June 5th, 2020
Searching for the right lender is just as important as finding the right home! Your loan officer plays a key role in the homebuying process, specifically when it comes to your mortgage application, and they will help you figure out the best financing options for you. So when you’re shopping for lenders, it’s important to remember that they’re there to help you. You should feel confident in being particular if someone you meet with doesn’t answer questions to your liking, or you don’t get a good first impression. Continue meeting with agents and asking questions until you find the right fit.
Before you commit to a contract, here are some questions you should ask at your first meeting with a loan officer.
1. Which loan type is best for you?
There are many different types of mortgage products out there, with various interest rates, down payment, and repayment options. There are federally backed loans, first-time homebuyer assistance and down payment assistance programs. Ask the agent which loan types they even offer.
Loan type options:
Take some time to research and talk to people to figure out what type of loan will work best for you and your financial profile, then ensure the lender offers the appropriate mortgage option.
2. How will it affect my credit?
Many lenders will let you begin the mortgage shopping process with a soft credit inquiry. From this, they can give you a pre-approval until you find your home and are ready to process the loan.
However, some lenders will conduct an initial hard credit inquiry. If you’re not prepared (or don’t choose them to be your lender in the end), this could negatively impact your credit score unnecessarily.
3. How much can I borrow?
Once your lender crunches some numbers, your lender will figure out your mortgage amount. This is different from how much you can actually afford to pay. Rather, based on your down payment and personal qualifications, the lender will decide how much they’re willing to loan you for your new home. This is based on several factors including your income and credit history.
4. What is my down payment?
Your calculated down payment depends on the types of loans offered as well as your personal qualifications (based on your financial profile). Traditionally, down payments have been 20 percent of a home’s purchase price; today, however, you can find mortgages offering no-down-payment loans or loans with as little as 3 percent.
Also keep in mind that a lower down payment is often accompanied by a higher interest rate and private mortgage insurance (PMI).
5. What is my interest rate and Annual Percentage Rate (APR)?
Your mortgage’s final interest rate will be calculated based on the size of your loan, your credit history, the down payment you can afford, and the type of mortgage you go with. Rates can be fixed or adjustable, and you may even be able to purchase points to lower the rate further. Make sure to ask about points! (See #6)
The APR is a more complex calculation including the mortgage interest rate and other related lender fees, divided by the loan’s terms. APRs vary from lender to lender, so ask your mortgage lender about finalizing the adjustment frequency if your interest rate is adjustable, as well as the maximum annual adjustment, highest rate, index, and margin.
6. What are discount points?
If you want to lower your interest rate, you may be able to buy points. These will reduce your rate by a fraction of a percent, though this can save you quite a bit over the years (and they’re tax-deductible). Each discount point is equal to 1% of the loan amount. For example, two points on a $100,000 loan would cost you $2,000.
Some lenders include points in their initial quoted rates. Be sure to ask if points are added to your initial offer, or if they are available for purchase.
7. How much are origination fees?
Loan origination fees cover the cost of the lender processing your loan application. They’re essentially labor and processing costs and are usually charged upfront.
While fees vary, you can expect them to be between 0.5 percent and 1 percent of the loan total.
8. What are my closing and other costs?
Closing costs are fees charged at your new home’s closing and will vary. They include costs and third-party fees like appraisals, insurance premiums, attorney fees, inspections, escrow fees, recording fees, taxes, etc. Federal law requires that the broker gives you a Loan Estimate, a document estimating these potential costs.
Your lender may not be able to give you an exact dollar amount from day one, but they can give you an idea of the standard fees they charge so you won’t be surprised when they come around.
9. Are there prepayment penalties?
Prepayment penalties are no longer allowed in some states, so be sure to ask about this. But down the line, you may decide to pay a little extra on your mortgage to reduce your monthly payments or shorten your repayment schedule, or pay it off early altogether. If there are prepayment penalties built into your loan, this could wind up costing you quite a bit in fees. Be sure to ask if your specific loan will incur penalty fees if you prepay.
10. Can you get a loan rate lock?
Interest rates fluctuate depending on the economic market, and sometimes change daily. If you’ve discussed a loan rate that works for you and feel that the market might fluctuate, ask if a loan rate lock is on the table. Find out if loan rate locks require a fee (most lenders charge one point), what the loan rate lock covers, how long it’s effective, and if you can get it in writing.
You are not limited. to these questions!
The homebuying process can be confusing and full of financial jargon. Ask about anything you’re unsure about. It’s okay to ask for clarification! By asking your loan officer these 10 questions when you first meet, you’ll find the right mortgage professional for you faster, and avoid more pitfalls along the way.