1. What Are My Payments Going to Be?
Knowing how much you can afford to spend on housing each month and how much you will actually be spending are essential considerations. You need to keep your search for a home realistic. The lender will review your income, assets, and credit to determine what they will offer you but don't forget a home has additional costs beyond the mortgage/insurance/taxes that will be part of the payment. Repairs and maintenance are necessary, and you need to consider this outside of the number they tell you.
2. What Are the Terms That You Offer?
There is no single type of mortgage that is best for everyone, and there may be different programs that will be appropriate for you. Be sure to discuss your options with your lender before deciding. A few of the options available are:
- Conventional Fixed-Rate - 15, 20, and especially 30 year fixed rate loans are the most common mortgages. The longer the loan's term, the lower the monthly payment, and in turn, the more the total interest you will pay. If you can afford the monthly payments of a shorter-term mortgage, this may be an excellent option to help you save. Or, if you want a longer term and are able to pay extra each month, you can pay off your mortgage substantially faster
- Adjustable-Rate (aka ARM)-these mortgages have a rate that will change over the life of the loan. The rate can increase or decrease with market fluctuations after a fixed period expires. AMRs can be a low-cost option initially but can lead to a nasty surprise if rates go up, making budgeting a challenge. Almost all ARMs require a rate cap or "ceiling" to protect borrowers from payment shock. For borrowers who plan to stay in home for a long time, this can be a great option.
- FHA Loans- buyers with low credit scores and smaller down payments will often qualify for Federal Housing Administration loans. There are restrictions and limits to the amount you can borrow, and FHA loans require mortgage insurance.
- VA Loans- The Department of Veteran Affairs has loans for veterans, service members, and surviving spouses with lower rates and no down payments. These mortgages have some restrictions and fees, and borrowers should have reserve funds available.
3. What Is the Interest Rate (APR)?
Knowing the interest rate is vital to understand how much total interest you will pay over the loan's life. Rates get determined by your credit score, a home's location, down payment size, and the term. The Annual Percentage Rate (APR) will include both the interest rate and the fees charged by the lender for the loan and is an excellent apples-to-apples comparison for other comparable loans. If you are talking about an ARM, ask about the adjustment frequency to know how soon and often the rate could change.
4. Can I Lock in a Rate?
A rate lock means the interest rate will stay the same between now and closing regardless of what the market does. Locks are helpful if rates are at record lows and could move up, you can not pay more than the current rate, or you are looking for a home (with a lock, you don't have to hurry). Some companies will still drop their rate even after you lock, and you need to know the maximum time for the lock, so ask. The industry typically requires a home in contract before locking a rate for a borrower. Rates expire and locking a rate without a contract can be taking advantage of the market so it’s not a very popular option for lenders to offer.
5. What Are Your Minimum Credit Qualifications?
Each lender has its own minimum credit score requirements, and it is good to ask this early. The lower your score, the more you will usually pay for your loan. The higher your credit score, the easier it will be to find a mortgage, and you can ask if there are any special offers/rates.
6. Do You Have Income Requirements?
Income does play a role in the home you can afford. Lenders will look at income sources (commissions, military benefits, child support, etc.) and will often require a two year minimum work history. Ask what sources they use for determining earning power and what forms they will need (W-2s, bank account info, tax info, pay stubs, etc.)
7. What Downpayment is Needed?
Not all loans will require a 20% downpayment. Some will need as little as 3% down, and VA loans will require 0% down. In the case of conventional (Fannie/Freddie) loans, 20% down payment avoids private mortgage insurance (PMI), which protects the lender in the case of default. PMI can be canceled once 20% of the equity in the home is reached and is automatically canceled at 22%.
8. What Are the Closing Costs?
Closing costs are the fees paid to the lender to close the loan, such as appraisal fees, origination fees, attorney costs, and title insurance. Most closing costs depend on where you live, the down payment, and the property size. Costs run between 3-6% of the total loan; some costs may be optional (not required by law), and for some, you can choose a provider yourself.
9. Are Mortgage Points Available?
Mortgage points are a fee you can pay to get a lower interest rate, saving the overall cost of the mortgage. The point's price is usually equal to 1% of the total loan. You have a $100,000 loan, so for $1000 each, you can buy points at closing. This is good for those planning to live in the home for a long time, saving money over the term. Ask how much the rate will be lowered per point and the maximum points available to purchase.
10. Is There a Prepayment Penalty?
After beginning a mortgage, you may get a raise or bonus, come into some funds, wish to refinance your purchase, or need to sell the property. All of these will mean an early repayment (partial or total), and all but the last can save you from paying the interest left on your loan. Some mortgages have a prepayment penalty for doing so, which recoups the lender's loss of interest income. There are two general types of penalties:
- Soft prepayment penalties- A home's sale is not penalized, but paying off the mortgage with a lump sum or refinancing will result in a penalty.
- Hard prepayment penalties- Fees are due regardless of the reason for repayment, sale, refinance, or large payment.
Knowing if there is a penalty, the type, and its amount can save you money and headaches in the future.
Bonus Question: Do you offer Preapproval or Prequalification?
These are often confused but important:
- Prequalified- A prequalification is based on a preliminary conversation with a lender that looks at a borrower's income, credit score and assets. Based on this conversation, a lender will estimate the amount of money a borrower can get for a home loan. At this point, no information is verified, and if incorrect, the qualification amount can change.
- Preapproved- The lender will verify income, credit information, and assets, including W-2s, bank statements, and tax returns, and then provide you with an accurate loan amount. Keep in mind that being preapproved will depend on how serious you are about looking for a home when you apply.
Prequalification and preapproval are both important parts involved in looking for a home, but it's a good rule of thumb to never start making offers on homes without getting a preapproval from your lender first!
Remember, when you're unsure about something, don't be afraid to ask!
