10 Essential Questions to Ask Your Mortgage Lender Before Applying for a Loan
The decision to purchase your dream home is one of the most important decisions you’ll make in your lifetime. But the process that follows is anything but straightforward. There are so many nuances involved in the purchase process that you’ll need to get familiar with before you can hang up the sold sign in the front yard.
One of the first steps in the process for you, the homebuyer, is to apply for a mortgage. Before you go through the application process for a mortgage, here are ten essential questions to ask your mortgage lender.
1. Which documents do I need to bring when applying for a mortgage?
In its simplest form, a mortgage is a type of loan. When applying for a mortgage (or any loan for that matter) in order for your loan officer to understand how much to approve you for, they’ll need to learn a little bit more about your financial history.
While you may not necessarily need to bring every single one of these documents at the application, your loan officer will need these documents eventually in order to verify the information you write down on your application. For example, your loan officer might ask to see pay stubs, W2s, 1099s, tax returns, or bank statements. It’s a good idea to know where they are so if you’re called upon to furnish them, they’ll be ready at hand.
2. How much will my monthly payment be?
There are a handful of factors that play into how much your monthly mortgage payment will be. For example, your monthly payment could change considerably, depending on how much you put down at signing and how much you eventually take out for your mortgage.
Your mortgage loan officer and your real estate agent are your best bets in getting to the finer details of how this is calculated and what factors impact your monthly payment.
3. What’s the application process like? What questions should I be prepared to answer?
These two questions to ask your mortgage lender are important in the application preparation phase. The conversation with your loan officer will get to some fairly nitty-gritty questions during the application: they'll ask for your date of birth, your Social Security Number, and your marital status. They’ll also ask general questions about your income. For example, they could ask:
- How are you paid? (W2 or 1099?)
- Do you receive Social Security benefits, a pension, or any other benefits from the Federal government?
- Have you ever had to report a bankruptcy or foreclosure before?
- Are there any other adverse credit events we should know about?
During this conversation with your mortgage lender, honesty is the best policy. It’s best to be open about past credit challenges in order to paint a complete picture of your financial situation.
And even if you’ve have past credit challenges, not to worry. There may be some programs that are more forgiving depending on these factors or additional waiting periods depending on which loan program you apply for.
4. What is a pre-approval?
Want to get a general sense of how much of a mortgage you could be approved for? Then a pre-approval might be a solid option.
A mortgage pre-approval is simply a letter you’ll receive from your lender that states they’ve reviewed your financial history and they have a general estimate of how much of a loan you could afford.
You’re not fully approved for a loan until your mortgage underwriter clears it. This requires completing the application, verifying your income, and finally passing your loan through an underwriter.
One thing to keep in mind is that pre-approvals are not binding nor guarantees. Your financial situation could change drastically (for example, you could pay a off major loan and improve your credit score or undertake debt in another form that impacts your financial situation). These factors all impact how much of a loan you’re approved for. Keep in mind that a pre-approval is more of a general estimate, versus a full clearing and approval of a loan.
5. Do I need a home inspection to qualify for this loan?
A home is a big investment. And a lender will likely require a home appraisal, not a home inspection, before they decide to fund the loan or not. Through the appraisal process, you'll learn if the home you're about to purchase is in sound condition or if you narrowly avoided buying a lemon.
There’s a key difference between home inspectors and home appraisers that every borrower should be familiar with. A home inspector will take a closer look at the structure of the home, certify that there aren’t major issues with the foundation, and that it’s up to code. That inspector will then come back with rates on comparable sales in the area to match it. Most appraisers are not trained to do this. The appraiser will give you a better picture on the home’s condition and flag anything that may require repair.
Depending on how major the repair may be, it might need to be corrected by the seller before you’re approved for a loan.
6. Can I pay this loan off faster than it is scheduled? Are there pre-payment penalties with this loan?
Imagine this: you were approved for a mortgage, moved into your dream home, and received a significant raise at work a few years after your received your mortgage. That means you’re suddenly able to put down more on your monthly mortgage payment than you originally thought. But are there penalties for paying the loan off sooner than it’s scheduled?
While generally uncommon to have pre-payment penalties, it’s a good idea to ask your lender if there are any associated with your mortgage. Your lender can shed some light on what the rates would be if there are penalties if you foresee your financial situation changing drastically in the next few years.
7. Are there any special programs or discounts for first-time homebuyers?
For first-time homebuyers, the path to homeownership can be a daunting one. But there may be special programs or discounts to make things easier for you to secure the home of your dreams. As a means for major cost savings, be sure this is on your list of questions to ask your mortgage lender.
There are both Federal programs and discounts that are designed to offer assistance to new homebuyers. For instance, some programs may allow you to put down less than 20% at closing, depending on the geographical area that you live in. You might also get access to discounted interest rates or closing cost assistance, both of which could save you major mortgage dollars during the course of owning your home.
8. What is mortgage insurance and do I have to pay it?
Mortgage insurance is an insurance policy that is geared towards protecting the lender in the event that you default. In most typical mortgage scenarios, borrowers will customarily put down 20% at closing. You, as the borrower would pay mortgage insurance in the instance that you did not put down 20% down at the closing.
Rates for mortgage insurance vary from lender to lender and borrower to borrower. The amount you pay for mortgage insurance could also vary depending on the loan program you select. For example, VA loans for current or former members of the military are never required to pay for mortgage insurance. However, this may not be the case for conventional loans.
Talk to your lender about the different scenarios and see if you’ll be required to pay for mortgage insurance or not.
9. How much of a down payment do I have to make? Do I need a down payment at all?
Your monthly mortgage payment will depend on how much you take out and how much you put down at closing. The norm for most down payments at closing is generally 20%. But some lenders allow for borrowers to put down as little as 3% at closing. For VA loans, a borrower may not need to put any money down at the closing.
Knowing how much of a down payment you’ll need to put down will help prepare you financially when it’s time to close on your home.
10. What type of loan is best for my situation?
VA loans. FHA loans. Conventional loans. USDA loans. What does it all mean? And which one do you qualify for?
Your loan officer will work with you to understand the different types of loans, which one best fits your situation, and which will get you a manageable monthly payment with competitive rates. No two borrowers and their financial situations are alike and good loan officers know that. Lenders should take a consultative approach to get to know your entire financial picture and not just sell you a loan.
I’m ready to take out a mortgage. Now what?
Your mortgage lender should be, above all, a trusted partner throughout the process. If you’re shopping around for a mortgage lender but want to compare, do your research.
It’s not uncommon for borrowers to ask their lender for referrals from previous customers. Was your would-be lender responsive with their previous clients? Did the loan officer make sure their borrowers understood the ins and outs of their loan before signing? Understanding what satisfied (or unsatisfied) customers have to say about your loan officer or the mortgage lender can help you make a better, educated decision on which mortgage will suit you best.
Have a list of questions to ask your mortgage lender? Share yours with us by sending us a tweet @notarize.