You’ve decided to buy a home! Deciding to buy a house is an exciting life step, but many first-time home buyers can quickly become overwhelmed by the process. Choosing a mortgage lender is one of the most important steps in buying a home and knowing what to look for is vital. Here are some questions to ask and things to look for when deciding on a mortgage lender.
1. Does the lender seem interested in you and your situation?
A good mortgage lender is going to want to sit down and talk to you about your situation and goals before they start suggesting any one type of loan. There are many different types of loans to consider and each is suitable to different situations. Matching a buyer to the right type of loan is important and a good lender will make the effort to help set you up for success. You don’t want to work with a lender that makes you feel unimportant or that is pushy. You should feel comfortable asking them questions.
2. What type of loan is best for you?
One of the first conversations you should have with your lender is about the different loan options available to you. Ask them to explain the pros & cons of adjustable-rate loans, fixed-rate loans, interest-only loans, and negative amortization loans. They should be able to fully explain each type and then make a recommendation to you.
3. What are the interest rate, annual percentage rate, and the minimum down payment?
Your mortgage lender should be up front about the interest rate of your mortgage and clear about whether that will change or not during the duration of the loan. Loan rate locking is an option with some lenders and may be a good choice if you believe that interest rates might rise in the near future. Usually a lender will lock in a loan at a higher interest rate than you were already paying, but this may be worthwhile in the long term.
The APR is calculated slightly differently by all lenders, but they should be able to clearly explain to you how they calculate theirs. Some types of loans, such as adjustable rate, make it impossible to accurately calculate what the APR is.
Most lenders require a minimum 20% down payment on a mortgage, but your lender may have their own guidelines. Your credit score may impact whether the minimum down payment is higher or lower than this.
4. Ask to see a Loan Estimate and have it explained to you
A loan estimate is a document that estimates to the best of the lender’s ability what the sum total of their fees plus all third-party fees will amount to. This should include appraisals, inspections, credit reports, title policy, taxes, escrow, and miscellaneous fees. Don’t be afraid to ask questions about any entry on the Loan Estimate if you aren’t sure what it means. Your lender should be happy to explain any aspect of the document to you and you should feel comfortable with it before continuing with the process.
You should ask for a copy document before you officially apply for the loan. Your lender is legally required to provide an official copy after the application has been submitted and approved, but an estimated version can be provided beforehand.
5. What is the loan processing time and expected closing date?
Average loan processing time is around one and a half months. Coordinating a date with your mortgage lender is imperative because a closing date must be included on the purchasing contract. It is important to establish the timeline and to clearly communicate whether any obstacles might delay or push back the closing date.
Some lenders have guaranteed on-time closings. Ask your lender if this is something that they provide.
6. Ask about prepayment penalties
Prepayment penalties are a fee that a lender charges should you pay off your loan early. In some places this amounts to up to six months of additional interest. Be certain to discuss with your lender if a prepayment penalty is part of your loan agreement. It is important to know that prepayment penalties are illegal in many states. This may include your own.