When you’re trying to buy a home, there are a million things on your mind. It’s tempting to throw yourself at the first financial expert you find and ask them for everything you need to know and an action plan. However, if you meet with a mortgage lender or broker and seem lost, the wrong one might take advantage of you.
Don’t forget that the process of finding a mortgage lender is a two-way street. They will certainly interview you and evaluate your credit, and you should be prepared to evaluate their policies and intentions as well. Here are some of the most important questions to ask when vetting a mortgage lender.
1. Which Types of Mortgage Do You Offer?
You might think a mortgage is a mortgage and there is just one type, but there are actually two main categories: conventional loans and government-backed loans. Not every lender is legally authorized to provide both types of loans, so if you are leaning toward one or the other, check that this mortgage lender can meet your needs. Conventional loans are probably what you’re most familiar with as they can be used by anyone. In turn, each lender has its own credit score and downpayment requirements which serve as an applicant filter.
Government-backed loans are more favorable to borrowers since they have lower down payment and credit score requirements. On top of that, the federal government insures them, which helps you avoid foreclosure. That being said, these are more exclusive loans only available to qualifying individuals such as those who have served in the U.S. military or who live in rural areas.
If you believe you may qualify for a government-backed loan, you should absolutely discuss this with a lender. A lender with your best interests at heart will help you determine if you qualify and support your application efforts.
2. What Credit Qualifications Do You Require?
To avoid a lengthy discovery process with a lender only to find you don’t meet their credit qualifications, ask about the requirements upfront. What is considered an acceptable credit score will vary from lender to lender, so don’t automatically assume you qualify. If you do have a great credit score, ask your lender if you’re eligible for any special offers or lower interest rates. No one likes to miss opportunities to make money, so don’t be afraid to stand up for your interests and ask.
If you have some time before you meet with a mortgage lender, see which tips you can follow to improve your credit score and get more favorable rates.
3. Which Type of Mortgage is Best for Me?
Sounds obvious, but it’s a must-ask. After all, this is one of the main points of seeking financial advice. Once you’ve provided detailed information about your history and needs, ask for a specific loan recommendation that includes the pros and cons of each option. This is also the time to speak up and ask the lender to explain all the fees. If you want more time to think and compare other lenders’ options, ask for a written summary.
4. What Are the Servicing Charges?
First, what is servicing? Servicing is when your mortgage payments are sent from your mortgage payment collector to investors, insurers, and tax authorities. One of the ideas behind servicing is to protect homeowners. First, servicers make sure that homeowners have the right insurance coverage. Second, if homeowners miss payments, servicers give them guidance to make payments, look for loan modifications, or find alternatives to foreclosure.
In general, these servicing payments are handled through escrow accounts, which you can imagine as the savings account your mortgage servicer manages that contains your mortgage payments. Servicing fees often fall between 0.25% to 0.5% of the monthly outstanding mortgage balance and cover the management costs of payments. However, a common difficulty here is that many mortgage lenders won’t know what servicing fees you’ll face because they sell the rights to your loan after it closes.
5. Do I Qualify for Any Down Payment Assistance Programs?
This is one of the most important questions you can ask a mortgage lender to see if they have the knowledge and motivation to get you the best bargain. There are many down payment assistance programs that vary by state and whether or not you are a first-time home buyer. If a lender can help you navigate through all the different programs and find one that suits your specific situation, they are worth their weight in gold.
6. Do You Offer Mortgage Points?
Now, what are mortgage points (AKA discount points)? In a nutshell, you can pay a portion of your interest upfront and thereby earn a lower interest rate. Buying one mortgage point costs 1% of the total loan value; however, depending on the loan, you can save a significant amount of money over the years by doing so. Along with this, ask if there is a maximum number of points you can buy.
These may not be right for everyone’s situation, but if you are interested, run the numbers and ask your lender to help you calculate the breakeven point. If the lender is interested in helping you save money at every junction while accommodating your financial circumstances, they’re a keeper!
7. What Will My Interest Rate Be?
This is another no-brainer question, but it determines how much you will pay each month. It can be difficult to predict exactly what your interest rate will be because it depends on your credit score, the size of your loan relative to home value, and whether you will live in your home or are buying it as an investment. Furthermore, general economic conditions, such as a recession or Federal Reserve policies, play a major role in determining interest rates.
To get an idea of what your rate should look like, see here.
8. What Will My Monthly Payment Be?
Your monthly mortgage payment is not determined by your interest rate alone. For example, you must take out private mortgage insurance if your down payment is under 20%. On top of that, real estate and property taxes may apply. Keep in mind that the mortgage payment not only covers a portion of the principal but also the interest you owe the lender.
If you want to keep monthly payments to a minimum, put down more money up front if possible. Another crucial part of this question is finding out if there are any prepayment penalties for paying off the mortgage early, either from moving or refinancing. Even if you think you know ahead of time what your payments will be, ask to make sure you aren’t surprised by any fees.
9. Do You Charge for an Interest Rate Lock?
In a fluctuating economy, you may want to lock down your interest rate so that it does not double in three years. Even from the time you begin your mortgage application to the time you sign, mortgage rates can change significantly. The tradeoff here is that you miss any opportunity to lower your interest rate should rates decline in the future.
There is some wiggle room here since some lenders give you the option of a one-time float down. Moreover, a new property appraisal, credit score, employment, or loan revision can be grounds to void a rate lock. Regardless of your preferred risk level, ask if there is a fee for locking the rate. If there is no extra charge, that’s the answer you want and a good reflection on the lender.
10. Do You Have an Origination Fee?
An origination fee is a charge to cover the costs of processing and “underwriting a loan” with “Mortgage Underwriting” a loan. It’s also an opportunity for the lender to earn some extra profits. Typically, it’s between 0.5% and 1.0% of the total loan amount. 1% may sound like a small number, but when we’re dealing with a six-figure property, this is not a cost to overlook.
Although it’ll be tough to get an origination fee below 0.5%, it is possible to negotiate a lower fee by talking with several lenders and bringing each competitor’s offer to the table. Moreover, the larger the loan you seek, the more bargaining power you have. Regardless of whether you are concerned with origination fees, you should compare lenders across a variety of factors and bring that information to the negotiating table.
11. What Other Costs Will I Pay at Closing?
Generally, origination fees are included in the closing costs, but there is also a multitude of other fees that can appear at this time. These should be detailed in the Loan Estimate document, but it’s important to have these in mind from the beginning when you are still loan shopping. You don’t want to place all your hopes in a lender only to be surprised with hidden fees at the end.
Be on the lookout for the following and more:
- application fee
- appraisal fee
- credit check
- mortgage insurance
- VA funding fee (if you use a VA loan)
- prepaid mortgage interest points
- title insurance
- escrow fees
- settlement fee
- homeowner’s insurance
- recording fees and transfer taxes
There is a large range when it comes to closing costs, but you can expect them to be between 3% and 6% of your total loan value.
12. How Will You Update Me on the Loan’s Progress?
Especially if you are dealing with multiple lenders simultaneously, you will want to make sure they have a regular and defined communication plan regarding your application process to help you stay organized. While you can take it upon yourself to independently follow up with each lender, you want them to be on top of things and proactive.
Here are some key questions to ask:
- How often will you update me?
- Will I have a single point of contact throughout the entire process?
- How will these communications be shared? Phone, email, online, etc.
Part of the reason you should ask this question is to see how accommodating the lender is to your expectations and needs. If they want to follow a communications plan that works for you instead of a rigid, cookie-cutter plan, this is a good sign that they are accommodating and care about your experience. Moreover, when you are comparing lenders, you want to be sure that you can reach someone and determine your status when necessary.
13. How Much Time Is Left Till My Loan Closes?
You have a busy schedule and a million things to coordinate before moving, so you want to know when you can get your mortgage and nail down a move-in date. Moreover, if you are still comparing lenders, consider the pace of business operations between lenders. Does one lender take ages to process applications and make decisions? This could be a headache in the future.
Another component of this question is asking your lender what actions you should avoid during this time. For example, making major purchases on credit or doing things that change your credit score could damage your chances of getting the loan you want.
14. Will You Sell My Loan?
Don’t be too alarmed if this answer is yes because selling loans is standard practice. In your parents’ and grandparents’ time, lenders would keep your mortgage in order to regain the loan amount plus interest. Nowadays, the purchase of, or investment in, mortgages is a major industry and involves institutions such as Fannie Mae, Freddie Mac, FHA, and more.
If the answer is yes, ask how that will change your relationship with the lending and servicing institution and who will be your point of contact. Normally, when you have trouble making payments, you will discuss options with the servicer, so make sure there is someone available to you.