How To Choose A Mortgage Lender: 14 Questions To Ask
Hanna Kielar12-minute read
December 15, 2021
If you’re a first-time home buyer, you might be wondering what questions you should ask when talking to a mortgage lender. We’ve gathered 14 essential questions, plus a few others to ask your mortgage lender or broker before you sign on your home loan so that you can rest easy knowing you’re prepared for the road ahead.
1. What Will My Fees And Payments Be?
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’ll review your income, assets and credit.
After analyzing your financials, your mortgage 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. Which Types Of Mortgage Terms Do You Offer?
There isn’t a single type of mortgage loan that’s superior to others or right for everyone. Because multiple programs may be appropriate for you, it’s crucial that you discuss your options with your mortgage lender. Make sure to ask your lender about the following types of loans:
Conventional Fixed-Rate Mortgages
A 30-year conventional fixed-rate loan is the most common type of mortgage loan. Because the term is so long, monthly payments are lower, and the fact that rates are fixed means that your interest rate will remain the same throughout the life of the loan. However, the longer the term of your mortgage the more interest you’ll pay on the loan. 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.
Borrowers who have lower credit scores, incomes and savings are more likely to qualify for Federal Housing Administration (FHA). FHA loans have lower credit score minimums and down payment requirements than most conventional loans. Yet, FHA loans do come with restrictions, and there are limits to how much money you can borrow. Additionally, you’ll be required to pay a mortgage insurance premium.
VA loans are backed by the U.S. Department of Veteran Affairs, so they’re only available to veterans, active servicemembers and their 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 Qualifications Do You Require?
A credit score is a three-digit number that indicates to 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 its own standards for what they consider an acceptable credit score. That’s why it’s vital that you ask your mortgage lender about credit qualifications early in the process. If you have a good credit score, you also may want to ask your lender if you qualify for any special offers or lower interest rates.
4. Do You Offer Mortgage Points?
Mortgage points (sometimes called “discount points”) are an optional fee that 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 they can save tens of thousands of dollars over their loan term.
Be sure to ask your lender when it makes sense to buy mortgage points, 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 often required for government-backed loans and optional for conventional loans.
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. Make sure you also find out how much money you’ll need to hold in escrow.
6. What Is The Interest Rate And APR?
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 (APR), because 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. Do You Offer A Mortgage Rate Lock?
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. Also, 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. Is It Possible To Buy A House Without My Spouse?
Buying a home without your spouse is possible, but 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 will allow you to add your spouse’s name to the deed later if you choose.
9. Which Type of Mortgage Do You Offer?
There are two major categories of mortgage loans: conventional loans and government-backed loans.
- 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 have lower down payment and credit requirements. They’re insured by the federal government, which means that if you have trouble keeping up with your monthly payments, the government will help you to try to prevent foreclosure. 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 mortgage lender which types of loans they offer. They should be able to explain the different requirements for each government-backed loan.
10. Are There Income Requirements For Buying A House?
There is no set dollar amount of income you need to have to buy a home. However, your income does play a significant role in how much home you can afford. Lenders look at all 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 You Offer Preapproval Or Prequalification?
Preapproval and prequalification are two processes that are often confused with each other. Let’s break each down:
- Prequalification: During a prequalification, a lender asks you questions about your income, credit score and assets to give you an estimate of how large of a loan you can get. However, they don’t verify any of this information, which means that the number you get during prequalification can easily change if you report incorrect information.
- Preapproval: During a preapproval, your lender verifies your income, assets and credit information by requesting official documents, including your W-2s, bank statements and tax returns. This allows your lender to give you an accurate mortgage loan figure.
Ask your lender about the difference between prequalification and preapproval, because it often doesn’t mean the same thing. 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. What’s The Down Payment Needed To Buy A House?
You might assume that you need a 20% down payment to buy a house. However, 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), which protects your lender in the instance that 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 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 your loan had you continued to make monthly payments through the end of your loan term. For example, Rocket Mortgage has no prepayment penalties.
There are different types of prepayment penalties: soft and hard. Let’s break them down:
- Soft prepayment penalty: Borrowers can sell their homes without being penalized, but are charged if they refinance or pay off the mortgage in one lump sum.
- Hard prepayment penalty: Borrowers are required to pay fees regardless of whether they sell their home, refinance it or make a large payment to pay it off.
If your mortgage lender charges prepayment penalties, ask how much they cost. How prepayment penalties are charged varies among lenders. They can be very expensive and can make early payoffs costly.
Other Frequently Asked Questions About Mortgage Lenders
The 14 questions we just went over can serve as your starting point when it comes to choosing a mortgage lender. The next few questions aren’t necessarily as important, but they’re good to have when you’re on your home buying journey.
Do you need mortgage insurance?
Mortgage insurance is typically required for most loans with a down payment of less than 20%. The type of insurance varies by loan, and how much you pay can vary by lender. PMI, for example, can cost 0.5% - 1% annually.
How do you find a mortgage lender?
Although it may be easy to find a lender, you should get one when you’re ready and prepared. Here are a few steps you should take when shopping around for a mortgage lender:
- Strengthen your credit
- Determine your budget
- Understand your mortgage options
- Compare rates
- Get preapproved
- Real the fine print
What is a mortgage broker vs. a mortgage lender?
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 brokers 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. Here are some important questions to ask a mortgage broker:
- 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 me the right loan type and lender for my 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?
The Bottom Line: Prepare Questions Before Choosing A Mortgage Lender
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.
In the meantime, you can get started today by connecting with one of our mortgage specialists. They’re ready to answer your questions and help you find the right loan.
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