by Daniel Kurt
October 14, 2020
by Daniel Kurt
October 14, 2020
My wife and I are buying our first home. Well, we've been hoping to buy our first home for nearly a year and a half. We've come close at times, but some places didn't feel right. The one thing that makes the process difficult is understanding mortgage rates, the different types of home loans, being pre-qualified versus pre-approved. There's a lot of language and insider terms and it's pretty frustrating. I was hoping you could offer some questions to ask a mortgage lender so I don't feel like a dimwit during the process. Thanks, Marcus
Let's be honest. Unless you eat, sleep and breathe financial stuff, home buying is complicated. That's especially true of the financing part, where a lot of folks feel totally overwhelmed by the complexity of the lending industry and its bewildering jargon.
In terms of knowing what to questions to throw the loan officer's way, I thought I'd reach out to Colin Robertson, founder of the blog The Truth About Mortgage and a former lender himself. Here's what he said should be on everyone's list.
It's easy to focus on what your actual mortgage payment will be each month. But keep in mind that you'll also have to pony up for things like property taxes, homeowner's insurance, and, in some cases, HOA fees. If you put down less than 20 percent on the home, you may also have to pay mortgage insurance premiums, which protect the lender against the risk that you'll default on the loan. These all add up.
"Know the full amount you'll need to pay each month to ensure the home will be affordable and not get in the way of your other expenses and savings goals," says Robertson.
Snagging a low interest mortgage rate helps reduce your monthly payment, giving you a little extra wiggle room in your budget. That means shopping around for lenders – and negotiating.
But Robertson says you should also ask how long the rate is good for (the lock period) and ensure it's actually locked once you're happy with the quote you receive. That way it won't change, even if rates rise in the meantime.
Expect to pay a host of charges when you take out a mortgage, including title fees, loan processing fees, underwriting fees, and loan origination fees. Some of these can be whittled down with a little negotiation. The loan origination fee, for example, is usually a percentage of the home sale price. For more expensive homes, the lender may be willing to take a smaller slice of the pie, knowing that they'll still make a respectable profit.
By law, the lender has to provide the "APR," a version of the interest rate that includes some or all of these fees. Be sure to ask what's included in their figure. That way, you can compare the APR for different loan options, accounting for any fees that are not rolled into it.
Also check to see whether the lender is charging you any prepaid interest, also known as "points." Each point is equal to one percent of the home price. So paying two points on a $300,000 home means you have to fork over $6,000 at closing. Paying points will typically lower your interest rate, which is one reason it may look like you're getting a great deal. Unless you take them into consideration, you're not really doing an apples-to-apples comparison of different lenders.
Keep in mind that if you plan to stay in the home a long time, paying finance charges on the front-end may not be a bad idea. Otherwise, it's probably better to steer clear.
While most lenders will assume you want a 30-year fixed, a good one should take the time to go over a number of different loan options.
"It might turn out that a cheaper 5-year ARM is a better alternative if you don't plan on keeping the home for very long, or if you expect to refinance in the near future once your financial situation improves," says Robertson. "Or that a 15-year fixed is totally manageable and a better value for you as a homeowner."
The bottom line: there's no one-size-fits-all solution to mortgages. Tell the lender about your plans and have them give you the pros and cons of different products.
A good lender will be able to provide with a variety of down payment options, depending on how much cash you have to put down. Before picking a mortgage, ask exactly how much you'll need to pay upfront, including closing costs like appraisal and title fees, property taxes and points, if there are any.
Are you required to pay mortgage insurance based on your low down payment? If so, make sure you know how much that will tack on to your monthly bill – and potentially your closing costs, too.
The lender offers you a great rate with a down payment you can actually afford. Everything's looking great. The last thing you want is to find out that the bank or mortgage company decided to back away from your loan at the last minute. And yet it happens.
Robertson recommends asking why other loans tend to fail in order to avoid the same misfortune. "They might tell you because of credit, or a new job, or a lack of seasoned assets," he says. "Knowing why mortgages don't make it to the finish line could be key to getting yours to the funding table."
When it comes to home buying, timing is of the essence. You'll want to ensure that the lender you choose can not only close your loan, but do so by the closing date specified in the purchase agreement.
That might mean seeking out a mortgage originator with a record of efficiency. "Some lenders specialize in refinances, and may not be the best fit for a time-sensitive home purchase," says Robertson.
As with any huge purchase, you definitely want to shop around. Bounce your list of questions off multiple lenders so you can figure out who's going to give you the best overall value, not just the lowest advertised rate. Considering how much money and heartache you could be saving, you'll be glad you did a little homework going into the process.
Are you looking to buy a house? Before you start going on showings, contact the loan officers at Wintrust Mortgage to discuss your options.