If you're buying a home for the first time, you might be wondering what questions to ask when talking to a mortgage lender. We've put together 14 essential questions to ask your lender or mortgage broker so you can rest easy knowing you're ready for what lies ahead. A conventional 30-year fixed-rate mortgage loan is the most common type of mortgage loan. Because the term is so long, the monthly payments are lower, and the fact that the rates are fixed means that your interest rate will stay the same for the entire life of the loan.
However, the longer your mortgage term, the more interest you'll pay on the loan. So, if you can afford higher monthly payments, it might be worth choosing a 15- or 20-year term. Mortgage points (sometimes referred to as “discount points”) are an optional charge you can pay at closing to “buy a lower interest rate and save on the total cost of the mortgage loan.” The cost of each mortgage point equals 1% of your total loan. Ask your lender how much income you need to buy a home and what sources of income they consider when calculating your total purchasing power. Finally, ask your lender what documents you need to provide to prove your income, such as W-2 forms, pay stubs, bank account information, and other materials.
You might assume that you need a 20% down payment to buy a home. However, in some cases, you can buy a home with as little as 3% down payment. Certain types of government-backed loans even allow you to get a mortgage with a 0% down payment. The oft-quoted 20% figure has to do with avoiding private mortgage insurance (PMI), which protects the lender if you don't repay the loan. You can cancel the PMI of a conventional loan as soon as you accumulate 20% of equity in your home, and your lender will automatically cancel the PMI as soon as you reach 22% of your home equity.
Closing costs are the processing fees you pay to your lender to pay off your loan. Some typical closing costs include appraisal fees, opening fees, attorney fees, and title insurance. The specific closing costs you'll pay will depend on where you live, the down payment, and the size of your property. Closing costs typically range from 3% to 6% of the total value of your loan.
The 14 questions we just reviewed can serve as a starting point when choosing a mortgage lender. The following questions aren't necessarily what you should ask your potential lender, but they are questions you may still have about the process of finding a mortgage lender. Mortgage insurance is generally required for most loans with a down payment of less than 20%. The type of insurance varies depending on the loan, and the amount you pay may vary depending on the lender. PMI, for example, can cost between 0.5% and 1% per year.
Mortgage Basics: 4-Minute Reading Rocket Mortgage, 1050 Woodward Ave. A 20% down payment is ideal for all lenders, but it's not always required. Qualified buyers can find mortgages with as little as 3% down payment or even no down payment. Once again, there are considerations for each down payment option.
The best lenders will take the time to explain the options to you. In our example of receiving a 6% pay rate, you're looking for the lowest APR based on that pay rate. Maybe one lender will offer you an APR of 6.25% and another an APR of 6.5%. The lender with an APR of 6.25% charges you lower fees.
If you deposit less than 20% in a conventional loan, the answer is probably yes. Mortgage insurance for government-backed loans works differently. For example, read more about FHA mortgage insurance. Insurance services offered through NerdWallet Insurance Services, Inc.
California resident license number, OK9203 insurance licenses. Unfortunately, some consumers still believe in the myth that a 20% down payment is needed to buy a home, delaying their homebuying plans while saving. That said, a higher down payment will translate into a lower monthly payment. Your lender may even offer you a supplemental loan, which can help you bypass PMI if you can make a 10% down payment on a conventional mortgage.
However, there's no way to avoid FHA mortgage insurance unless you choose a different type of loan, since it's mandatory regardless of the amount of your down payment. Some lenders allow you to lower your interest rate by buying “points” for each mortgage point you buy, you'll lower the interest rate by up to 0.25%. In the case of a conventional loan, completing the homebuying process, from application to closing, could take around 43 days. Refinances take one more day, so plan for 45 days if you want to replace your current loan with a new one.
During that time, make sure you understand how to receive updates from the lender and submit any documents they request from you. That way, you won't unintentionally delay the process. These are 30 questions to ask a mortgage lender that can help you analyze your options and find a loan and lender that fit your situation and goals. Therefore, a pre-approval letter shows real estate agents and sellers that you are willing to buy.
Pre-approval is usually valid for 30 to 90 days, so it's best to wait until you're ready to buy a home and make an offer. Lenders usually check your credit when you apply for a loan. This is known as a thorough consultation and will temporarily lower your credit rating. Although this can't be avoided, it's good to understand how queries work.
For example, several credit checks performed by mortgage lenders over a 45-day period count as a single inquiry. This means it won't hurt your credit if you compare prices or if a lender needs to check your credit a second time before closing, as long as this happens within 45 days. If you're almost ready to buy and interest rates are low, ask the lender if they can set your interest rate. The rate lock usually lasts between 30 and 60 days, and you'll have to pay a commission for it.
However, as long as you close your home purchase before the lockdown expires, you'll pay that rate no matter how much the market has changed in the meantime. An ARM has an interest rate that changes from time to time, affecting the amount of your monthly payment. Most ARMs have a fixed introductory rate for the first three to 10 years of the loan. After that, the interest rate will be adjusted at certain intervals based on the federal funds rate. When rates rise, your monthly payment will increase. If rates decrease, your payment will be reduced.
Many loans set a maximum DTI ratio for borrowers, usually between 43% and 50%. The less debt you have, the lower your DTI ratio and the more room you have in your budget to pay the mortgage. One of the key points on a list of questions and answers about mortgage loans is how much you need for a down payment. While 20% allows you to avoid private mortgage insurance, the minimum down payment for a conventional compliant loan is 3% more affordable.
FHA loans require 3.5%, and VA and USDA loans don't require a down payment. Closing costs, on average, represent between 2% and 5% of the purchase price, so you should be prepared to pay them in addition to the down payment at closing. You can try asking the lender to reduce or cancel some closing costs, although this can result in a higher interest rate and, in general, cost you more. The most common type is private mortgage insurance or PMI.
The insurance is provided through a private company and the premium is added to the mortgage payment. For most loans, PMI is required whenever the buyer's equity is less than 20% of the value of the home. This usually means that they have made a down payment of less than 20% of the purchase price. The PMI can be canceled once you have 20% or more equity in your home.
If you don't pay your monthly mortgage bill by the due date, you'll typically be charged a late fee that ranges from 3% to 6% of the monthly payment amount. Lenders usually grant a grace period, usually 15 days before charging a late fee. This can be useful for homeowners who are waiting to receive payment or who are temporarily on a tight budget. If you are more than 30 days late in paying your mortgage, you risk damaging your credit rating. If you incur serious delinquencies, you run the risk of foreclosure.
If you pay by mail, processing can take seven to 10 business days. If you decide to set up automatic payments online, it's recommended that you do them directly with your lender instead of the bank's bill payment feature, which sometimes causes delays. Asking these important questions can help you gain the knowledge needed to make informed decisions when borrowing money for a home with a mortgage. Given the differences in their roles, the questions you would ask a mortgage broker are different from those you would ask a lender.
Be sure to ask your mortgage lender (or broker) a lot of questions about income requirements, the types of loans you qualify for, and how much you have to save for a down payment and closing costs. While the above list of frequently asked questions about mortgages may make it seem like mortgage lenders can ask you anything they want, there are some legal limits, according to Darrin Q.When comparing two or more mortgage offers, the APR provides a better understanding of the total cost compared to just the interest rate, making it an important question to ask a mortgage lender.
