Financing can be the most challenging and stressful part of buying a home to navigate if you're not yet well-versed in mortgages and the buying process. Our list of preferred lender partners is a great place to start; we recommend you speak with a few to see who you feel most comfortable working with. Having a well-qualified and experienced lender can make all the difference, but ultimately, it's most important that you educate yourself and understand what you're signing up for. Here are a few questions to help you do just that.
What financing options do I qualify for?
As obvious as this might seem, it's an important question because there are many options in the marketplace. While a "30-year Fixed Rate Mortgage" may often be the default, other terms (largely depending on the points raised in the following questions) may actually be more suitable and affordable for you.
What information do you require from me?
Applying for a mortgage can feel intrusive - be prepared to provide the underwriters everything from pay stubs, bank statements and W-2s to details on other assets and liabilities. It's helpful to know up front what's required as it can take time to pull all the required documents together.
What is the monthly mortgage payment?
The rule of thumb for most lenders: your monthly mortgage expenses (principal, interest, taxes and insurance) should not exceed 28% of your income before taxes. Depending on other factors (assets, cash on hand, etc.) this may vary.
What is the interest rate on this loan?
The interest rate you qualify for is often based on both the type of loan you're pursuing and your credit score. Ask your lender for the APR (annual percentage rate), which will include the interest rate, points, fees and other charges, to give you a more inclusive picture of your monthly and annual costs associated with the loan.
Is the interest rate fixed or adjustable?
Fixed rate mortgages maintain the same interest rate for the entire term of the mortgage, whereas adjustable rate mortgages (ARM) may fluctuate after an initial fixed period. For the later, it's important to understand what index your rate is tied to and the rate's margin so you can calculate a variety of scenarios and ensure you can afford a higher payment if rates increase.
Can I lock in my interest rate?
Interest rates may fluctuate between the time you apply for and close on a loan, so it's important to understand 1) if you can lock in the rate you were quoted, 2) when you can do so, and 3) what the fees are (if any).
What is the term of the loan? Is there a pre-payment penalty?
There are many options available, but loans typically span 10 to 30 years. With the low interest rates we're experiencing, you may be surprised to learn that a 15-year mortgage may not cost much more on a monthly basis than a 30-year option, for example. You may also want to ask if there are any pre-payment penalties associated with your mortgage, which may be applied if you opt to refinance or pay off your mortgage at a later date.
What is the down payment required for this loan?
You may be prepared to use your entire life savings as a down payment, only to learn that you need less (or more) to qualify for the mortgage terms you were hoping for. Down payments can start as low as 3.5% for FHA loans; be sure to ask your lender for a few scenarios to choose the one that suits your need best. Typically, the lower the down payment, the more your monthly payment will be.
What origination fees are associated with this loan?
You may be responsible for all, part or none of the closing costs associated with your mortgage. One-time origination fees cover the costs your lender and third-parties, including the title company, incur to process your loan. Some are negotiable or may even be covered or reduced by your lender.
What discount points are associated with this loan?
Discount points are a form of prepaid interest and are tax deductible. One point is equal to 1% of the loan amount ($1500 on a $150,000 loan, for example). The more points you pay (typically between 1 and 3), the lower your interest rate.
Do I need mortgage insurance? If so, how much is it?
If your loan to value (LTV) ratio exceeds 80% (i.e. if your down payment is less than 20%), you will likely need Private Mortgage Insurance (PMI). PMI is one way lenders manage risk against borrower default; the cost is passed on to you, the borrower. Sometimes, PMI can be removed at a later date once the principal balance on your loan has been paid down, the appraised value of your home has increased, or a combination of the two has occurred to bring your LTV below 80%.
How long will it take to process my loan? What might delay the process?
Depending on your financial situation and how busy your lender is, closing on your loan may take as few as 2 weeks or as many as 10. It's important to be on the same page with your lender in terms of deadlines (especially the closing date of the home you're purchasing) to ensure you reach the finish line together. Providing the documentation your lender requires for underwriting in a timely manner will help.