses that you might incur if you have to pay movers to reschedule. Find out how these and other costs are addressed.
You're Not Limited to These Questions
Not everyone is an expert in mortgages and mortgage terms. One good rule of thumb is to question anything you're not sure about. The only stupid question is the one you don't ask; it's okay to request clarification even if you are pretty sure you understand. You want to nail down all the finer details, and there's less of a chance of signals getting crossed if your lender explains something to you more than once.
Frequently Asked Questions (FAQs)
What is a mortgage broker?
A mortgage broker acts as an intermediary between borrowers and lenders. Lenders are the institutions offering loans, such as banks and credit unions. A broker often works with many lenders, which allows them to present you with more options than a single lender might be able to offer.
What questions will mortgage brokers or lenders ask me?
When applying for a mortgage, you will need to provide information about all of your assets and debts, including loans or credit cards. They are allowed to ask for financial records, bank statements, tax returns, income amounts, work history, and other relevant information. They are not permitted to ask questions that would discourage you from applying for a mortgage or to discriminate based on any protected status such as your age, race, sex, religion, or marital status.
How long does a mortgage approval last?
When you get a commitment letter from your lender or broker, it will usually be valid for 30 to 90 days. You should ask for this information upfront, since it varies by lender.