When it comes to buying or refinancing your home, choosing the right mortgage and the right lender can be a challenge. After all, getting a mortgage isn’t something you do every day. So how do you evaluate the differences among home loans and lenders, so you can choose both wisely?
To help you find the best mortgage loan that is right for your circumstances, we interviewed Scott Lackman, ditech’s Sales and Product Trainer. Scott has nearly four decades of experience in the mortgage industry helping homeowners, lenders, realtors, and builders with the home financing process. He’s written thousands of loans and he’s trained hundreds of mortgage professionals. Scott not only brings a seasoned perspective on what questions to ask each prospective lender, but he also has insight on those questions you might not think to ask, but should!
So without further ado, here is the list of key questions Scott recommends and why. Keep these handy while you’re shopping for a mortgage lender and a mortgage.
1. What mortgage loans or loan terms are available?
First and foremost, explore your options. There’s more than one kind of mortgage product. Many borrowers focus on the popular 30-year fixed, without even considering other home loans. Gone are the days of 15 and 30-year fixed loans ruling the mortgage world.
While terms vary among lenders, you’ll often see 10, 15, 20, 25, and 30-year fixed rate mortgages. The difference between a 25-year and 30-year fixed mortgage could mean a small increase in your monthly payment, but a significant savings in interest payments over the life of the loan. Not to mention 5, 7 and 10-year adjustable rate mortgages, which may be a good option, especially if you plan to move in a few years.
2. Are non-traditional loan options available?
There are mortgages that go beyond traditional fixed rate and adjustable rate loans. For example, a hybrid ARM is a blend of both. It starts with an initial fixed rate, followed by an adjustable rate period. Of course, there are other options available, too, such as a jumbo loan, FHA loan, VA loan, and more. Certain requirements may apply, but some of these loans offer very attractive terms if you’re eligible.
Bottom line: Provide the mortgage company with the monthly payment range that works for you and your budget. Then ask the lender for multiple term options that fall within that range.
3. What is the interest rate on this loan? What is the annual percentage rate (APR)?
It helps to first understand the differences between both percentages, which mean very different things. Your interest rate is the cost of borrowing the principal of your loan, whereas your annual percentage rate (APR) reflects the total cost of your loan over time and includes your interest rate plus other charges like closing costs and PMI. So the APR is typically higher than your interest rate.
Here’s a quick tip: Keep in mind that loans from different lenders with the same term and identical interest rates are not always equal. If multiple lenders offer you the same interest rate and terms, compare the APR to determine which loan might cost more.
4. What is the minimum down payment for this loan? Can you tell me about other down payment options?
It’s a common misconception that you always need 20% for a down payment. There are several mortgage options available that require far less, depending on the type of loan you choose. You can go as low as 3% down, or even 0% if you qualify for a VA loan. Even for loans requiring less than 20%, you have the option to put down 20%--or more-- to reduce your principal payments. Don’t want to use that much cash up front? You can put down 10% and keep the other 10% in your savings account. There is a lot of flexibility with down payments today.
5. How many discount points will I pay, if any? What is your origination fee?
Understanding the difference between discount points and the origination fee should help you evaluate loans among lenders, and then select the better option.
- Discount points, aka prepaid interest, allow you to “buy down” the interest rate on your loan—the more points you pay, the lower the interest rate. The decision to pay or not to pay discount points depends on how much money you have available to cover closing costs, and how long you plan to stay in your home. Generally speaking, the longer you plan to stay in your home, the greater the benefit. Depending on the interest rate, some lenders can credit money towards your closing costs.
- Origination fee, or the mortgage origination fee, is usually a flat fee charged by the lender to cover the cost of making the loan. These fees vary from lender to lender.
6. What is the total cash required to close my loan?
The wording of this question may sound unfamiliar, but I recommend phrasing your question this way to be perfectly clear. You’re really asking the lender, “What is the total cash required to walk away with the keys to my new home?” You want to know the exact amount to avoid any hidden costs. Here is what’s typically included in closing costs. Of course these payments will vary depending on the loan option you choose.
7. What documents are needed when I submit my application?
Think of it this way: a lender is looking for documentation that can help them make a decision on the loan. Since each mortgage application is different, the information required can be different, too. In general, when applying for a mortgage, four types of documentation are required that demonstrate your qualifications as a potential borrower. Here are some common examples:
- Income: Pay stubs, W-2’s and/or I-9’s, and tax returns.
- Assets: Bank statements, IRAs, stocks, bonds, current real estate holdings.
- Credit: You’ll provide access to your credit report, plus documents on your current auto, student, and mortgage loans. If you rent, you’ll need to provide rental history, and landlord information.
- Property: An appraisal of the home you want to buy will be required by the lender to ensure you are not over-paying and that the house is worth the money being lent to you.
8. How long will it take to get a credit decision on my loan application?
Each application is a different story. Your loan officer should set expectations with you up front so you’ll have an understanding of the process. Many people are surprised to learn the law requires a decision be made within 30 days of receiving a completed mortgage application. The key word is “completed.” The 30-day clock doesn’t start until the lender gets all the information it needs to make that credit decision, so be sure to get that to the lender as soon as possible.
9. Are there prepayment penalties on this loan?
This is always a good thing to know before you make a final decision. While prepayment penalties are becoming less common, they still exist—and if you someday want to put extra cash toward your principal to save money on interest payments, you don’t want to eat up the savings with penalties.
10. Is this loan assumable?
This is a very little known feature, but it can be really helpful to understand. While all FHA, VA, and USDA loans (and even some hybrid loans) are assumable, not all traditional loans are, so ask your lender. Why? Since an assumable loan allows the buyer to pick up where the seller left off on the loan, it can be really appealing to a future buyer when you’re ready to sell your home. With attractive interest rates currently available, this can be a powerful differentiator and offer a future home buyer terrific incentive for choosing your home.
when it comes to choosing the right lender, option, and term for your investment, it pays to do a little research. These questions can give you the “score card” you need to help avoid making a financing decision that can set you back, and instead, choose a loan and a lender that can set you up successfully for the future.
Remember that you’re not tied to your loan forever. Actually, the average homeowner refinances every 6 to 7 years, so owning a home doesn’t mean you can’t change the mortgage. Your home is likely the largest purchase you will ever make and the right financing can turn it into a very smart investment. So invest a little time to explore your options.
Scott Lackman is currently ditech’s Sales and Product Trainer, and has been a professional in the mortgage industry for nearly four decades. For the first 25 years of his career, Scott sold and managed thousands of home loans, and then began sharing his expertise by training others. While at ditech, Scott has been instrumental in training Home Loan Specialists, developing mortgage curriculum, providing input into product development, and evaluating point of sales systems. He is always willing to share his time and knowledge, both with ditech Customers and colleagues.
If you’d like more information—or you want to run this list of questions by a ditech Home Loan Specialist—feel free to give us a call at 1-800-700-9212!