01Which Type of Loan Is Best?
Reputable lenders will find out more about you before throwing out loan options. You wouldn't expect a doctor to suggest surgery before she assessed your medical situation, would you? Choose a lender that gathers enough information from you before recommending a particular type of loan. Don't be afraid to ask a lender to explain the pros and cons about:
02What Is the Interest Rate and Annual Percentage Rate?
The annual percentage rate (APR) is derived by a complex calculation that includes the interest rate and all the other related lender fees divided by the loan's term. However, bear in mind that:
- Some lenders do not compute APR correctly.
- There is no way to compute an APR rate for an adjustable loan accurately.
- An APR does not account for early payoffs.
If your interest rate is adjustable, ask about its:
- Adjustment Frequency
- Maximum Annual Adjustment
- Highest Rate (Cap)
03What Are the Discount Points and Origination Fees?
Each "point" is equal to 1 percent of the loan amount. Therefore, 2 points on a $100,000 loan cost $2,000.
- Sometimes lenders charge origination fees in addition to points.
- Points "buy down" the interest rate, meaning the more points you pay, the lower the interest rate.
- Points are also tax deductible, even if the seller pays some or all of the points.
04What Are All the Costs?
All the costs of a loan include not only fees that go into the lender's pocket but also related third-party vendor fees such as:
- Credit Report
- Lender's Title Policy
- Pest Inspection Reports
- Escrow (where applicable)
- Recording Fees
An estimate of these fees constitutes what is now called the Loan Estimate, which federal law requires the lender to give you.
05What Is the Loan Estimate?
Lenders are required to give you a loan estimate, accurately containing all of the costs of your loan. Lenders are required to deliver the loan estimate when an application has been completed. The following six items are typically required to be received first:
- Name of Borrower
- Social Security Number
- Property Address
- Estimated Value of Property
- Loan Amount
06Do You Offer Loan Rate Locks?
Interest rates fluctuate and change daily. If you have reason to believe that interest rates are moving up, you might want to lock your loan. Lenders typically charge zero to one point to lock a loan rate and points. Ask your lender:
- Do you charge a fee to lock in my interest rate?
- Does the lock-in protect all the loan costs?
- For how long will you lock in this rate?
- Will you give me the loan lock in writing?
The alternative is to pay the prevailing rate and points on the day your loan funds.
07Is There a Prepayment Penalty?
In some states, prepayment penalties are no longer allowed, so ask. Typically, prepayment penalties let the lender collect an additional six months of "unearned interest" if you pay the loan off early through a refinance or sale of the property. Be sure to ask:
- How much is the prepayment penalty?
- What are the terms of the prepayment? Some are in effect only during the first two to five years of the loan.
- Would the prepayment penalty apply if I refinanced through you at a later date?
08Are You Equipped to Approve Loans In-House?
Underwriters review loans and issue conditions before approving or rejecting a loan.
- Ask if a lender can handle its underwriting.
- VA and FHA loans typically take longer to process, but some lenders meet government requirements to automatically approve or disapprove a loan without sending it to the VA or FHA.
09How Much Time Do You Need to Fund?
Average loan processing time periods fall between 21 and 45 days. To properly write a purchase contract, you need to include a closing date, and that date should be coordinated with your lender. Find out:
- What is your anticipated turnaround time?
- What obstacles could hold up closing?
- How long after final application approval will the loan fund?
10Do You Guarantee On-Time Closings?
A big issue is closing your transaction on time. Your purchase contract will contain a date to close escrow, but that date is generally subject to the lender's ability to close on time. If the lender cannot close on time, that could mean extra costs or problems for the buyer, such as:
- An increase of interest rate if the lock expires.
- Additional expenses to pay movers to reschedule.
- Loss of a home if the buyer's rental lease is over.
10 Questions to Ask Your Mortgage Broker or Lender
Before you commit to a lender, ask these ten questions of your potential mortgage broker. If you don't like the answers you receive, continue shopping for a loan until you find a mortgage broker/lender with whom you feel comfortable.
To provide you with accurate information, your mortgage loan officer needs to find out more about you. Don't be afraid to share all of your personal information, including permitting the lender to run your credit report. Remember, the more your lender knows about you, the better advice and assistance you will receive.