Important Questions to Ask Before Committing to a Loan Program

1. What Kind of Loan do I need?

There are several different kinds of mortgage types including fixed-rate, adjustable rate. Federal Housing Administration and even Veteran’s Association are just a few.  Make sure you know what kind of loans your lender can offer and make sure you ask them to explain each type to you in details so you can make an educated decision about which one to choose.

It is important that the lender knows the details about your personal situation before recommending a particular type of loan, otherwise they could be just pushing you into a certain loan program that may benefit them more than you.

Ask them why they think their recommended type of loan will work best for you too.

2. What does my down payment need to be?

The size of your deposit significantly affects what your interest rate and monthly payments will be.  It also determines whether you’ll need to pay mortgage insurance or not.  It is common for lenders to waive the private mortgage insurance if your deposit is 20% or more of the purchase price.  However some loans offered by Veteran’s Association and Federal Housing Administration will allow zero to 3.5% deposit.  In most cases with low deposits you will be required to be covered by mortgage insurance for the life of the loan.  Once your equity reaches 20% be sure to reach out to your lender to renegotiate your loan program and see if they’ll waive the mortgage insurance.

3. What will the monthly payment be?

This will determine what your budget will look like.  Be sure to include things like taxes and insurance in your monthly payment budget.  Also leaving room in the budget for unexpected expenses and future retirement is a wise move.  You’ll need to know what your monthly expenses look like and going into a home purchase with all the facts is important.

4. What are the interest rates and Annual Percentage Rate?

This will depend largely on the size of your loan and your credit history.  Over 20-30 years, the interest can add up to quite a significant amount.  Ask your lender about your interest rate and if it is adjustable, how long will the rate remain fixed.  Also make sure you know about the maximum annual adjustment, the highest rate, the index and margin.  The Annual Percentage Rate is made up of the interest rate and all other fees then is divided by the term of the loan.

5. How much does it cost for loan rate locks?

If you feel there is an upwards trend for interest rates you may want to lock your interest rate in at it’s current amount.  Before you lock in a rate, make sure you can negotiate it for as long as possible to ensure it continues beyond the loan processing period, otherwise you’ll lose the rate.

6. Please explain the fees and costs, as well as how much you’re going to make?

You’re entitled to know how much the lender will make out of your loan.  Costs of purchasing a home usually include an appraisal, credit report, pest inspection, recording fees, title policy, escrow (if applicable) and taxes.  Sometimes you need to pay points or origination fees.  It is worth asking if you can exchange paying points for a higher interest rate.  You should get a Good Faith Estimate with all your estimated fees and costs itemized.  It is worth asking your lender to guarantee this estimate in writing, which can pressure them to stick by the quote.

7. Will I be penalized if I pay my loan out early?

This is an important one to know before you sign on the dotted line.  Some lenders will charge you extra for each payment you make in addition to the mandatory ones. Others only charge a penalty if you pay off your loan in the first few years.  Ask if your monthly payments will adjust in line with any extra payments you make.  Sometimes a lender will ask for 6 months of unearned interest if you pay off your loan early.

8. Will the loan be approved in time, how long does it take for a mortgage to go through?

The quicker you can get all your documentation to your lender the quicker the process can start.  Stay in contact with your lender making sure you can answer any questions or supply additional documents in a timely manner.  A good lender will be able to close a loan between 30-45 days from application.