10 Questions to Ask Your Mortgage Broker or Lender
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 it can give you. Don't hesitate to share your personal information, including giving permission for 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. 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 the 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 correctly, and there's no way to accurately compute an APR rate for an adjustable loan. An APR does not account for early payoffs.
Questions to ask your mortgage lender include pinning down the adjustment frequency if your interest rate is adjustable, as well as the maximum annual adjustment, the highest rate or cap, the index, and the margin.
How Much of a Down Payment Is Required?
The commonly accepted answer to this one is 20%, but that's not always mandatory, particularly if you're well qualified. You might get away with as little as 3% with some types of loans, but there are pros and cons to this so ask about all your options.
One of the cons 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 that magic 80%-equity threshold.
What Are the Discount Points and Origination Fees?
Each "point" is equal to 1% of the loan amount. For example, Therefore, two points on a $100,000 loan would cost you $2,000.
Points "buy down" the interest rate. The more points you pay, the lower your interest rate. Points are also tax deductible.
Sometimes lenders charge origination fees in addition to points. This is an extra little bonus in addition to the interest they're charging you. They're sometimes called "lender fees," so use this term, too, when you're trying to pin down information on a lender's policy.
What Are All the Costs?
The costs of a loan include not only fees that go to the lender, but also related third-party vendor fees. These can include appraisals, credit report, 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 federal law requires that the broker give to you. Lenders are required to deliver the Loan Estimate when an application has been completed. It should include the name of borrower, 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?
Lenders typically charge zero to one point to lock in a loan rate and points. Ask if it charges a fee. Does the lock-in protect all the loan costs? For how long will they lock in this rate? Will they give you the loan lock in writing?
The alternative is to pay the prevailing rate and points on the day your loan funds.
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 the sale of the property.
Be sure to ask how much the penalty is if you're buying in a state where they're permitted. Ask about the terms of the prepayment. Some are only in effect during the first two to five years of the loan. Ask if the prepayment penalty would apply if you refinanced through the same lender at a later date.
Are 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 important 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 falls between 21 and 45 days. You must include a closing date to properly write a purchase contract, so you'll have to coordinate this date with your lender.
Ask about the anticipated turnaround time. Find out if there are any anticipated obstacles that could hold up closing, and ask how long after final application approval will the loan fund.
Do You Guarantee On-Time Closings?
Closing your transaction on time is a big issue. Yes, 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 costs and other costs are addressed.
You're Not Limited to These Questions
Not everyone is an expert in mortgages and mortgage terms. A good rule of thumb is to question anything you're not sure about. The only stupid question is the one you don't ask. And it's OK 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.