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 diligently saving for a down payment and choosing a reputable mortgage lender, you’re left with a seemingly endless list of decisions. With so many mortgage options, it’s tough to know where to start.
Especially as a first-time home buyer, you’re prone to picking options that seem most convenient after limited research. The Consumer Financial Protection Bureau found that 47 percent of home buyers are so overwhelmed by the purchasing process that they don’t even bother comparing mortgage lenders.
It’s not easy to automatically know all the right questions to ask your mortgage lender, but it’s important to learn. Even if it’s stressful, being inquisitive and shopping around could save you tens of thousands of dollars in the end. Before you start asking questions, let’s refresh our memories of the differences between mortgage lenders, brokers, and servicers.
Do you feel comfortable asking your mortgage lender questions so you can make smart financial decisions? Knowing the answers to the following 17 mortgage questions can empower you to make smart choices for your specific situation.
1. Do I Need Preapproval or Prequalification?
What to look for: Prequalification and preapproval don’t have universal definitions among lenders. Clarify with your lender to understand the difference, and then ask which would be a better choice for your situation. A mortgage preapproval is an official letter explaining how much a lender will allow you to borrow based on your income, debt, and credit history. On the other hand, a prequalification isn’t an official document and doesn’t require a hard credit check.
2. What Is Your Process for Preapproval?
What to look for: Ask your lender what information is necessary to become preapproved for a home loan. Preapproval usually requires an analysis of your financial history, including your income, credit, and debt. Although a preapproval letter doesn’t guarantee your ability to secure a mortgage and buy a home, it puts you in a better position to negotiate with sellers. Be sure to ask your lender how long your preapproval would be valid. Some preapproval letters expire within 30 days, while others last for 60 – 90 days.
3. How Do I Decide the Type of Home I Can Afford?
What to look for: Your lender should be your advocate and shouldn’t want your home to become more of a liability than an asset. If a lender is truly on your side, he or she should want you to stick with a relatively conservative monthly mortgage payment. If your lender is encouraging you to stretch your budget or live outside your means, it could be a major red flag that they don’t have your best interest in mind.
4. How Much of a Down Payment Do I Need for a House?
What to look for: Don’t always assume the down payment will be 20% of the cost of the house. Ask your lender to find out about how much of a down payment you need. Don’t forget to inquire about government-backed loans too — you may qualify for a 0% down loan. Ask about PMI (Private Mortgage Insurance) requirements, too. PMI can offer a sense of security if you are unable to make your monthly payment, but it may not always be necessary. It also can’t hurt to ask what income range it is recommended to have to keep up with mortgage payments.
5. Do You Offer Both Conventional and Government-Backed Loans?
What to look for: Ask your lender which types of loans they offer. Mortgage lenders should be able to help you figure out the ins and outs of their conventional loan offerings. A conventional home loan is a large sum of money lent to a borrower by a bank, credit union, or lending agency. Not every lender is legally qualified to offer both conventional and government-backed loans. Lenders can inform you of the various requirements for each government-backed loan. Don’t be shy about asking your lender to walk you through the pros and cons of each home loan type.
6. What Credit Score Do I Need to Qualify for a Mortgage?
What to look for: Generally speaking, the higher your credit score, the easier it will be to navigate the home buying. However, you don’t actually need a credit score at all to secure a home loan — you can go through the process of manual underwriting. Ask your lender about this topic to see what their opinion on this topic is, and to gauge how open-minded they are.
7. Do You Offer Mortgage Points?
What to look for: Mortgage points, or discount points, allow you to prepay interest to get a lower interest rate on your mortgage. Each mortgage point equals 1% of your home’s value — if you’re getting a $500,000 loan and have two discount points, you’ll pay $10,000. They’re not for everyone, though. If your lender is selling you too hard on points, it may be a red flag.
8. What Is the Interest Rate and the Annual Percentage Rate?
What to look for: Your mortgage lender should be able to help you understand your mortgage interest rate. It all depends on factors like your credit score, home location, down payment, loan type, term and amount. Lenders should reassure borrowers by explaining the Annual Percentage Rate (APR) as well. The APR provides insight into the full expense of the loan because it includes both the interest rate and the fees that the lender charges to originate the loan.
9. What Is a Mortgage Rate Lock?
What to look for: A mortgage rate lock is basically when your lender affirms that the interest rate they secured for your will remain the same until closing. Ask your lender about current market rates, if they’d suggest locking your rate, and how long the rate lock would be valid. Be sure to double check their process — some lenders will drop your interest rate if market rates decrease after rate locking.
10. Do I Need an Escrow Account?
What to look for: Be sure to ask your lender if you need an escrow account, which is a type of neutral savings account that holds money for prepaid property taxes and insurance premiums. Ask about your options if you’re required to have one. Also, your lender should inform you about how much money you’ll need to hold in escrow.
11. Should I Buy a House With or Without My Partner?
What to look for: Buying a house with a partner or spouse could be a great move, but it requires some additional steps. Ask your lender if it’s possible to buy a home without your spouse — he or she should know whether you live in a community property state or a common-law state. Inquire about quitclaim deeds as well as these deeds allow you to retroactively add your spouse’s name to the title.
12. How Long and How Expensive Is It to Refinance?
What to look for: Remember, a lender should want to educate and empower you with this type of information far in advance. If you anticipate the refinancing process could be extremely long and costly, it’s even more motivation to secure the best possible loan and rate when you start off. If they don’t seem willing to openly discuss theoreticals like this with you, it could be a red flag.
13. When Should I Consider Refinancing and Would It Hurt My Credit?
What to look for: There are no dumb questions when it comes to asking about home loans and refinancing. Lenders should be comfortable answering questions about refinancing long before you would actually consider it. Before speaking with a lender, research the refinancing process, requirements, and added costs that could slow you down from reaching your goals. You might already think you know the answer about the effect of refinancing on your credit, but it’s still useful to hear your lender’s experience with previous clients.
14. How Would a Reverse Mortgage or Cash Out Refinance 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 for situations that you’re much less likely to be involved with. It can’t hurt to hear your lender’s two cents on the matter.
15. What Is Your Process for Closing?
What to look for: Inquire about your lender’s closing process because being informed and prepared will keep you sane and protect your finances. Your lender should reassure you that they’ll support you in verifying and understanding the various documents involved in closing. How long will the process take? Does the closing occur in-house at the mortgage company, at a law office, at your home, or can it be completed online?
16. Is There a Prepayment Penalty?
What to look for: Be sure to ask how much paying in advance costs if your mortgage lender charges for these penalties. Prepayment penalties vary greatly between lenders. Unfortunately, they can be quite pricey and make early payoffs unprofitable and stressful.
17. Why Should I Work With You Instead of Going With a Broker?
What to look for: Seasoned lenders should be comfortable answering this question. In some cases, it might seem like a no-brainer to go with a broker because they’re commission-based and will work harder to get you the loan you want. On the other hand, brokers could be baiting you with a loan that doesn’t even exist yet, one that has hidden charges or other surprises.
How to Avoid Overpaying on Fees
It’s great that you chose a reputable mortgage lender, but you also need to know the right questions to ask to avoid overpaying on fees. Be sure you ask your mortgage lender about income requirements, which loans you qualify for, and the amount you have to save for a down payment and closing costs.
Before you make the final decisions about your mortgage, be sure that your lender is willing and able to answer at least the 17 questions we covered. Mortgages might be complicated, but it’s imperative to understand your options.
Whether you’re trying to buy a home, improving your investing strategy, or simply working on your budgeting, remember that financial progress takes time and consistency. Building a support system of educated individuals that can help you answer key financial questions will empower your money management success.