1. What Is the Rate and APR?
Even if the lender has already quoted you a rate, your first point of business should be to find out the exact interest rate and annual percentage rate (APR) for your loan. The APR takes into account the interest rate plus other fees and loan-related charges, and therefore gives you something which you can use to compare between lenders. If your lender has offered you an adjustable rate, make sure to ask about the rate cap (the highest possible rate the lender can charge), the frequency at which interest rates will change, and the maximum annual adjustment.
2. What Is the Minimum Down Payment for This Type of Loan?
Each lender will require you to pay a certain portion of the loan upfront, and that amount can vary significantly. If you have good credit, you might be able to secure a mortgage loan with a down payment of as low as 3% (for example, for a $200,000 loan, you will be asked to make a down payment of just $6,000). If your credit isn’t great, your lender might ask you to make a down payment of 20% or more. Given that the down payment is a compulsory part of your loan, it’s important to know exactly what the lender’s expectations are before continuing with the application process.
3. What Are the Discount Points and Origination Fees?
Discount points (or simply “points”) are prepaid interest which you pay to reduce the interest rate on your loan, and, by doing so, reduce your monthly payments. The more points you pay in advance, the less interest you will pay over the term of your mortgage. Another benefit of points is that they are tax-deductible. Origination points are another type of upfront payment, although they won’t save you any money. Put simply, origination points are a type of fee you pay a lender in return for the time they spend evaluating and processing your loan.
4. What Are the Closing Costs?
With all the focus on interest rate, APR and down payment, it’s easy to forget the closing costs. These are fees you’ll need to pay after the lender approves your mortgage, and they include direct and third-party fees for things like: appraisal, surveying, credit checks, title policy, taxes, and recording fees.
5. Are There Prepayment Penalties?
Some lenders charge a penalty fee if a borrower prepays all or a portion of the mortgage within a certain time period shorter than the term of the loan. For example, if you are approved for a 15-year mortgage but complete all your payments within 10 years, the lender might charge you a penalty. Penalties are prohibited in some states and vary between lenders in states where they are permitted. Your lender should be able to tell you during your application what penalties it will impose for prepayment. And remember that penalties aren’t always set in stone; for example, your lender might offer you a lower interest rate if you select a loan that comes with a penalty.
6. What Are the Qualifying Guidelines?
Each type of loan will have qualifying guidelines based on things like credit worthiness, employment history, and level of income and assets. Some first-time homebuyer programs and government-backed programs, such as FHA loans and VA loans, have flexible requirements. Other loans, such as jumbo loans for loans of around $500,000 or more, have stricter requirements.
7. What Documents Will I Need to Provide?
You can be sure that your lender will ask you to provide the following: personal information, such as social security number and driver’s license or state ID card; proof of income, through pay stubs and income tax filings; bank or investment statements; and other financial information. Forgetting to file a document can lead to delays in your mortgage application. Therefore, it’s important to establish precisely which documentation your lender needs from you in order to process your application, and to take care to submit everything in time. As a general rule, the more documentation you provide, the better your chance of being approved and of being offered a good rate.
8. Can I Lock in an Interest Rate?
Interest rates can change daily, and therefore if you believe that rates are likely to move up, you can ask your lender if they are able to lock in the rate they offered you. Some (but not all) lenders will charge a fee for locking in a rate. You may want to ask your lender the following questions: Do they charge a fee? Does the lock apply to all loan costs or only the rate? And when will the lock expire?
9. How Long Will It Take to Process My Application?
Depending on your lender, it can take anywhere from a couple of weeks to a couple of months for your application to be processed and approved. In addition to asking how long it will take to process your mortgage application, you might also want to ask whether there are any factors that might delay approval of your loan. As a general rule, it’s a bad idea to change jobs or anything else to do with your employment or finances while your application is being processed. After all, if you’ve given your lender documentation in regards to a certain employer and certain income level, and these details change during your application – you’ll most likely have to submit new documentation and wait for the lender to get around to looking at it.
10. Do You Guarantee On-Time Closings?
If your lender doesn’t close on time, you may find yourself unable to close escrow or having to pay extra costs for things like setting a new removal date or finding a short-term rental to live in. In order to plan ahead, you should ask your lender if they can guarantee a closing date. Some lenders will even offer compensation if they can’t close by an agreed date.
Once you know what to ask your lender and the answers that will work for you, visit these in-depth reviews of the leading mortgage loan companies for more information.