Buying a home is one of the most important investments you can make. Becoming a homeowner is an exciting milestone, but the process can be intimidating. After carefully saving for a down payment and choosing a reputable mortgage lender, you are left with a seemingly endless list of choices. With so many mortgage options, it's difficult to know where to start.
As a first-time home buyer in particular, you tend to pick options that appear most convenient after doing limited research. The Consumer Financial Protection Bureau found that 47 percent of home buyers are so overwhelmed with the buying process that they don't even bother comparing mortgage lenders.
Automatically knowing the right questions about your mortgage lender is not easy, but it is important to learn. Even when it is stressful, you can end up saving tens of thousands of dollars by curious and shopping. Before you start asking questions, let's refresh our memories of the differences between mortgage lenders, brokers, and service providers.
Do you feel comfortable asking your mortgage lender questions so you can make wise financial decisions? Knowing the answers to these 17 mortgage questions can help you make smart decisions for your specific situation.
1. Do I need pre-approval or prequalification?
What to look for: Prequalification and pre-approval have no universal definitions among lenders. Check with your lender to understand the difference, and then ask which would be the better choice for your situation. A mortgage pre-approval is an official letter that explains how much a lender will allow you to borrow based on your income, debt, and creditworthiness. On the other hand, a prequalification is not an official document and does not require a tough credit check.
2. What is your pre-approval process?
What to look for: Ask your lender what information is required to get pre-approved for a home loan. Pre-approval usually requires an analysis of your financial history, including your income, credit, and debt. While a pre-approval letter doesn't guarantee your ability to get a mortgage and buy a home, it does put you in a better position to negotiate with sellers. Be sure to ask your lender how long your pre-approval is valid. Some pre-approval letters expire within 30 days while others take 60 to 90 days.
3. How do I choose the type of house I can afford?
What to look for: Your lender should be your attorney and shouldn't want your home to become a liability rather than an asset. If a lender is really on your side, he or she should want you to stick to a relatively conservative monthly mortgage payment. If your lender is encouraging you to stretch your budget or live outside of your means, it could be a big red flag that they don't have your best interests in it.
4. How much down payment do I need for a house?
What to look for: Don't always assume that the deposit will be 20% of the cost of the house. Ask your lender how much down payment you will need. Don't forget to inquire about government sponsored loans as well – you can qualify for a 0% down loan. Also, ask about Private Mortgage Insurance (PMI) requirements. PMI can provide a sense of security when you cannot afford your monthly payment, but it may not always be necessary. Also, it can't hurt to ask what income range is recommended to keep up with mortgage payments.
5. Do you offer both conventional and government-supported loans?
What to look for: Ask your lender what types of loans they offer. Mortgage lenders should be able to help you find out the advantages and disadvantages of their traditional loan offers. A traditional home loan is a large sum of money loaned to a borrower by a bank, credit union, or credit agency. Not every lender is legally qualified to offer both conventional and government-supported loans. Lenders can tell you about the different requirements for any government-secured loan. Don't be afraid to ask your lender to walk you through the pros and cons of each type of home loan.
6. What credit score do I need to qualify for a mortgage?
What to look for: In general, the higher your credit score, the easier it is to control home purchases. However, you don't need a credit rating at all to secure a home loan. You can go through the process of manual underwriting. Ask your lender about this to get their opinion on the matter and to see how open-minded they are.
7. Do you offer mortgage points?
What to look for: You can use mortgage points or discount points to prepay interest to get a lower interest rate on your mortgage. Each mortgage point is equal to 1% of the value of your home. When you get a $ 500,000 loan and you have two discount points, you pay $ 10,000. However, they are not for everyone. If your lender is selling you too high on points, that can be a red flag.
8. What is the interest rate and the annual percentage?
What to look for: Your mortgage lender should be able to help you understand your mortgage rate. It all depends on factors like your creditworthiness, where you live, your down payment, your loan type, your term, and your amount. Lenders should reassure borrowers by also explaining the annual percentage (APR). The APR provides an insight into the total cost of the loan as it includes both the interest rate and the fees that the lender charges for extending the loan.
9. What is a mortgage interest lock?
What to look for: Basically, a mortgage rate lock is when your lender confirms that the interest rate secured for you will stay the same until you close. Ask your lender about current market rates, whether they are proposing to lock your interest rate, and how long the interest lock would be. Make sure to review their process – some lenders will lower your interest rate when market rates go down after the rate fixation.
10. Do I need an escrow account?
What to look for: Be sure to ask your lender if you need an escrow account. This is a kind of neutral savings account that stores money for property taxes and insurance premiums paid in advance. Ask about your options in case you need one. Your lender should also let you know how much money you need for the escrow account.
11. Should I buy a house with or without my partner?
What to look for: Buying a home with a partner or spouse could be a big step, but it does require a few additional steps. Ask your lender if it is possible to buy a home without your spouse. He or she should know if you live in a community owned state or a common law state. Inquire about Quitclaim Certificates. These certificates allow you to add your spouse's name to the title retrospectively.
12. How long and how expensive is the refinancing?
What to look for: Remember that a lender should give you this type of information well in advance of the time. If you anticipate the refinancing process could be extremely lengthy and costly, getting the best possible loan and interest rate is even more motivating. If they don't seem willing to openly discuss such theories with you, this could be a red flag.
13. When should I consider refinancing and would it affect my balance?
What to look for: There are no silly questions when it comes to asking for home loans and refinancing. Lenders should be able to conveniently answer questions about refinancing long before you actually think about it. Before talking to a lender, find out about the refinancing process, requirements, and any additional costs that may be preventing you from meeting your goals. You may already think you know the answer about the impact refinancing has on your bankroll, but it is still useful to hear your lender's experience with previous clients.
14. How would reverse mortgage or cash-out refinancing work?
What to look for: A lender should be prepared for all scenarios, and it would be helpful to hear them walk you through different options, even in situations where you are much less likely to be involved. It can't hurt to hear your lender's dime on this matter.
15. What is your graduation process?
What to look for: Read up on your lender's closing process because if you are informed and prepared, you will stay healthy and protect your finances. Your lender should assure you that they will assist you in reviewing and understanding the various documents that are associated with the deal. How long does the process take? Is the deal done in-house with the mortgage lender, a law firm, at your home, or can it be done online?
16. Is there a prepayment penalty?
What to look for: Be sure to ask how much prepayment costs if your mortgage lender charges these penalties. The prepayment penalties vary widely between lenders. Unfortunately, they can be quite expensive and make early withdrawals unprofitable and stressful.
17. Why should I work with you instead of going with a broker?
What to look for: Experienced lenders should be able to conveniently answer this question. In some cases it seems like a no-brainer to reach out to a broker as they are commission based and work harder to get you the credit you want. Brokers, on the other hand, could lure you in with a loan that doesn't even exist, that has hidden costs, or other surprises.
This will avoid overpaying the fees
It's great that you chose a reputable mortgage lender, but you also need to know the right questions to avoid overpaying fees. Be sure to ask your mortgage lender about income requirements, the loan you qualify for, and the amount you will need to save on a down payment and closing costs.
Before making the final decisions about your mortgage, make sure that your lender is ready and able to answer at least the 17 questions we covered. Mortgages can be complicated, but understanding your options is imperative.
Remember, whether you are trying to buy a home, improve your investment strategy, or just work on your budget, financial progress takes time and persistence. Building a support system for educated people who can help you answer important financial questions will strengthen your success in money management.