Questions You Should Ask Before Getting a Mortgage
We recommend that you contact at least five lenders when you shop for your mortgage. You should compare proposals to find the lender that offers the best loan program and terms. When you speak with lenders there are several questions you should focus on. Knowing the questions you should ask mortgage lenders is an important part of the selection process. You want to gather the right information so that you can successfully compare proposals.
Below we provide a series of questions as wells as answers to guide your discussions with lenders. We advise borrowers to ask these questions as part of the lender evaluation process. Lenders who are willing to answer these questions are more likely to possess deeper mortgage expertise and offer a higher level of customer service. Lenders who are unwilling to address these questions or who do not provide satisfactory answers are probably less experienced and less likely to deliver a positive experience for borrowers. In short, an experienced and qualified lender welcomes questions from potential borrowers whereas a less qualified lender may react less positively so the questions function similar to a test. Understanding the questions you should ask before getting a mortgage makes the lender selection process more productive and enables you to find the loan that is right for you.
What is My Mortgage Rate?
This seems like a simple question with a simple answer but there several points to consider when you ask it. First, your mortgage rate depends on several factors including the mortgage program you select, the length of your mortgage, the down payment you make and the closing costs you pay.
A fixed rate mortgage typically has a higher interest rate than an adjustable rate mortgage (ARM) or an interest only mortgage. A shorter mortgage (less than 30 years) has a lower rate than a longer loan. If you make a down payment of at least 20% your mortgage rate is usually lower than if you make a down payment of less than 20% (or the lender will require that you pay extra fees, called private mortgage insurance (PMI)). If you pay higher lender costs or discount points (additional fees paid to the lender to lower your interest rate), your interest rate should be lower. When a lender quotes you an mortgage rate, make sure you know what assumptions the lender is using for these key points.
Additionally, ask the lender if your mortgage rate can change over the life of the loan. With a fixed rate mortgage your interest rate stays constant throughout your mortgage but with an ARM or interest only mortgage, your rate can change and potentially increase. A mortgage with a low interest rate today but a potentially higher rate in the future may not be right for you.
The table below enables you to compare mortgage rates for leading lenders in your area. We recommend that you shop at least five lenders to find the best mortgage terms.
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What Mortgage Qualification Requirements Do I Need to Meet?
This is a general question but it is important to know if you can qualify for the mortgage before you submit your loan application. There are many guidelines that you need to meet get approved for your loan but we recommend that you focus on the lender's credit score, down payment and debt-to-income ratio guidelines.
Credit Score. You must meet the lender's minimum credit score requirement to be eligible for a mortgage. Additionally, your loan terms may vary depending on your score. Applicants with a higher credit score typically pay a lower mortgage rate while applicants with a lower score may pay a higher rate. If your score is too low, you may not be eligible for certain mortgage programs. It is important to understand upfront if your score is high enough for your specific lender and program.
Down Payment. The down payment is the money you contribute to buying a home. You typically need to put down 20% of the property purchase price to receive a lender's best mortgage terms but it is certainly possible to qualify with a lower down payment. In addition to your down payment, if applicable, you also need to pay closing costs and potentially hold money in reserve so be sure to ask your lender how much you need to put down so you understand the funds required to close your mortgage.
Debt-to-Income Ratio. In short, a debt-to-income ratio is the percentage of your monthly gross income you are permitted to spend on monthly debt payments including your mortgage, property tax and homeowners insurance plus other debts such as credit cards and car, personal and student loans. Debt-to-income ratios vary by lender and loan program and usually range from 40% to 50%. The higher the ratio used by the lender, the higher the loan amount you can afford. We recommend that you ask the lender what debt-to-income ratio they use so you know what size mortgage you qualify for.
What is My Mortgage Program?
It is important to understand that there are different types of mortgage programs and each program has pros and cons. Most borrowers select a fixed rate mortgage because the interest rate and monthly payment never change. Some borrowers select an adjustable rate mortgage (ARM) because the monthly payment during the initial period of the mortgage is lower than a fixed rate mortgage. But with an ARM, your interest rate and monthly payment can potentially increase over the life of the loan. An interest only mortgage offers the lowest monthly payment during the initial interest only period -- because you are not paying principal -- but the payment typically increases when the interest only period ends and you start paying both principal and interest. Plus, with an interest only loan your mortgage rate can potentially increase, which would cause your payment to go up even more.
Review What Mortgage Program is Right for Me?
In short, be sure to understand the exact mortgage program a lender is offering you and make sure you select the program that is right for you based on your personal financial profile and objectives.
How Long Will It Take to Close My Loan?
There are several reasons it is important to understand how long it will take to process and close your mortgage. First, the mortgage process can be rather challenging so borrowers want to get it over with as soon as possible. Plus if you are getting a mortgage to buy a home, the sooner your mortgage closes the sooner you can move into your new pad. Another reason to know how long it will take to close your loan is because the key terms of your mortgage, such as your interest rate and closing costs, may only be valid for a certain period of time. If your mortgage does not close within the specified period of time, your interest rate could increase which could cost you thousands of dollars over the life of your mortgage.
Review our Day-by-Day Mortgage Process Schedule
You should consider locking your mortgage and make sure the the length of your rate late period is long enough to process and close your loan. Issues always arise that delay the mortgage process so ask your lender what happens if your mortgage does not close within the stated time frame. Request that the lender extends the initially quoted interest rate and key terms of the mortgage until closing, even if process timeframe extends beyond the rate lock period.
Understanding how long it takes to process your loan and locking your interest rate can save you thousands of dollars in the long run.
What Documents Do You Require?
It is important to understand what personal and financial documents a lender requires to process and close your mortgage. Most lenders require two years of tax returns and W-2s and two months of banks statements and pay stubs. You may also be required to provide the most recent statement for any loans or debt accounts. Lenders may also require additional personal or financial documents depending on your individual circumstances and the type of mortgage you are applying for. Knowing what information and documents you need to submit allows you to get organized and makes the process go more smoothly.
Review our Mortgage Document Checklist
Additionally, being prepared will help you avoid surprise lender requests that could potentially delay the process. Make sure you know exactly what information the lender requires before you apply for your mortgage.
What Are My Total Closing Costs?
Mortgage closing costs are the fees that a borrower is required to pay at the time a mortgage closes. Closing costs can run thousands of dollars depending on the lender and the size and type of mortgage. It is important to understand that there are two types of closing costs: non-recurring and recurring. Non-recurring closing costs are one-time, up-front costs that the borrower pays to process and close the mortgage such as lender, appraisal, title company, escrow and attorney fees.
Recurring closing costs are costs that the borrower will continue to pay after the mortgage closes such as interest (from the day your mortgage closes until the end of the month in which your mortgage closes), homeowner's insurance, pro-rated property taxes and homeowners association fees, if applicable. The amount of recurring closing costs you pay depends on when your mortgage closes and these costs are less subject to negotiation.
When you speak with a lender ask what your total non-recurring and recurring closing costs are. Focus on the non-recurring closing costs as these fees can vary by lender and are subject to negotiation. Ask the lender what items are included in non-recurring closing costs including any discount points you are potentially paying to lower your interest rate. Additionally, ask what your closing costs would be if you paid a higher or lower rate. You may be able to negotiate lower closing costs or a lower mortgage rate.
Learn Should I Pay Discount Points?
Do You Provide a Lender Fees Worksheet and a Loan Estimate?
When you contact lenders, it is also important that you request you request a Loan Estimate and Lender Fees Worksheet. These documents outline the key terms of the lender's proposal including mortgage rate and closing costs. Use the information from these documents to compare proposals, negotiate better terms and save money on your mortgage. Please note that some lenders may request that you to submit a loan application to receive an Loan Estimate and Lender Fees Worksheet. Lenders, however, cannot charge you to submit a loan application or to provide these documents. Plus, most lenders will provide a Loan Estimate and Lender Fees Worksheet even if you do not submit a loan application.
Can I Get Pre-Approved?
Getting pre-approved for your mortgage provide greater certainty that your loan will close, enables you to identify and resolve issues before you apply and potentially accelerates the mortgage process. Getting pre-approved also makes you more attractive to property sellers. Plus, it is free and there is no obligation for borrowers. You want to make sure that you select a lender who is willing to pre-approve you.
Use our free and easy-to-use get pre-approved form to compare loan terms and get approved by leading lenders
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Do You Have Experience that is Relevant to Me?
There are many different types of mortgage programs for different borrowers and property types. Each program has unique qualification requirements so you want to make sure that your lender has experience with program that best meets your needs. For example, there multiple no or low down payment programs that may require slightly different applicant information. Or the loan requirements for an investment property are different than the requirements for a mortgage on an owner occupied property. Working with a lender who possesses expertise with a specific loan program can make the mortgage process much easier.
You should also confirm that the lender offers the mortgage program you need as many lenders offer a limited selection of programs. For example, you are buying a fixer upper, make sure the lender offers renovation mortgage programs. You do not want to waste your time selecting a lender that does not offer the program you need.
Provide Client References
We recommend that you request multiple customer references when you contact lenders. A lender's response to this question says a lot. If a lender is willing to provide references they are more likely to provide a higher lever of customer service. If the lender is unwilling to provide references it suggests that the they are either inexperienced or do not have many satisfied clients. You can learn from a lender's client references, even if you only contact one or two references.
Do You Fund My Mortgage
This question allows you to determine if you are working with a mortgage broker or a direct funding lender. If the answer is yes, you are working with a direct lender . If the answer is no, you are working with a mortgage broker. There are positives and negatives to each type of lender and it is important to understand from the start what type of lender you are speaking with. Direct lenders may offer better mortgage terms because they are funding your loan directly but mortgage brokers offer borrower the benefit of shopping a network of lenders and they may have a wider range of loan programs to offer. We recommend that borrowers contact at least one mortgage broker and one direct lender when you shop for a mortgage.
Will My Mortgage Be Sold?
If the lender intends to sell your mortgage after closing, then potentially you may have to make your payment to, and deal with, another party going forward. While this does not change the terms of your mortgage it can cause complexity in the future. This should not be the deciding factor when you select a lender but it is something to consider. It is important to highlight that even if a lender sells your loan, they may still service it, which means you continuing making your payments to that lender. Some borrowers may prefer that their mortgage is not sold or serviced by a different company so this is a helpful question to ask.
Are You the Servicing Lender?
This is kind of a technical question but it is important to understand what company will be servicing your mortgage after it closes. The servicing lender is responsible for collecting your monthly mortgage payment and addressing any issues with your loan after it closes. In some cases the servicing lender is different than the originating lender, or the lender you worked with to obtain your mortgage.
When your mortgage closes you receive a first payment letter that outlines the servicing lender's name, your monthly mortgage payment amount and when the payment is due. Understanding who your servicing lender is ensures that you will make your initial mortgage payment to the right party and on time and also allows you know who to contact if you have any questions about your mortgage after it closes.
Will You Compete for My Business?
If a lender is willing to compete for your business then they may be more open to negotiating mortgage terms and offer you a better quote. If a lender is unwilling to compete for your business then they have either offered you their best loan terms or they do not want your business. For example, if a lender refuses to provide a mortgage quote or proposal, we recommend that you contact a different lender. Shopping lenders and creating competition for your mortgage business enables you to find the best terms.
Is There Anything Else That Could Prevent My Mortgage From Closing?
This is a "catch-all" question that you should ask the lender at the end of your conversation. We frequently hear from borrowers that an unexpected issue came up during the mortgage process that significantly delayed, or in the worst case prevented, their mortgage from closing. Asking this question helps you identify any issues that could hold up your mortgage process and also makes the lender more accountable.
Sources
"Job Interview Questions for Your Next Lender." My Home by Freddie Mac. Freddie Mac, April 25 2016. Web.