Whether you’re a first-time homebuyer or looking to buy your dream home, understanding the key questions to ask a mortgage lender can help you secure a better rate. Finding a mortgage lender can seem daunting. Knowing answers to key questions can better prepare you for this major life step. Learn what to ask with these 17 questions to ask your mortgage lender.
1. What Types of Mortgages Do You Offer?
Knowing whether the lender has various options available to suit your specific needs and financial situation is essential. This is the first on a list of questions to ask mortgage lenders.
Mortgages can be:
- Conventional fixed-rate mortgages
- Adjustable rate mortgages
- Federal Housing Administration (FHA) loans
- Veterans Affairs (VA) Loans
- High-balance loans
- U.S. Department of Agriculture (USDA) loans
- Reverse mortgages
- Bank statement mortgages
- Nonqualified mortgages
- No-closing-cost mortgages
Understanding mortgage types will confirm whether the lender is a good fit and save time on applications. For example, if you’re self-employed or work as a freelancer, you will need a lender offering bank statement or nonqualified mortgages.
2. What Are the Current Interest Rates and How Do They Fluctuate?
Current interest rates can equal thousands in savings or additional expenses over the life of a mortgage. On a 30-year fixed-rate $300,000 mortgage with a 4% interest rate, you’ll pay $215,691 in interest over the loan's lifetime. With a 6% interest rate, the interest payments jump to $347,934, and for 7% interest, you’ll pay $419,307 in interest over 30 years.
Knowing the interest rates beforehand can help you compare different lenders and choose the best option and should be near the top of your list of what to ask a mortgage lender.
3. How Much of a Down Payment Will I Need?
Down payments commonly range from 3% to 20%. First-time homebuyers pay an average of 6% upfront to obtain a mortgage from a bank or other financial institution. Down payment amount impacts your mortgage type, the loan amount, interest rates and the loan's terms and conditions.
A larger down payment can give you a lower loan-to-value (LTV) ratio, which may help you qualify for lower interest rates. On the other hand, a lower down payment may allow you to buy a home sooner. While every lender prefers a down payment of 20% or more, you may qualify for a mortgage with a lower or no down payment.
4. What Is the Maximum Loan Amount I Can Qualify For?
Lenders calculate your maximum loan amount based on your debt-to-income ratio. For a conventional loan, you won’t qualify for a mortgage with a debt-to-income ratio above 43%. To calculate your debt-to-income ratio, add all monthly debt obligations and expenses like rent and utilities. Divide that number by your total income before taxes.
If you have a monthly income of $10,000 and $2,000 in monthly debt obligations (other than the mortgage), the maximum mortgage payment you’d likely be approved for would not exceed $2,300. That is 43% of your monthly income ($2,000+$2,300=$4,300 or 43%). The lender would take into account the interest rate, fees and duration of the loan to determine your monthly payment for a home loan.
5. What Are the Closing Costs and Related Fees?
This is the most often overlooked of all the mortgage questions to ask lenders. Closing costs and fees are typically 2% to 6% of the loan value. Closing fees can add up quickly, so it’s essential to know what to expect and save accordingly before you commit to a mortgage. You can also compare closing costs between lenders to get the most favorable terms.
6. Can I Prepay the Loan Without Penalty?
If you plan to make extra payments or pay off your mortgage early, you need to know whether any prepayment penalties are involved. Having the flexibility to pay off the loan early, especially if the interest rate is higher, could save thousands of dollars if you’re not hit with penalties.
7. What Are the Requirements for Loan Approval?
Understanding what documents you’ll need to provide can help smooth the loan process and avoid delays. With requirements for loan approval, you can gather all documents ahead of time and ensure that all information is correct.
8. How Long Will the Loan Approval Process Take?
Loan approval is important to include on your list of questions to ask mortgage lenders. Mortgage approval typically takes two to six weeks. Some lenders take longer, especially during peak times. Choosing a lender with a shorter approval time can be beneficial in case the seller prefers a fast closing.
9. What Additional Fees Should I Expect?
Additional fees can include monthly fees that increase your interest rate. Asking lenders about additional fees can give you a general idea of what to expect in addition to base interest rates and is one of the most important questions to ask mortgage lenders.
10. Can You Provide a Breakdown of My Monthly Payments, Including Taxes and Insurance?
Understanding not only mortgage obligations but all taxes and insurance can give you a better understanding of whether you can afford monthly payments. You don’t want large unexpected monthly expenses. Asking ahead of time ensures you get a mortgage with insurance, taxes and monthly fees that fits within your total financial plan.
11. How Often Will My Interest Rate Be Adjusted?
For an adjustable-rate mortgage, adjustment periods are one of the most important mortgage questions. Even if you have a fixed-rate mortgage, your interest rate may be adjusted according to changes in fees.
Generally, for adjustable-rate mortgages, you’ll have a period of five years where the interest rate doesn’t change. After that time, your interest rate will change once per year. Most mortgages have periodic and lifetime caps, but you should also confirm cap amounts with lenders.
12. Do You Offer Any Special Programs or Incentives for First-Time Homebuyers?
Some lenders offer special programs for first-time homebuyers, veterans (VA loan), self-employed, small-business owners or those with limited income. Asking about these programs can help you save money on your mortgage. Find best first-time homebuyer incentives by state.
13. What Is the Timeline for Closing?
Knowing how long it will take to close can help you plan your move and other financial obligations accordingly. It is also helpful to inform the seller once the contract is signed so that they can schedule according to the expected closing times.
14. What Happens if I Miss a Payment?
Ideally, you’ll set up auto pay and make all mortgage payments on time. However, knowing the consequences of missing a payment can help you avoid any potential issues down the road.
15. Can I Make Extra Payments on the Principal?
Making extra payments on the principal can shorten the loan length and lead to significant savings if you pay off the loan early. As with the example above, paying off a 30-year mortgage in 20 years could save over $160,000 in interest payments.
Your normal monthly payments will pay down or amortize your loan. Paying extra toward the principal can reduce the time it takes to repay your loans and the interest you'll pay.
16. What Are the Minimum Credit Score Requirements for Each Loan Type?
Different loan types have different credit score requirements, and if your credit score falls below the required minimum, you may not be approved for the loan.
By asking this question, you can determine whether you need to work on improving your credit score before applying for a mortgage or if you are already eligible for certain loan types. This knowledge helps you make informed decisions and save them time and effort in the loan application process.
17. Do You Offer Preapproval and Prequalification?
Prequalification is an initial assessment that provides an estimate of the loan amount you may qualify for based on basic financial information provided by you, such as income and debts.
Preapproval, on the other hand, is a more detailed process where the lender thoroughly evaluates your financial situation, including credit history, income, and assets, to determine the exact amount you are approved to borrow.
More Questions to Ask a Lender
In addition to the above 17 questions, you'll want to confirm your annual percentage rate (APR), ask about mortgage insurance, total monthly payments and — once you've chosen a lender — whether they charge for an interest rate lock. When you find a lender that best meets your needs, you may be able to lock in the interest rate to ensure it won't go up before you close on your home.
Remember to be patient and shop around for interest rates when looking for a mortgage. Don't be afraid to ask more mortgage questions. Finding the right lender may take time, but it could save tens of thousands of dollars or more over the loan's lifetime.
Frequently Asked Questions
Why is it important to ask these questions to my mortgage lender?
Asking your mortgage lender questions helps clarify what you can expect in terms of interest rates and fees, closing time and loan amount. Understanding each lender’s offering can also help you choose the best lender.
Can I negotiate the terms of my mortgage loan?
Yes, you can negotiate the terms of your mortgage loan, especially if you’ve received offers or preapproval from several lenders.
How do I find a reputable mortgage lender?
You can find a reputable mortgage lender by speaking with local banks, credit unions and online lenders. Check reviews, ask about rates, loan terms, down payment requirements, mortgage insurance, closing costs and fees, and then compare every offer.