If you’re looking to buy a home, the odds are that you have tons of questions about the process. In fact, there may also be questions that you don’t even know to ask. Thankfully, Vaster is here to help with the ten questions you should ask a mortgage lender:
1. What Types of Loans Do You Offer?
Not all mortgage lenders offer all types of mortgage loans. If you’re looking for a specific type of loan, it’s best to ask the lender what types of loans they offer before you move forward.
Here are some of the most common types of loans offered by mortgage lenders:
A conventional loan is not backed by the government and is entirely provided and backed by the lender. Conventional loans often come with some of the lowest interest rates since they come with higher qualification requirements due to the risk that they present to lenders.
Depending on your qualifications and other factors, you may be able to receive an interest rate as low as 2.5%. You are required to put at least 3% down with a conventional loan.
A government loan is provided by a lender but is backed by the government in case of non-payment. This effectively lowers the risk taken on by the lender and makes these loans more accessible to those who may not have the strongest financial profile.
Government loans, including FHA loans, VA loans, and USDA loans, come with more restrictions and requirements. You are required to put at least 3.5% down with an FHA loan but don’t have to put anything down with a VA and USDA loan.
A bridge loan is provided entirely by a private lender. Bridge loans are temporary in nature and are designed to bridge the gap between closing and securing permanent financing.
Most bridge loans have a term of one year, during which you only make payments on the accrued interest. Interest rates are generally higher for bridge loans compared to conventional loans; however, it does not accrue as much due to the shorter term.
Non-Qualified Mortgage Loans
A non-qualified mortgage loan, also called a non-QM Loan, is a mortgage option for those who don’t meet the traditional profile of a traditionally qualified applicant. These types of loans are not held to the same 2014 qualifications for qualified mortgages from the U.S. Federal government and the Consumer Financial Protection Bureau.
Non-QM loans are open to borrowers who may have lower credit scores (620 or potentially less) or a higher debt-to-income ratio (43% or higher). When applying for a QM-loan, job history is not as important as a determining factor, and the down-payment can sometimes be as low as 10%
2. What Type of Loan Is Best for Me?
Now that you have a better idea of what types of loans are offered, you need to figure out which type of loan is best for you based on your financial profile and financial goals.
When approaching a lender, they will consider all your options based on your profile, including your down payment amount, employment history, and credit score. All of this information combined can help determine which loan is best for you.
To start, there are different loan terms to choose from — usually 15 years and 30 years for conventional loans. If you’re able to pay more on a monthly basis to end up paying less interest, then a 15-year loan might be the best option for you.
On the other hand, if you’re looking for lower monthly payments in exchange for paying more interest over time, then you should go with the default 30-year loan. This is the most common type of mortgage.
Another example involves the interest rate of the loan since there are both fixed interest rate loans and adjustable interest rate loans. If you’re not planning on staying in the home for a long time, it might be best for you to go with an adjustable-rate mortgage loan since these often come with lower initial rates.
However, if you’re making a long-term purchase and don’t want to deal with varying interest rates (and, therefore, monthly payments), then you should stick with a fixed-rate loan.
3. How Do I Qualify for a Loan?
Once you’ve determined the right loan for you, you need to figure out if you qualify for it as different lenders have different qualification requirements. For example, you may need a certain credit score in order to qualify; most lenders want credit scores above 620.
You may also need a certain debt-to-income (DTI) ratio based on your gross monthly income and your monthly debt payments. Lenders generally want to see a DTI below 36%, with no more than 28% going towards housing-related expenses like your mortgage payment.
Finally, many lenders will also consider your employment history to evaluate your risk as a borrower. Specifically, they are looking for steady employment over the past two years. That said, there may be exceptions made for recent graduates and those that are self-employed.
A mortgage lender may ask to see your pay stubs, W-2s, tax returns, and more when considering your home loan.
4. What Interest Rates Do I Qualify for?
The main purpose of talking with different mortgage lenders is for you to secure the best possible interest rate. Different lenders will offer you different interest rates based on your qualifications. Before you move forward, it’s a good idea to see what interest rates you would qualify for based on your financial profile.
At the end of the day, the lowest interest rate will save you the most money. So don’t be afraid to meet with several different lenders to make sure that you’re getting the best interest rate.
5. Do You Offer Mortgage Points/Discount Points?
If you’re not satisfied with the interest rates you’re qualifying for, you may want to consider purchasing points to effectively lower your interest rate. Some lenders allow you to purchase mortgage “points” for about 1% of the loan value to subsequently lower your interest rate by 1%.
This can be extremely worthwhile if you plan on staying in the home long-term as lower interest rates translate into lower monthly payments and less money spent on interest throughout the term of the loan.
However, this option is not offered by all lenders. So if it’s something you’re interested in, make sure to ask the lender about it.
6. How Much Can I Afford To Spend on a House?
Perhaps the most important question to ask a mortgage lender is how much you can afford to spend on a house since the answer to this question will likely inform your entire home search.
Keep in mind that just because you “qualify” to spend a certain amount on a home doesn’t mean you have to spend that entire amount. Your real estate agent can help you find homes within this price point.
Generally speaking, you can afford to spend up to 3x your gross annual income on a mortgage. So if you make $100,000 a year, you can afford to take out a mortgage loan worth $300,000. If you factor in a 20% down payment, that leaves you with a total purchasing budget of about $380,000.
Of course, this is just one way to calculate how much house you can afford. Your mortgage lender will likely perform a more complicated loan estimate based on your financial profile.
7. What Will My Monthly Payments Be?
While the overall value of your home and your mortgage are certainly significant, your monthly mortgage payment is even more so as it’s what you’ll be paying on a monthly basis for years to come. As a result, you need to make sure that this payment will fit comfortably within your monthly budget.
The best way to determine how much you should spend on your monthly mortgage payment is to go back to the concept of DTI that we covered earlier. The basic rules of DTI state that you should not spend more than 28% of your gross monthly income on housing-related expenses, including your mortgage.
So if you make $100,000 a year, you gross about $8,333 a month. 28% of $8,333 is $2,333. However, it’s important to keep in mind that the actual cost of your mortgage and interest aren’t the only components of your monthly mortgage payment. Instead, the payment also includes taxes and insurance.
Most lenders require you to use an escrow account to pay into the cost of your annual property taxes on a monthly basis. Most lenders also require you to maintain a homeowner’s insurance policy and pay into the cost of your premium on a monthly basis. The exact cost of these two factors varies depending on your location and the condition of your home.
8. How Much of a Down Payment Do I Need?
Many potential homebuyers are understandably concerned about the minimum down payment. After all, it’s a huge chunk of money. As a result, it’s important to understand how much you’re expected to put down on the purchase of your house.
While putting down 20% of the home’s price is always recommended, it’s not required. Depending on the type of loan, you may be able to put down as little as 3% of the home’s price. However, keep in mind that down payments of less than 20% come with additional costs in the form of private mortgage insurance (PMI).
PMI is a way for lenders to mitigate the risk of lending to low down payment borrowers. PMI usually costs about 1% of your loan amount per year and disappears once you reach 20% equity.
9. What Closing Costs and Fees Come With My Loan?
While most homebuyers are aware of the down payment, many aren’t aware of closing costs and might be surprised to learn that they owe thousands of dollars on top of their down payment at the time of closing. To avoid this surprise, ask your lender about closing costs from the get-go.
Different lenders charge different closing costs, but generally speaking, you can expect to pay anywhere from 2% to 5% of the loan amount in closing costs that cover things like the home appraisal, home inspection, credit report, and loan underwriting.
If you’re concerned about expensive closing costs that are closer to the 5% mark, you may want to try negotiating with your lender to save money on closing costs. It’s not always possible, but it’s definitely worth a try if it can save you money.
10. How Quickly Can You Process and Close My Loan?
Finally, you need to ask the lender how quickly they can process and close on your loan. We are all dealing with a fast-paced real estate market wherein sellers don’t want to wait around for slow-moving lenders. They are more likely to go with cash buyers who can close quickly.
So if you want to submit competitive offers and successfully close on a house, you and your lender need to be on the same page in terms of a closing timeline. Most lenders will be able to close on your loan in about 30 days. However, it can take as long as 45 days, depending on a variety of different factors.
Let Vaster Answer All Your Mortgage Questions
Applying for and receiving a mortgage loan to buy a home can be a confusing and overwhelming process, but it doesn’t have to be with the right lender. Vaster makes it easy for you to get the best loan terms possible thanks to our dedicated and experienced team of lending experts.
So reach out today to get all your mortgage questions answered and finally start the homebuying process.