Don’t Be Afraid to Ask These Questions

Are you in the process of buying a new home or considering refinancing your current one? Before making any decisions, it’s crucial to have a comprehensive list of mortgage questions ready. To help you get started, we have compiled the most important factors to consider and essential questions to ask your mortgage lender.

While all our local lenders are experienced, having a clear understanding of the right questions to ask can greatly assist you in selecting the best lender for your needs. It is highly recommended to prepare a list of questions before your initial meeting to ensure that you gather all the necessary information. Although our list is not comprehensive, it can serve as a strong foundation for your discussions.

1. How Does A Mortgage Work?

A mortgage is a type of loan used to purchase a house. It enables home buyers to finance their home purchases and repay the amount over time. Homeowners have the option to refinance their mortgage, in which they replace their existing loan with a new one. The funds from the new loan are then used to pay off the original loan in its entirety.

When you choose to purchase a home using a mortgage loan, you are entering into an agreement to repay the loan by the terms and conditions outlined. Your home serves as collateral for the loan, giving the lender security. However, if you are unable to meet the terms or conditions of the loan, the lender may take action to foreclose on the home. We highly recommend staying informed and meeting all obligations to avoid any potential complications.

2. What Types Of Loans Are There?

There are various types of mortgage loans available, each with its unique features. One crucial factor to consider when evaluating a loan is whether it has a fixed or adjustable interest rate. With an adjustable rate, your interest may fluctuate over time.

Mortgage loans also have different term lengths to choose from. Generally, a longer term will result in lower monthly payments, but you will end up paying more interest compared to a shorter-term loan.

  • Conventional Loans: Another consideration is the investor in your mortgage loan. Conventional loans, which meet the requirements of Fannie Mae and Freddie Mac, require a slightly higher credit score than other loan options. If you make a down payment of 20% or more on a conventional loan, you can avoid paying private mortgage insurance (PMI).
  • FHA Loans: An FHA loan is a government-backed loan that is guaranteed by the Federal Housing Administration (FHA). You can qualify for an FHA loan with a slightly lower credit score than many other loan options.
  • USDA Loans: U.S. Department of Agriculture (USDA) loans (and Department of Veterans Affairs (VA) loans) offer borrowers the option to purchase a home with no down payment. USDA loans encourage development and home buying in rural areas and the outskirts of suburbia.
  • VA Loans: VA loans are a benefit for qualifying active-duty service members, reservists, veterans, and eligible surviving spouses. For borrowers who qualify, the VA loan also offers some of the best interest rates available under any loan option. VA borrowers can also roll their closing costs into their loans. There’s usually no required down payment.

3. What Types Of Home Loans Do You Offer?

Now that you have a better understanding of the available types of loans, it’s time to find a reputable lender who can guide you toward the right loan for your needs. To kick-start the process, it is crucial to inquire about the loan options offered by the lender.

While most lenders provide fixed-rate and adjustable-rate mortgages (ARMs), it is vital to thoroughly examine the details of each loan. As they say, the devil is in the details. Therefore, it is essential to carefully consider every aspect of a loan before selecting a mortgage loan and lender.

Additionally, if you are interested in an FHA, USDA, or VA loan, it is crucial to confirm if the lender offers those options.

4. Which Type Of Mortgage Is Best For Me?

When communicating with the lender, it is important to provide detailed information about your situation and address any inquiries they may have.

It is also helpful to request written documentation of any recommended loan options, allowing you to compare and contrast the strengths and weaknesses of each option. This is also a good opportunity to inquire about alternative loan options. Don’t hesitate to ask questions and seek clarification if needed.

5. How Do I Qualify For A Mortgage?

When applying for a loan, mortgage lenders take into consideration various aspects such as your credit score, income, debt-to-income ratio (DTI), and accumulated assets.

Credit Score

Your lender will review both your credit report and credit score. They use this information, along with the lowest median or average median credit score of all borrowers on the loan (depending on the type of loan), to determine your eligibility for the loan.

  • For an FHA loan, you’ll need a credit score of at least 580 to purchase a home or refinance to a lower mortgage rate or change your loan term with 3.5% down You can technically purchase a home with a VA loan with a 500 qualifying score if you have 10% down, but few lenders do these loans.
  • The minimum qualifying credit score for most conventional loans is 620.
  • Lenders determine the qualifying credit score for VA loans.

Debt-To-Income Ratio

Having a good credit score and credit history is crucial, but it’s equally important to consider your income. Lenders assess your pre-tax income about your current debts to determine your debt-to-income ratio (DTI). To be eligible for more favorable rates on most loans, your DTI should not exceed 40%, which also includes your monthly mortgage payments.

Assets

Ultimately, the lender will thoroughly examine your assets to ensure that you have adequate funds for both your down payment and potential financial emergencies, such as job loss. They may also require that you have a certain amount of money saved in your cash reserves, equivalent to several months’ worth of mortgage payments.

6. What’s The Difference Between Being Prequalified And Preapproved?

Home buyers and lenders often confuse the terms “prequalified” and “preapproved.” However, it is important to understand that these terms have distinct meanings. As such, it is crucial to be aware of the differences between the two.

Prequalification

Prequalification means that you have provided a lender with your financial information, and based on their assessment, they estimate the loan amount that you can reasonably afford. While you may receive a prequalification letter from the lender, it may not hold much weight with real estate agents or home sellers since the information has not been verified.

However, if you are in the early stages of planning, prequalification can still be a valuable tool. It can help you determine the price range of houses that you can comfortably afford. As you progress toward actively searching for a home, you will likely require a preapproval letter to demonstrate to agents that you are a serious and committed buyer.

Preapproval

A preapproval is the first step in applying for a mortgage. The lender will thoroughly examine the financial documents you submit, verifying their accuracy and assessing your credit report. The necessary documents for preapproval may include bank statements, pay stubs, and W-2s.

7. How Much House Can I Comfortably Afford?

Although being prequalified or preapproved can give you an estimate of your maximum budget for purchasing a home, it does not necessarily mean you should begin searching for homes at the highest end of your affordability range.

It is important to avoid overspending on your monthly mortgage payment, as it can limit your ability to save for unexpected expenses and emergencies. In addition to managing unforeseen costs, it is essential to leave some room in your budget for things that bring joy to your life. This could include setting aside money for occasional trips or treating yourself to dinner out with friends once a week.

Your mortgage preapproval amount can serve as a starting point for your budget, but it shouldn’t be the only factor you consider. Before house-hunting, carefully assess your homeowner’s budget to accurately determine a monthly mortgage payment that you can comfortably manage.

In addition, it is recommended to set aside 1% – 2% of the home’s purchase price each year for maintenance expenses. It is wise to budget no more than 33% of your monthly income towards housing costs. Going beyond this amount may result in overstretching your financial resources.

8. How Much Do I Need For A Down Payment?

There are two components to consider: the mandatory savings and the optimal down payment for your specific circumstances.

Are you eligible for a USDA or VA loan? If so, you may not have to worry about making a down payment. For an FHA loan, the minimum down payment is 3.5%, while conventional loans typically require a 3% down payment. However, it is worth considering a larger down payment if it is within your means, as there are numerous benefits to doing so.

By making a 20% down payment on a conventional loan, you can successfully waive the need for private mortgage insurance (PMI). However, if you do end up paying PMI, you have the option to request its cancellation once you have attained 20% equity in your home.

In contrast, with an FHA loan, you will be required to pay mortgage insurance premiums (MIPs) as long as the loan is active, if your down payment is less than 10%. However, if you can make a down payment of 10% or more, you can have the MIP removed after 11 years.

The interest rate you receive for your mortgage is influenced by both your median FICO® Score and the size of your down payment. Therefore, a larger down payment can lead to a lower rate. To secure a favorable mortgage interest rate, it is recommended to put down as much as you can comfortably afford without sacrificing other financial objectives. Additionally, a larger down payment means you will have more equity in your home, providing a sense of security and potentially leading to better loan terms.

9. Is There Help Available For Home Buyers?

Looking to purchase a new home? We understand it can be quite costly. But don’t worry, there are options out there to help first-time and low- to moderate-income home buyers make their homeownership dreams a reality. The Department of Housing and Urban Development (HUD) provides a comprehensive list of state and local home-buying programs that could be of great value to you. These programs typically offer assistance to first-time buyers or aid with down payments.

If you are eligible for down payment assistance, inquire with your lender about their collaboration with the assistance program. In case the assistance involves a secondary mortgage, ensure that your lender is open to accepting this form of home-buying aid.

10. What Will My Interest And Annual Percentage Rate Be?

It is important to note that two rates are typically displayed. The first is the base interest rate, which is the rate charged for the mortgage. The second rate is known as the annual percentage rate (APR).

One important aspect to understand is that mortgage lenders have various ways of structuring the charges included in a loan. These charges can include upfront fees or they can be rolled into the base interest rate. Looking at the Annual Percentage Rate (APR) will take into account both the interest rate and associated mortgage fees. Keep in mind that the APR is typically higher than the interest rate as it considers the base interest rate and closing costs associated with the loan.

11. How Much Will The Loan Cost Me?

One of the outcomes of the 2008 financial crisis was a requirement that borrowers receive full disclosure of all the costs included in a consumer loan.

Loan Estimate

A Loan Estimate is a comprehensive overview of the expenses involved in your loan, encompassing the closing costs. Additionally, the Loan Estimate will outline the fundamental terms of the mortgage.

As a borrower, it is within your rights to receive an estimate from lenders within 3 business days of submitting your mortgage application. In the event of any significant changes that may impact your mortgage expenses, the lender is required by law to provide you with a new Loan Estimate.

Closing Disclosure

As we get closer to closing on your mortgage, we want to make sure you are fully informed about all of the costs involved. That’s why you can expect to receive a thorough Closing Disclosure at least 3 business days before the finalization of your mortgage. This document will provide a detailed breakdown of all the expenses you can expect to pay at closing.

Gone are the days when home buyers would receive this important information on the day of closing, leaving little time to review, comprehend, or contest any charges. With the current regulations, your lender is required to give you ample time – 3 business days to be exact – to carefully examine the charges and address any last-minute concerns.

Don’t hesitate to reach out to your lender with any questions or uncertainties, we are here to help!

12. What Happens After My Offer Is Accepted?

Underwriting involves verifying the accuracy of all the financial information you have provided and ensuring that you meet the requirements for the loan. Furthermore, the underwriter will assess the appraisal of the property. This is to ensure that the value of the home closely aligns with its purchase price, preventing the lender from overvaluing the property and the buyer from paying more than its appraised value.

Ask the lender about the most effective means of communication during the underwriting process. Seek their advice on the optimal approach for submitting necessary paperwork or responses, as well as the expected timeline for updates after completing all requirements.

13. What Should I Know About the Appraisal Process?

After the seller accepts your purchase offer, both you and the house you are hoping to own must undergo a vetting process. You will be assessed to determine your financial capability to afford the loan, while the house will be appraised to ensure that you are not overpaying for it.

If you opt for a government-backed loan, it is important to understand that the same guidelines used for FHA appraisals also apply to VA and USDA loans. This includes a health and safety component, which may require a more comprehensive appraisal process.

14. What Happens If My Appraisal Comes In Low?

It’s important to understand what your mortgage lender may do if the appraisal comes back too low.

A low appraisal can affect how much a lender will lend and how much you’ll pay out of pocket.

  • For example, if the home you want is $200,000 but appraised at $170,000, your mortgage lender will only lend the appraised amount. You’ll have to come up with the extra $30,000 on top of your down payment.

Your other option is to try to renegotiate the purchase price with the seller or walk away. If you have an appraisal contingency, you can get your earnest money deposit back.

15. What Is Your Average Loan Processing Time?

We recommend asking your local lender what their average loan processing time is. Refinances may close a little quicker because an appraisal may not be required, and there’s no home inspection.

Processing time can be a crucial factor when buying a home because sellers will likely be on the lookout for a buyer who can get their financing squared away fast so they can move on to the next chapter of their lives.

16. What Happens At Closing?

At closing, you’ll sign two crucial documents.

The first is the promissory note, sometimes called the mortgage note. It’s your written promise to pay back the loan. The promissory note details the repayment process, specifying your monthly mortgage payment and the length of the loan’s term.

You also sign the mortgage agreement. Although we use the term “mortgage” to refer to the home loan, legally, the term “mortgage” refers to the security instrument that places a mortgage lien on the home.

The mortgage agreement includes the options your lender can exercise if you default on your loan. Typically, a lender can reclaim the house if you default on your mortgage payments. However, once your mortgage is paid off, the lender will no longer be able to take possession of your home.

17. How Will I Pay My Closing Costs?

In the days leading up to closing, you can expect to receive multiple communications from your lender, real estate agent, and attorney. One important document you will receive is the Closing Disclosure, which will detail and add up the total amount of closing costs you will need to pay.

It is crucial to be cautious about transferring any money before the closing. Unfortunately, some scammers are aware that you have a significant amount of funds in your checking account and are eagerly waiting for instructions on what to do next. They may send you seemingly legitimate instructions, but these could be a ploy to trick you into sending your money to their account. It is important to be vigilant and avoid falling prey to wire fraud.

18. What Do I Need To Bring To The Closing Table?

Being prepared and having everything you need for closing is important. Ask your local lender about what you’ll need to bring to the closing table.

19. What Will My Monthly Mortgage Payment Include?

You can remember the components of a mortgage payment with the acronym PITI: principal, interest, taxes, and homeowners insurance.

The makeup of a monthly mortgage payment will differ among borrowers depending on whether they have an escrow account for their property taxes and homeowners insurance. Most lenders require escrow, especially if you made a down payment that’s less than 20%. You’ll also need to pay mortgage insurance if your down payment is less than 20%.

At a minimum, every mortgage payment includes principal – the amount you borrowed and pay down every month – and interest.

If you have an escrow account, your mortgage payment will also include your property taxes and homeowners insurance, each divided over 12 months. If you have to pay mortgage insurance, your payments will be handled the same way.

If the home is located within a homeowners association (HOA), you will either pay your dues annually or every month. While your HOA dues are paid separately from your mortgage, your lender will factor your dues into your debt-to-income ratio to help confirm your ability to comfortably afford your mortgage and your other bills.

20. Will You Sell My Loan?

The answer to this question is probably “yes.” The vast majority of mortgages are bought by major mortgage investors, like Fannie Mae, Freddie Mac, FHA, etc.

If you ever think you might have trouble making a payment, your loan servicer is the one to call. They can go over pre-foreclosure options, like forbearance, for potential relief and help you look for ways to stay in your home or gracefully exit.

21. What Will I Get Charged For Loan Servicing?

Servicing is the process of collecting and processing your payments and handling your escrow account after your loan closes. Here’s what you’ll need to ask:

  • It’s important to ask your mortgage lender about loan servicing fees.
  • Ask if there is a mortgage prepayment penalty.
  • Ask if you’ll be charged if you change your payment method or its frequency.
  • And ask if you should anticipate late charges if you miss a payment deadline.

22. How Often Will You Communicate After I Close?

Having effective communication with your lender throughout the mortgage process is important, but does your prospective mortgage lender communicate after the loan has closed?

This may not seem important, but asking if your lender communicates after closing can benefit you in the long run.

Our local lenders and servicing team sends out valuable homeowner tips and information to help you manage your mortgage. They’ll also check in with you every so often to answer any questions you might have and to see if your current mortgage is still serving your financial goals.

Stay informed in
our Learning Center

Visit Learning Center

Possibility starts here.
Get approved for your mortgage.

It may be hard to believe, but in just a few clicks, a new home or mortgage savings could be yours. Whether you’re looking for a rate that works for you or searching for your local branch, there’s no commitment. Get started today!