Before choosing a lender, you should interview a few different options. Your agent can give you names and contact numbers of lenders they recommend, or you can ask your friends and family for referrals.
Here’s a list of questions to ask when meeting with a lender:
What’s the best type of home loan for me?
There are several different types of loans available to borrowers today. Your lender can help you decide which is best for your financial situation. But they cannot do this without first learning about you. A lender should collect information about your finances, credit score, debt-to-income ratio, and ask you about any changes that may impact your future spending power (e.g, upcoming job promotion, new car payments, college tuition, anticipated additional expenses, etc). You want a lender that takes the time to make a valid loan recommendation based on your specific monetary capabilities.
What do you know about current incentives?
There are several national and local home buyer incentive programs that you may qualify for. Some are temporary, and others are always offered. In some cases, credits may be given for purchasing in redeveloping or mixed-income areas. Opportunities like these can save you a substantial amount of money. You want to make sure your lender is familiar with available programs and can assist you in benefiting from their incentives.
What are the interest rate and APR (annual percentage rate)?
For a fixed-rate loan, the interest rate is the percentage you pay on your principal balance each month and the annual percentage rate is a calculation of the interest rate plus assorted lender fees divided by the term of the home loan. You want to look at the difference between the two numbers. The typical difference (for a loan with no points) is 0.5 or less. A larger variance may mean you are overpaying for the mortgage, and if the interest rate and APR are the same you’re looking at too high an interest rate. These rates can be compared between lenders to see who is offering you the best option.
What costs are associated with the loan?
The Good Faith Estimate is an approximation of all lender and third-party fees plus additional closing costs. It itemizes everything you will have to pay at closing so you know how much is going toward each article. It may include fees for the credit report, appraisal, title policy, recording, title insurance, attorney services, notary, tax stamps, loan origination; prepaid taxes, interest and insurance; and the down payment. The Good Faith Estimate can help you compare loan costs between various lenders.
What are my options for discount points?
A discount point is equal to 1% of your loan amount and is used to “buy down” the interest rate, which lowers your monthly payment. If you have a mortgage for $100,000, a point would cost $1,000. Ask your lender how much you could decrease your monthly loan payment with points and calculate whether it would be a cost savings in respect to the amount of time you’ll be in your home. Points tend to be a better deal for those who plan on staying in their home for over five years, don’t plan on refinancing anytime soon, and/or want to keep the home as an investment property after moving.
Can you lock in rates for me?
Many lenders offer loan rate locks where they can “lock in” an interest rate before you actually obtain the mortgage in order to secure a lower rate. This is common practice when rates seem like they might move back up. More often than not, you will not be charged for a 30-day loan lock, but it is best to ask your lender if there is a fee. Find out how long the loan lock is good for and whether it protects all loan costs. Also, request that the locked-in interest rate be put in writing.
Is there a prepayment penalty if I pay off the loan early?
This is very important to know because you may end up selling or refinancing your home before paying the entirety of your mortgage, in which case you could be subject to prepayment penalties. There are two kinds of prepayment penalties. One charges a penalty for refinancing but not for selling; and in the other scenario you get charged for both refinancing and/or selling your home. Typically, the prepayment penalty is equal to six months of interest, however this could vary from lender to lender. Many lenders do not include prepayment penalties. But if yours does, find out beforehand what the terms are and how much you would have to dole out. Usually, it is recommended that you do not get a loan with a prepayment penalty.
Do you handle FHA loans?
A lender must be FHA-approved in order to provide FHA home loans. If you are interested in getting an FHA-insured mortgage your lender will have to be sanctioned by the Federal Housing Administration. Many first-time home buyers and those with fewer funds for upfront costs use this type of mortgage. The main benefits of an FHA loan are a smaller down payment, easier credit qualifications and lower monthly payments. Ask your lender about the documents required to apply for an FHA loan and what the process entails.
Can you approve loans in-house?
A number of lenders are able to underwrite their own loans, which means they review it, enter your exact financial figures and determine whether you are approved or denied. It may be advantageous to use a lender who does in-house underwriting because they know their own guidelines and know how to package a mortgage that won’t need any additional conditions for approval.
How long will it take to get a loan?
It is impossible to say for certain how long the loan process will take, but a normal application-to-approval time is 3–7 weeks. A more precise timeframe is helpful to know because you have to establish a closing date in the purchase offer (which becomes your purchase contract after a price is agreed upon). For that reason, it’s important to discuss with your lender the anticipated turnaround time and how long it will take for the funds to be accessed after loan approval.
What is the minimum down payment required?
The down payment amount is dependent on a number of different variables. The amount typically runs between 3.5 and 20 percent of the purchase price. The type of mortgage you get is a big factor in how much money you are required to put down. For example, an FHA loan only calls for 3.5%, while conventional loans are more apt to want 15 or 20 percent down. This is an extremely critical aspect of buying a home and something that greatly influences the type of loan a lender can offer you.
What is your track record?
Ask your lender for reviews from previous clients. A professional, well-prepared lender should have this readily available and will be happy to oblige. You can also inquire about their past experience with situations like your own—for instance, if you want to use an FHA loan, you don’t want a Jumbo loan specialist.