Questions for your Mortgage Lender

Purchasing a home is so much more than finding the perfect place to call your own. Financing one of the biggest purchases of your life is an equally daunting process, filled with technical jargon, the potential for costly errors, and piles of paperwork. However, having solid and trustworthy professionals on your side, including a knowledgeable real estate agent and a quality lender, can help you navigate the process and leave you feeling confident and calm rather than anxious or overwhelmed. 

Additionally, knowing the right questions to ask—and not being scared to ask them—can make you feel like you're not just along for the ride but in control and an integral player in the process. In this post, we'll discuss some of the common questions home buyers might have for lenders and ones to ask that will help you understand the process and save you headaches along the way. 

 

Questions about the Process

Applying for a mortgage is a long and complex process, and many people will only experience it, at most, a few times in their lives. If the mortgage application process is new or unfamiliar to you, don't hesitate to ask questions. Though it can feel formidable, you can rest assured that a qualified lender is equipped to guide you through it. In addition to general concerns you may have about applying for a home loan, here are a few specific questions that are useful in the early stages of the process as you determine your budget and narrow down your lender choices.

Do I Need Prequalification or Preapproval?

Prequalification and preapproval are both steps banks use to determine how much of a loan you might qualify for and are essential tools to determine your budget before shopping for specific homes. But they are not the same thing. Prequalification is based on information that you, the consumer, submit about your income and debts. It's a non-binding guess and a preliminary tool at best. On the other hand, preapproval is, as Credit Karma explains, "a lender's conditional approval for a home loan in the form of a preapproval letter." It involves your lender verifying your income and checking your credit, and, while still not a guarantee, is a more reliable indicator of what you can afford. In fact, most sellers will require a preapproval letter before accepting your offer.

Your lender will not only be able to explain the important differences between the two but also help you determine if you need a preapproval or if, at this stage in your home hunt, a prequalification will be sufficient.

Will there be a single point of contact throughout the mortgage loan process? 

Some lenders are massive, national financial institutions, and you may be shuffled from one department to another as your loan application moves through the process. Other lenders work on teams, where several specialized individuals work with you, though your "team" will remain consistent from preapproval to closing. And other, often smaller banks will assign you one mortgage professional to handle the bulk of the work, and they will become the main person to reach out to if you have any questions. Establishing your service expectations upfront, and seeing just how eager the lender is to meet them, will give a clear point of comparison among lenders.

Down Payment Questions

When you are ready to apply for a preapproval, you will need to share with the bank how much money you are able to put down. Many homeowners fear that this number will be the single most important figure in determining what kind of home they can afford (if they can buy one at all). Although most loans require some form of down payment—that doesn't mean that homebuyers who cannot come up with such a sizable chunk of cash don't have options. Talk to your lender about what size down payment you will need for your mortgage and possibilities for obtaining a loan with less money down.

How much down payment will I need for my type of loan?

Down payments are standard for most mortgages and depend on the type of loan. Conventional mortgages are sometimes available with down payments as low as 3%. Suppose you have good credit and a debt-to-income ratio of 43% (including your new home loan). In that case, you may be able to access a conventional loan, which often offers the best interest rates and has the most straightforward application process. These loans, called Conventional 97 Loans because 97% of the home is financed, are offered through your local lender. You will need to pay a Private Mortgage Insurance (PMI) each month until the equity in your home reaches 20%.

Here are a few additional program options that feature low or no-down-payment options and don't have such strict credit and income requirements:

• Federal Housing Authority (FHA): Loans offered through your bank but backed by the FHA offers 3.5% down payments when you have a credit score of 620 or higher.
• U.S. Department of Veterans Affairs (VA): available through your own lender, the VA offers zero down payment home loans with low closing costs and no PMI for eligible service members, veterans, and surviving spouses.
• United States Department of Agriculture (USDA): If you purchase a home in an eligible rural location, you may qualify for a no down payment USDA loan available through your bank.

Ask your lender if any of these loan products (or others!) are available to you and which ones would make the most sense in your particular situation.

Do I qualify for any down payment assistance programs?

In addition to different loan options, you may also qualify for down payment assistance (DPA). 

These funds can come from state or local agencies and are often designed to help low-income residents obtain their home buying goals. Here are a few options for qualifying Illinois residents

• Down Payment Plus: grants up to $6000 for certain low-income buyers in Illinois.
• IHDA Down Payment Loans: The Illinois Housing Development Authority offers several mortgage options through your lender that feature built-in funding ($6000-$10,000) for your down payment in the form of forgivable or interest-free loans.

There may be other assistance programs available to you, so ask your local lender about all your options!

Interest Rate and Monthly Payment Questions

Even on loans backed by federal agencies like the USDA, interest rates vary based on your lender, credit score, and the current market rates. Because seemingly small differences in interest rates can change your monthly payment amount, it's important to ask your lender some key questions upfront to understand your obligations better.

What is my interest rate?

It might seem obvious, but given that 38% of current homeowners don't know their interest rate, it's important for you to talk with your lender about yours, even if you have already applied for a loan and your rate is set. If you are still in the prequalification or preapproval phase, asking questions about interest rates is even more important. If there are various loan options available to you, discussing the differences in rates can help ensure that you are getting the best deal. 

What is an interest rate? Interest rates are a percentage of your principal that a lender charges you to borrow money for your purchase, whether it's a home, car, or something you buy with a credit card. Your lender can help you understand how your interest rate was calculated, how interest affects your monthly payments, and whether or not it's a good idea to lock your current rate if you haven't completed your loan application yet (more on this below).

What is the annual percentage rate?

The annual percentage rate, or APR, tells you how much you will pay on your loan each year, not including payments for principal, and assumes you will have your mortgage for the entire original term (usually 30 years). As Investopedia explains, the APR is "expressed as a percentage representing the actual yearly cost of funds over the term of a loan or income earned on an investment." Unlike the regular interest rate, the APR can include additional items, like fees and other costs, giving you a better idea of what you will be paying on top of principal.

Sometimes lenders, especially those who advertise rates online, will include discount points in the APR. A discount point is a fee you pay upfront to reduce your interest rate, which can be beneficial if you plan on keeping your loan for a while (vs. selling or refinancing in a few years). However, including them in the APR can be misleading because it can appear that the rate is lower than it actually is, making it difficult to compare rates accurately.

What will my monthly payment be?

Based on your estimates for taxes and insurance, your lender will know in advance the approximate maximum monthly payment will be—though you certainly do not have to max out your monthly payment. Because of this, you can discuss your monthly payment expectations at any time in the process.

Your exact monthly payment, however, cannot be calculated until you know some specifics: the actual cost of the home you're buying, the home's property taxes, homeowner insurance costs, PMI (if needed), the size of your down payment (with or without assistance), and your interest rate. You will get a loan estimate, the legally-required breakdown of all charges associated with your mortgage that you get shortly after your application is sent in. This document will also include an estimate of your monthly payment. Your monthly payment is a complex number with lots of parts; ask your lender to explain the breakdown of all the costs, including principal, interest, taxes, and insurance, to better understand how it was calculated.

Closing Questions

Closing is the last step in the homebuying process. Reading up on closing can help you better understand what is ahead, but speaking with your lender about costs, timeframe, and best practices can help prepare you for the big day, save money, and avoid pitfalls that could derail your whole mortgage. Here are some important questions to ask.

What other costs will I pay at closing?

All loans have closing costs, though they may be limited in some cases (like VA loans). In addition to discount points (if you purchase them) and origination fees, other third-party fees are paid at closing, such as an appraisal, a title search, and property taxes. Ask your lender what fees you should expect to pay and how much they may cost you, based on the home you are buying (or your budget for purchasing a home) and the kind of loan you have. VA loans, for instance, will have an additional funding fee, depending on your downpayment size. Zillow offers a great breakdown of the fees you may expect to pay at closing and explanations for typical closing costs that are useful to read over before discussing them with your lender.

How long until my loan closes?

The length it takes between your loan application and closing will depend on several factors, including inspection and appraisal requirements of your loan type and how busy the housing market is at the time of your purchase. Forbes Advisor has a great guide to closing that covers these details, including recent average days to close for each major loan type. Your lender will be able to give you more specific information for your loan, as well, to help you better plan your move to your new home.

What should I avoid while waiting for my loan to close?

Lenders can explain the best practices to take between applying for your loan and closing when your loan is underwritten—and why. According to The Ascent, some common activities to avoid to ensure your final loan is approved include taking on new credit, closing old credit accounts, making large purchases on your credit cards, moving large quantities of money around, and quitting your job.

It's never too early (or too late!)

Even if you are still at the dreaming stage of a home purchase, it's never too early to reach out to a lender to help you understand the process and plan your next step. In fact, speaking to a qualified lender before you get too far along the road can be useful in determining your budget and finding ways to make your dream of homeownership come true—even if you're worried it might be out of reach. Even if you're already deep into the process, it's also never too late to speak to a lender to help guide you through purchasing a home.

At Town and Country Bank and Peoples Prosperity Bank, our local, dedicated mortgage professionals have extensive knowledge of Central Illinois and Metro East real estate and can find the right loan for your needs and budget. Contact us today to learn how we can help you!