*As of April 20, 2020, Quicken Loans® isn’t offering conventional adjustable rate mortgages (ARMs).
Buying a home can be a stressful experience, especially if you don’t know what to expect. You want to ensure that you make informed decisions. But, doing so can be challenging when you aren’t even sure of what the right questions are to ask your mortgage lender.
Don’t worry, we’ve gathered the 14 essential mortgage questions to ask your lender or broker before you sign on your home loan. So, you can rest easy knowing you’re prepared for the road ahead.
1. How Do I Determine How Much Home I Can Afford?
As a home buyer, one of the first things you need to think about is your budget. Knowing how much home you can afford can help you narrow your home search and keep your expectations realistic. When you ask your mortgage lender how much home you can afford, they will review your income, assets and credit.
After analyzing your financials, your lender will provide you with the potential cost of your monthly payments and break down the expenses involved. You’ll learn about your interest rate, closing costs and property taxes, as well as additional fees that are factored into your payments. Furthermore, your mortgage lender will help you figure out how much of a down payment you’ll need.
If you’re looking for an easy way to find out for yourself, check out the Rocket Mortgage® mortgage calculator. It will help you estimate how much house you can afford by determining the cost of your monthly payments. The more you play around with the mortgage calculator, the better your understanding of your budget will be.
2. What Type Of Loan Is Right For Me?
There is no one type of mortgage loan that’s superior to others. The best type of mortgage will depend on your situation entirely. Since multiple programs may be appropriate for you, it’s crucial that you discuss your options with your mortgage lender in detail. Make sure that you ask your lender about the following types of loans:
- Conventional Fixed-Rate Mortgages: 30-year conventional fixed-rate loans are the most common. Because the term is so long, monthly payments are lower. And the fact that they are fixed-rate means that your interest rate will remain the same throughout the life of your loan. However, you will end up paying more interest on your loan, the longer the term of your mortgage. So, if you can afford higher monthly payments, it may be worth choosing a 15- or 20-year term.
- Adjustable Rate Mortgages: Unlike fixed-rate mortgages, the interest rates of ARMs change over the life of the loan. If you choose to obtain an adjustable rate mortgage, your interest rate will increase or decrease as the market fluctuates after the fixed period expires. This means that your mortgage payments can be different each month, which can make budgeting a bit challenging. The good news is that there are caps on this loan type, which limit the extent to which your interest rate and monthly payment can increase both periodically and over the life of the loan.
- FHA Loans: Borrowers who have lower credit scores, incomes and savings are more likely to qualify for these loans because they are backed by the Federal Housing Administration. FHA loans have lower credit score minimums and down payment requirements than most conventional loans. Yet, FHA loans do come with restrictions. There are limits to how much money you can borrow. And, you’ll be required to pay a mortgage insurance premium.
- VA Loans: VA loans are backed by the U.S. Department of Veteran Affairs, so they’re only offered to veterans, active service members and surviving spouses. VA loans tend to have lower interest rates and don’t require down payments. However, there are some restrictions and fees involved in these mortgages. Those eligible should expect to pay funding fees and have reserve funds available.
3. What Credit Score Do I Need To Qualify For A Mortgage?
Your credit score is a three-digit number that tells lenders how likely you are to be able to pay back the money you borrow. The higher your credit score, the easier it is to get a mortgage loan. However, you can still find ways to buy a home if you have bad credit – you just may have to pay more for your loan.
Each lender sets their own standards when it comes to what they consider an acceptable credit score. That’s why it’s vital that you ask your mortgage lender about credit qualifications early on in the process.
If you have a good credit score, you may also want to ask your lender if you qualify for any special offers or lower interest rates.
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4. Do You Offer Mortgage Points?
Mortgage points (sometimes called “discount points”) are an optional fee you can pay at closing to “buy” a lower interest rate and save on the overall cost of the mortgage loan. The cost of each mortgage point is equal to 1% of your total loan.
For example, if you take out a $150,000 loan, you may have the option to buy mortgage points for $1,500 each at closing. Mortgage points are most beneficial for home buyers who plan on living in their home for a long time because you can save tens of thousands of dollars over your loan term.
Ask your mortgage lender whether or not they offer mortgage points. If so, ask when it makes sense to buy them. Also, ask how much each point will lower your interest rate and what the maximum number of points you can buy is.
5. Do I Need An Escrow Account?
An escrow account is a type of neutral savings account that holds money for prepaid property taxes and insurance premiums. Escrow accounts, which are usually established during closing, are not required for all loan programs. They are often required for government-backed loans, but they tend to be optional for conventional loans – though some lenders do require them.
Ask your lender if you need an escrow account. If you’re required to have one, ask what options you have for paying for shortages and whether you can get a refund if you overpay. And, make sure you find out how much money you’ll need to hold in escrow.
6. What Is The Interest Rate And The Annual Percentage Rate?
It’s essential that you ask your mortgage lender about your interest rate to find out how much interest you’ll be paying on your loan. Your interest rate is determined by multiple factors, including your credit score, the location of the home you purchase, the size of your down payment and your loan type, term and amount.
However, you should also ask your mortgage lender about the annual percentage rate, as it provides insight into the full cost of borrowing money. The APR includes both the interest rate and the fees that the lender charges to originate the loan.
If you’re planning to obtain an adjustable-rate mortgage, it’s also helpful to ask your mortgage lender about the adjustment frequency. Knowing what your adjustment frequency is will tell you how often you can expect your interest rate (and thus the amount of your monthly payment) to change.
7. What Is A Mortgage Rate Lock And Is It For Me?
A mortgage rate lock is an agreement between you and your lender that says your interest rate will stay the same until closing, regardless of market movements. Rate locks are important because they keep your loan costs predictable. When you get a rate lock, you don’t have to stress about finding a home immediately, because you know that your interest rate won’t increase.
Ask your lender about rate locks and how long they’re valid. Find out about current market rates (are they high or low?) and whether you should lock your rate. Some lenders will drop your interest rate if market rates decrease after you lock your rate, so be sure to check with your mortgage lender.
8. Can I Buy A House Without My Spouse?
Buying a home without your spouse is possible. However, it’s not as easy as applying for a loan and leaving your partner off the paperwork. If you live in a state with a community property statute, you must share ownership of any assets you gain during your marriage with your spouse.
If you live in a common-law state, you can leave your partner’s finances off the paperwork when you buy a home. Certain types of government loans require your lender to consider your partner’s debt and income when you apply for a loan, even in common-law states.
Ask your lender if it’s possible to buy a home without your spouse. Your lender should know whether you live in a community property state or a common-law state. Also, ask about quitclaim deeds, which allow you to add your spouse’s name to the title later on if you choose.
9. Do You Offer Conventional Loans, Government-Backed Loans Or Both?
There are two major categories of mortgage loans: conventional and government-backed. Conventional loans are open to anyone, and lenders can set their own standards when it comes to down payment and credit score requirements. Government-backed loans are insured by the federal government. This means that if you have trouble keeping up with your monthly payments, the government will help you to try to prevent foreclosure.
Government-backed loans are less risky for lenders, so they have lower down payment and credit requirements. However, you need to meet certain standards to qualify for government-backed loans. For example, you need to meet U.S. Armed Forces service requirements to obtain a VA loan, and you must live in a rural area to get a USDA loan.
Not every lender is legally qualified to offer both conventional and government-backed loans. So, ask your lender which types of loans they offer. They should be able to explain the different requirements for each government-backed loan.
10. How Much Income Do I Need To Buy A House?
There is no set dollar amount of income you need to have in order to buy a home. However, your income does play a significant role in how much home you can afford. Lenders look at all of your sources of income when they consider you for a loan, including commissions, military benefits, child support and more.
Ask your lender how much income you need to buy a home and which streams of income they consider when they calculate your total earning power. Finally, ask your lender what documents you need to give them to prove your income, such as W-2s, pay stubs, bank account information and more.
11. Do I Need Preapproval Or Prequalification?
Preapproval and prequalification are two processes that are often confused with one another. During a prequalification, a lender asks you questions about your income, credit score and assets to give you an idea of how large of a loan you can get. However, they don’t verify any of this information. This means that the number you get during prequalification can easily change if you report incorrect information.
Your lender verifies your income, assets and credit information during a preapproval. They ask to view your credit report in order to verify your scores and search for things like bankruptcies or foreclosures. During preapproval, you’ll also need to provide documents like W-2s, bank statements and tax returns to prove your income. This allows your lender to give you the best estimate possible of how much of a loan you can get.
Ask your lender about the difference between prequalification and preapproval, because it often doesn’t mean the same thing from lender to lender. Then, ask which one is right for you. The answer will change depending on how serious you are about buying a home at the time you apply.
12. How Much Of A Down Payment Do I Need For A House?
You might assume you need a 20% down payment to buy a house. This actually isn’t true – in some cases, you can buy a home with as little as 3% down. Certain types of government-backed loans even allow you to get a mortgage with 0% down.
The often-quoted 20% figure has to do with avoiding private mortgage insurance. PMI protects your lender if you default on your loan. You can cancel your PMI on a conventional loan as soon as you build 20% equity in your home, and your lender will automatically cancel PMI as soon as you reach 22% equity in your home.
Check with your lender to find out about how much of a down payment you need to have at closing. Ask about government-backed loans and whether you qualify for a 0% down loan. Finally, ask about PMI requirements and when you can cancel PMI if you’re required to have it.
13. What Will My Closing Costs Be?
Closing costs are processing fees you pay to your lender to close out your loan. Some typical closing costs include appraisal fees, origination fees, attorney fees and title insurance. The specific closing costs you’ll pay depend on where you live, your down payment and the size of your property. Closing costs will usually run 3% – 6% of the total value of your loan.
Ask your lender about the average closing costs in your state. Also, ask what fees and inspections are required by law, which are optional and which services you can choose for yourself.
14. Is There A Prepayment Penalty?
After you start paying off your mortgage, you may find that you have more access to funds than you initially thought and are able to pay off your mortgage early. If you can swing it, this option can save you thousands of dollars in interest. However, not all mortgage lenders allow clients to do so, which is why you should ask your lender ahead of time.
If they do allow you to pay off your loan faster, you should ask whether there are any prepayment penalties. Mortgage lenders often charge these fees to dissuade borrowers from making extra payments on their loans, refinancing their loans at a lower rate or selling their home before the loan is due. Prepayment penalties enable mortgage lenders to recoup some of the money that they would have made off of your loan had you continued to make monthly payments through the end of your loan term.
There are different types of prepayment penalties. With a soft prepayment penalty, borrowers are able to sell their homes without being penalized, but are charged if they refinance. However, with hard prepayment penalties, borrowers are required to pay fees regardless of whether they sell their home or refinance it.
If your mortgage lender charges prepayment penalties, make sure to ask how much they cost. How prepayment penalties are charged varies between lenders. They can be very expensive and make early payoffs unprofitable. Rocket Mortgage® has no prepayment penalties.
Different Questions To Ask A Broker
Before you obtain a loan, you should understand how mortgage lenders and brokers differ, so you know whose assistance you require. A mortgage lender works for a bank or financial institution to determine the qualification of borrowers and provide them with funds. However, a mortgage broker works with borrowers to help them shop around and find the appropriate lender for their circumstances.
Instead of researching different types of loans and lenders independently, mortgage brokers do the work for you. After they find the right loan and lender for your financial situation, they help you gather the information you need to fill out your mortgage application. As a result of the services brokers provide, you pay them a commission, which is a percentage of your ultimate mortgage amount.
Before choosing to work with a mortgage broker, you should understand how they operate. Some mortgage bankers primarily work with specific financial institutions and promote lenders with whom they have long-standing relationships.
Given the differences in their roles, the questions you would ask a mortgage broker are different from those you’d ask a lender. These questions include:
- Why should I work with you instead of going to a lender directly?
- How will you negotiate on my behalf to ensure I get better terms for my mortgage?
- How will you find us the right loan type and lender for our circumstances?
- How much do you charge for your services?
- Are there any specific lenders you work with frequently?
- Would you feel comfortable recommending a lender you don’t typically work with?
- How long will it take to find a lender?
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Asking your lender a handful of questions ahead of time can help make purchasing a home easier and less stressful for you. Make sure you ask your mortgage lender – or broker – plenty of questions about income requirements, the types of loans you qualify for and how much you have to save for a down payment and closing costs.
You’ll also want to ask your lender about their in-house requirements for credit scores, preapprovals, rate locks and escrow accounts. It’s crucial that you know which mortgage questions to ask your lender, so you can get a well-rounded idea of what to expect.
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