The mortgage application process is easier if you know what questions to ask.
If you want a second opinion on any mortgage you're considering, look for a fee-only financial advisor that charges by the hour. (Click here to find one.)
Whether you complete the process yourself - or hire an advisor to guide you - here are a few questions you should ask:
Question 1: What is the interest rate?
This is the first question to ask since the interest rate ultimately determines how much your home costs you. When comparing two or more loans, use the annual percentage rate, or APR, since this number includes lender fees.
A fixed-rate mortgage is the safest alternative, but an adjustable rate mortgage might offer a lower rate. If you select an adjustable rate mortgage, realize you're taking on more risk and be sure you know (1) how often it will adjust, (2) the maximum annual adjustment, (3) the highest possible interest rate, as well as (3) the index and margin.
Question 2: Are there any discount or origination points?
A lender might charge you discount points that benefit you by lowering the interest rate, as well as other types of points that might not benefit you at all.
Paying discount points might be a good idea if you plan to stay in your home for a long time, but ask to see a loan without points to compare the fees and interest rates between the two. You should calculate the "break-even point" to see how long you'd need to stay in your home for the lower interest rate to justify the higher up-front costs.
Question 3: Will the lender guarantee the Good Faith Estimate?
Mortgage lenders are required to provide a Good Faith Estimate that contains all of the costs of a loan you’re considering. Although lenders aren’t required to guarantee these numbers, it never hurts to ask your lender if he or she will stand behind the estimate.
Question 4: What is the total cost of the loan?
There are a lot of fees associated with obtaining a mortgage. Some fees – like points, origination fees, and underwriting fees – go to the lender and underwriter. Other costs are related to the third parties involved in the mortgage process and should be the same no matter who you select as your lender. Some examples of third party costs include fees for an appraisal, a title policy, escrow fees, recording fees, homeowners' insurance costs, and pre-paid taxes.
Question 5: Can I lock in the interest rate?
The interest rate will fluctuate during the application process until you choose to “lock” it. Ask your lender when you can lock in the interest rate and if there are any associated fees.
Question 6: What are the qualifying guidelines for the loan?
The lender will have certain qualification guidelines that relate to your income, assets, job, credit score, and other factors. If you need a mortgage with lenient terms, look for a first time homebuyer or VA loan if you’re eligible for these types of loans.
Question 7: What documentation will I have to provide?
Most loans require that you prove your income and assets, but some companies require more documentation than others. Make sure you know what you’ll need ahead of time to avoid surprises. And don’t make assumptions! A “stated income” mortgage I had several years ago actually required a bank statement to substantiate my stated income!
Question 8: Is there a prepayment penalty?
Some mortgages have penalties if you prepay the loan by refinancing or selling. Always make sure to check for a prepayment penalty. And, although a loan with a prepayment penalty might have a lower interest rate, it’s generally a good idea to avoid them.
Question 9: What is the down payment required for the loan?
Find out what cash you’ll have to bring to the table to qualify for the mortgage. You might qualify for a lower interest rate if you put down a lot on your home, and most lenders will require private mortgage insurance if your down payment represents less than 20% of the purchase price.
Question 10: How much time will it take to close the loan?
The time it takes to close a mortgage depends on a variety of factors and will vary from lender to lender. Closing times ranging from 30 to 90 days are common. Ask your lender what to expect so you’ll know what closing date to include in your offer and how long to lock in your interest rate.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
