Ten questions to ask your lender before buying a home

Before you settle on the house of your dreams, it’s essential to find the right lender. They can help you determine what mortgage works best with your financial situation. Here are 10 questions you should ask potential lenders before making your final selection.

“1. What is the interest rate & annual percentage rate?

The annual percentage rate (APR) is determined by a complex calculation that includes the interest rate and related lender fees divided by the loan’s term. Unfortunately, there is no way to accurately compute an APR for an adjustable loan, and APR doesn’t account for early payoffs. If you decide on an adjustable rate, investigate how often it can change, and if it has a maximum annual adjustment.

“2. What are all the costs?

There are many fees and costs associated with any third party involved in a mortgage transaction. These can include the appraisal, credit report, lender’s title policy, pest inspection reports, and taxes, among others. Find out about all these costs before finalizing a loan. Lenders are required to provide a written good faith estimate of closing costs within three days of receiving a loan application.

“3. Which type of loan is best?

The right lender will ask questions about you and your financial situation before suggesting loan options. Don’t hesitate to ask about the pros and cons of the different options: fixed-rate loans, adjustable-rate loans, interest-only loans, and others.

“4. What are the qualifying guidelines?

Depending on the loan, the qualifying guidelines may relate to your debt-to-income ration, credit history, employment, assets or liabilities. If you are participating in a first-time buyer program, a VA loan or other government-sponsored mortgage programs you may be able to find a loan program with easier qualifying guidelines. Ask your lender to thoroughly explain to you the guidelines for any loan, and which one works best with your situation.

“5. How many discount and origination points will I pay?

When people want to find out how much their mortgages cost, lenders often quote both loan rates and “points.” Points “buy down” the interest rate of a loan. Therefore, the more points you pay, the lower the interest rate, and vice versa. Each point is equal to 1 percent of the loan amount. Discount points are tax deductible, and are actually prepaid interest on the mortgage loan. Origination points are charged by the lender to cover the costs of making the loan. The origination fee is deductible if it was used to obtain the mortgage and not to pay other closing costs.

“6. Is there a prepayment penalty?

Many mortgages charge a penalty for paying off the loan before the end of the time period. The penalties vary; some are 1 percent of the loan total, others are equal to six months’ interest and some others apply only when you refinance. Find out upfront if your loan carries such a penalty, and what it would cost if you decided to prepay.

“7. Do you offer loan rate locks?

Interest rates can change from the day you apply for a loan to when you close it. If you think interest rates are moving up, you can lock your loan rate. Ask your lender about fees to lock your interest rate, how long they lock it for, and if the lock-in protects all loan costs. If you do end up locking your loan rate, make sure to get the details in writing

“8. Who will service the loan?

Underwriters review loans and issue conditions before approving or rejecting a loan. Ask if the lender does this in-house or uses another company. The answer can affect the amount of time the loan takes to process.

“9. How long will the loan approval process take?

In most cases, it takes between 21 and 60 days. Ask your lender what the anticipated turnaround time is and what possible obstacles could delay that. You’ll need to coordinate with your lender to determine the closing date for any purchase contract.

“10. What might delay approval of my loan?

The more accurate you are in your loan application, the smoother the process will go. Notify your lender if your financial situation changes, if you change jobs, incur additional debt or change martial status between applying for and receiving the loan. Check your credit report before applying for a loan to ensure that everything is accurate and up-to-date.