16 Questions to Ask Your Mortgage Lender

1. What types of mortgage loans do you offer?

It may come as a surprise to some buyers that there are many types of mortgages. Most buyers are familiar with the most common type — conventional mortgages — but there may be others that better suit your needs.

Lenders can usually help you navigate and apply for the following standard loan types:

→  Conventional loans: There are several types of conventional loans, but because they aren’t backed by any government agency, they’re tougher to qualify for. Applicants typically need credit scores of 620 or higher and a down payment of at least 20% to avoid paying private mortgage insurance (PMI).

Update to conventional rate fees in 2023: Look out for the   sign below for updates that may affect the rate you’re offered on a conventional loan after May 1, 2023. Fannie Mae and Freddie Mac are changing the fees lenders use to calculate your rate based on a variety of factors.

→  FHA loans: Insured by the Federal Housing Administration (FHA), borrowers can qualify for these loans with as little as a 3.5% down payment and credit scores as low as 580 — however, you’ll have to pay two different types of FHA mortgage insurance, regardless of your down payment amount.

→  VA loans: Military members may qualify for a VA loan if they served long enough to earn VA entitlement. No down payment or mortgage insurance is required, and there’s no set minimum credit score to qualify. However, VA borrowers typically pay a VA funding fee between 0.5% and 3.6%, unless they’re exempt because of a service-related disability.

→  USDA loans: The U.S. Department of Agriculture (USDA) offers home loans to help low- to moderate-income families purchase homes in rural areas. No down payment is required and loan terms can extend past 30 years. Credit scores of roughly 640 are required, though other qualifying factors may be considered in lieu of credit. Strict income limits apply.

2. What repayment terms do you offer?

The word “term” refers to the length of time you have to repay a loan, while “terms” describes the rates and fees tied to the loan you’re applying for. In both cases, the repayment terms will have a major impact on the cost of your loan repayment, so it’s crucial to know what the lender offers upfront:

→  Fixed-rate mortgage: This type of mortgage has a set interest rate that’s determined when you take out your loan. The rate and principal and interest payment won’t change for the duration of the loan.

→  Adjustable-rate mortgage (ARM): The interest rate on an ARM loan can change over time at set intervals — anywhere from one month to several years — and then the rate adjusts on a recurring basis. ARMs often start at a lower initial rate than fixed-rate loans, but once the low-rate period ends, the rate adjusts based on the terms of your ARM (generally every six months or annually).

→  15-year vs. 30-year mortgage: A 30-year repayment term is common for most buyers because it provides the lowest monthly payment. However, a 15-year repayment term can be a good option for those who are able to afford a higher monthly payment. A shorter term can save you hundreds of thousands of dollars over the life of the loan compared to a 30-year term.

3. What type of lender are you?

You’ll want to ask this question if you’re not applying for a mortgage with your local bank. Most lenders fall under three categories: mortgage bankers, mortgage brokers and retail banks.

Mortgage bankers handle the processing of your loan from application to funding, which means they have an in-house staff that works on your loan at every step. They are often approved to offer down payment assistance programs and you’ll make your payment to them in most cases after your loan closes.

Mortgage brokers are middlemen between you and a variety of lenders. They usually give you access to more loan products than a single mortgage banker can offer. However, they don’t actually approve your loan and you won’t make payments to them, as your loan actually closes in the name of the mortgage bank they send your application to.

Institutional banks are usually standard brick-and-mortar neighborhood banks, where you might have a checking and savings account, safety deposit box and access to credit card and personal loan products. The bottom line: The money you need for the mortgage is under their roof, along with access to other financial products.

4. Do you charge any upfront or nonrefundable fees?

This should always be one of your top five questions. While it’s not uncommon to pay a fee for a credit report if you’re getting a mortgage preapproval, you should never be charged a fee to have a loan estimate prepared or get guidance on the best loan for your situation.

Although your loan estimate is an important document for you to review — it contains important details like the repayment term, interest rate and closing costs — it may not indicate whether you have to pay any of the listed fees in advance.

Don’t be hesitant to review the document with your loan officer and confirm you have a thorough understanding of which terms you’ve been approved for.

5. What are my estimated closing costs?

In addition to a down payment, closing costs are the other major expense involved in buying a home. Closing costs typically range between 2% and 6% of the loan amount, and they cover a number of fees involved with taking out your loan, including:

→  Origination fees
→  Application and underwriting fees
→  Appraisals and inspections
→  Title fees and insurance
→  Recording fees

In some cases, you may be able to negotiate with your lender to reduce your closing costs, or negotiate to have the seller cover them.

6. What will my interest rate and APR be?

This information is also featured on your loan estimate. Your interest rates and annual percentage rate (APR) both refer to amounts you’ll be charged for owing a debt to your lender. These figures are based on some of the same information, though APR is a much more inclusive figure, and will more accurately represent the cost to repay your loan. Here’s the difference:

→  Interest rate: The rate a lender charges you for owing money, typically calculated as a percentage of your remaining balance each month.

→  APR: The annual cost of owing money to your lender, including your interest rate, plus all of the lender’s other fees, including closing costs and origination fees.

7. Do you offer preapproval or prequalification?

Many financial professionals use the terms preapproval and prequalification interchangeably, including loan officers. But there is a significant difference between these two terms:

→  Loan prequalification is based on the unverified information you provide to a lender, including your own estimate of your income, credit score and other qualifications.

→  Loan preapproval is a more involved process in which the lender verifies income, down payment funds and credit history with pay stubs, W-2s, bank statements and a full credit report.

One way to keep the two straight is to remember: Prequalification is based on a conversation, while preapproval is based on confirmation. The bottom line: A preapproval carries more weight because the information on your application is verified.

8. What is the minimum required down payment?

Homebuyers are often surprised to learn how many home loan programs only require low or no down payments. Conventional programs like the Fannie Mae HomeReady® loan only require a 3% down payment, while FHA loans only require 3.5% down. And if you’re eligible for VA or USDA financing, you may skip a down payment altogether.

Unfortunately, some consumers still believe the myth that you need a 20% down payment to buy a home, and delay their homebuying plans while they save up. That said, a larger down payment will result in a lower monthly payment.

9. Will I have to pay mortgage insurance? Are there any options where I can avoid it?

There are several different types of mortgage insurance that a lender may require you to buy. One way to avoid or reduce your insurance cost is to explore alternative loan types. You may also be able to reduce certain costs by improving your credit scores or reducing the amount of debt you carry before applying for your mortgage.

Your lender may even offer a piggyback loan, which may help you dodge PMI if you can come up with a 10% down payment on a conventional mortgage. However, there’s no way to avoid FHA mortgage insurance unless you choose a different loan type — it’s required regardless of your down payment amount.

10. Do you offer any down payment assistance programs?

Depending on where you live and how much you earn, you may be able to qualify for assistance to cover some or all of your down payment. State housing agencies often offer first-time homebuyer programs with aid including government grants, citywide homebuyer programs or assistance through your employer, and you may even be able to use multiple programs together.

Ask lenders which down payment assistance (DPA) programs they work with, and if you qualify based on your income and where you’re buying. Still, not all lenders are approved to offer DPA loans, so you may need to locate a list of approved lenders if you’re interested in a particular program.

11. What credit and income qualifications do I need?

Credit scores and income both play a role in what you can qualify for.

  You’ll need a higher credit score and lower debt-to-income (DTI) ratio if you’re applying for a conventional loan after May 1, 2023. The old 740 credit score threshold has been raised to 780 for the best possible rates.

Not every lender has the same requirements, but in general, this is what lenders will look for to approve your mortgage application:

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→  Credit score requirement:   Most lenders look for scores of 620 or higher. Lower scores may qualify, but higher scores will result in more mortgage approvals and better terms.

  One good reason to keep your DTI ratio at 40% or less on a conventional loan: A fee will be assessed for a DTI ratio above that percentage after Aug. 1, 2023.

12. Do you charge mortgage points?

Some lenders allow you to reduce your interest rate by buying “points” — for every mortgage point you buy, you’ll reduce your interest rate by up to 0.25%.

Each lender has their own way of calculating the cost of a point, so it’s important to get rate quotes, compare lenders’ pricing structures and calculate whether buying points will actually save you money on your overall loan repayment.

13. Do you offer an interest rate lock, and what is the fee?

If you get approved for a great, low rate from one of your potential lenders, you may want to lock in that rate. Mortgage rates fluctuate daily, and having your loan unlocked (known as “floating” in lender lingo) could cause your rate to change significantly before you close on your loan.

You won’t generally have to pay a rate lock fee unless you’re locking in your loan for longer than 60 days.

14. Is there a prepayment penalty?

It’s very rare, but some lenders may charge a prepayment penalty if you pay off all or part of your loan balance within a certain time period. You can find this information on the first page of your loan estimate or, prior to closing, on your closing disclosure.

Paying off your mortgage early is one of the best ways you can reduce the amount of debt you owe. Interest is charged based on the remaining balance that you have each month, and making early payments reduces your total interest charges. One tip: If you do make early payments, make sure to stipulate that the money is meant to go toward your principal, not toward interest.

15. How long does the process take, from application to closing?

Time frames for processing a loan can vary from one lender to the next, and the timeline for government-backed loans can be on the longer side. As such, it’s important to ask the lender about this up front.

For a conventional loan, it could take around 43 days to complete the purchase process from application to closing. Refinances take an extra day, so plan on 45 days if you want to replace your current loan with a new one. During that time, you’ll want to make sure you understand how to receive updates from the lender and submit any documents they may request — that way, you don’t unintentionally slow down the process.

16. Will you service my loan?

The company that lends you the mortgage may not be the same company you deal with down the line. That’s because some lenders sell mortgages to other companies that “service” the loans, handling things like billing and account management.

Ask your loan officer if your mortgage will be transferred to a loan servicer after closing — that way, you can be prepared to deal with a different agency. You’ll also receive notices from both the lender and the servicer if your loan is later transferred.