by Kent M. Sherry, Executive Director
Before you settle on the house of your dreams, it's essential to find the right lender. All of us are aware of what is now happening in our industry due to subprime lending. Knowing how much home you can afford before you start searching will help the home buying process go that much smoother, and the right lender also can help you determine what mortgage works best with your financial situation. Here are ten questions you should as potential lenders before making your final selection (Cut this page out and keep it with you when applying for a mortgage).
1. What is the Interest Rate & Annual Percentage Rate? The annual percentage rate (APR) is determined by a complex calculation that includes the interest rate and all the related lender fees divided by the loan's term. Keep in mind however that there is no way to accurately compute an APR for an adjustable loan, and APR doesn't account for early payoffs. If you decide on an adjustable rate, investigate how often it can change, and if it has a maximum annual adjustment. A few points increase in interest rates can make a big difference in your monthly payment. (Thousands of homebuyers with questionable credit took advantage of subprime adjustable rates with a very, very, low, up front interest rate, which later doubled or tripled.)
2. What are all the costs? There are many fees and costs associated with any third party involved in a mortgage transaction. These can include the appraisal, credit report, lender's title policy, pest inspection reports, and taxes, among others. Find out about all these costs before finalizing a loan. Lenders are required to provide a written good faith estimate of closing costs within three days of receiving a loan application.
3. Which Type of loan is best? The right lender will ask a lot of questions about you and your financial situation before suggesting loan options. Don't hesitate to ask about the pros and cons of the different options: fixed-rate loans, adjustable-rate loans, interest-only loans, negative-amortization loans, and others.
4. What are the qualifying guidelines for this loan? Depending on the loan, the qualifying guidelines may relate to your debt-to-income ratio, credit history, employment, assets or liabilities. If you are participating in a first-time buyer program, a VA loan or other government-sponsored mortgage programs you may be able to find a loan program with easier qualifying guidelines. Ask your lender to thoroughly explain to you the guidelines for any loan, and which one works best with your situation.
5. How many discount and origination points will I pay? When people want to find out how much their mortgages cost, lenders often give them quotes that include both loan rates and "points." Points "buy down" the interest rate of a loan. Therefore, the more points you pay, the lower the interest rate, and vice versa. Each point is equal to one percent of the loan amount. So, two points on a $100,000 loan costs $2,000. Discount points are tax deductible, and are actually prepaid interest on the mortgage loan. Origination points are charged by the lender to cover the costs of making the loan. The origination fee is deductible if it was used to obtain the mortgage and not to pay other closing costs.
6. Is there a prepayment penalty on this loan? Many mortgages charge a penalty for paying off the loan before the end of the time period. The penalties vary; some are one percent of the loan total, others are equal to six months' interest and some others apply only when you refinance. Find out upfront if your loan carries such a penalty, and what it would cost if you decided to prepay. Some lenders offer lower interest rates to buyers who accept prepayment penalties.
7. Do you offer loan rate locks? Interest rates fluctuate daily and can change from the day you apply for a loan to when you close it. If you think interest rates are moving up, you can lock your loan rate. Ask your lender about fees to lock your interest rate, how long they lock it for, and if the lock-in protects all loan costs. If you do end up locking your loan rate, make sure to get the details in writing.
8. Who will service the loan? Your bank or another company? Underwriters review loans and issue conditions before approving or rejecting a loan. Ask if the lender does this in-house or uses another company. The answer can make a difference in the amount of time the loan takes to process.
9. How long will the loan approval process take? In most cases, it takes between 21 and 60 days. Ask your lender what the anticipated turnaround time is and what possible obstacles could delay that. You'll need to coordinate with your lender to determine the closing date for any purchase contract.
10. What might delay approval of my loan? The more accurate you are in your loan application, the smoother the process will go. Notify your lender if your financial situation changes, if you change jobs, incur additional debt or change marital status between applying for and receiving the loan. Check your credit report before applying for a loan to ensure that everything is accurate and up-to-date.
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