Mortgage Questions to Ask Your LenderStories of bidding wars and all-cash purchases may have discouraged some homebuyers from entering the market in 2021. But recent reporting from the National Association of Realtors sheds light on the reality that the vast majority of primary home residence buyers — 95% of first-time buyers and 87% of buyers overall — do not pay cash but rather finance their home purchases through mortgage loans.
A house is a major purchase, after all, and a mortgage loan can help put it within reach. So, let’s talk about some of the basics of getting a mortgage and what mortgage questions you may want to ask as you compare mortgage lenders.
How much money do I need to buy a house?
Buying a house requires upfront cash in addition to the monthly mortgage payments you will need to make once you secure the loan. How much you need depends on the price of the home, its location (for property tax purposes) and the type of mortgage loan you get.
What is my minimum down payment?
Some loan options require a minimum down payment of 3% of the purchase price, but many lenders set that minimum at 5%. (Minimums for vacation homes and multifamily properties are higher, usually 10% to 15%.)
What will my closing costs be?
In addition to the down payment, cash-to-close costs need to be paid upfront. These may include lender fees, home appraisal costs, title insurance, private mortgage insurance, four to 12 months of property taxes and more. Closing costs can range from about 2% to 6% of the loan amount. Ask for a personalized estimate of closing costs from each mortgage lender you’re considering, because these costs can vary considerably from one lender to the next.
What will my monthly payments be?
Our mortgage calculator makes it easy to see your monthly payment and how it might change based on different down payment amounts.
How much do I need in cash reserves?
Some mortgage lenders require proof that a borrower’s bank account balance would sufficiently cover two monthly mortgage payments.
What is private mortgage insurance?
Private mortgage insurance, or PMI, is insurance required to protect the mortgage lender when a borrower takes out a conventional loan and makes a down payment of less than 20%. The lender secures the policy through a private insurance company and charges the borrower for the monthly premium, usually as part of the monthly mortgage payment.
You can typically stop paying for mortgage insurance once your loan is paid down to 78% of the home's original value. In theory, your PMI policy should automatically cancel when you've reached a 78% loan-to-value ratio, but there are situations where it could take more (or less) time.
What credit score do I need to qualify for a mortgage?
Lenders have the ability to set credit score requirements for mortgage applicants, but generally the minimum FICO® score to qualify for a conventional mortgage loan is 620 (the FICO scale range is 300-850). If you are applying for an FHA loan — a loan backed by the Federal Housing Administration — a score of 500-579 may be enough; however, you must make a down payment of at least 10% to qualify (a score of 580 or more reduces the down payment requirement on an FHA loan to 3.5%).
What does it mean to be pre-approved for a mortgage loan? How long does pre-approval take, and how long is it effective?
A mortgage pre-approval is a letter or statement from a lender saying you qualify to borrow up to a certain amount. That can help you in several ways. It:
- Lets you know what your homebuying budget is
- Reassures the seller that you are a serious, qualified buyer
- May help you close faster and move into your new home more quickly
The first step toward getting pre-approved is completing a mortgage application. You will need to share a substantial amount of financial information and documentation related to your job history, assets and liabilities, income tax returns, etc. The lender will also do a credit check to determine your creditworthiness. All of this information then goes to an underwriter who determines how much you qualify for.
The pre-approval process can take a few days to a few weeks, depending on the lender. Once issued, the preapproval is typically considered valid for 30 to 90 days, so it makes sense to wait to apply until you are serious about shopping for a home.
What is the difference between pre-approval and pre-qualification?
If you’d like to get a better feel for your homebuying budget earlier, consider pre-qualification, which is fast, easy and usually free (pre-approval application often involves a fee). Simply provide the lender with information about your income, debt and assets (sharing your credit score may help as well), and you’ll receive a letter that includes an estimate of the mortgage amount you may qualify for. Since this amount is based solely on the information you state, without a verification process, it doesn’t carry as much weight as a pre-approval -particularly when there are competing offers. In the current market with a lack of inventory, some real estate agents prefer a pre-approval over a pre-qualification. Still, a seller may ask to see a potential buyer’s pre-qualification status before they will accept a bid.
How do mortgage points work?
Mortgage points, sometimes called discount points, are essentially prepaid interest. They offer a home borrower the opportunity to buy down the interest rate of their mortgage at closing. The cost of a point is roughly 1% of the total loan, and each point may lower the interest rate on the loan by as much as .25%.*
Let’s say you finance $200,000. At closing, you may have the option of purchasing as many as three points for $2,000 per point. Best-case scenario, you may be able to lower your interest rate by .75% for $6,000 upfront. Your monthly payments will be lower and, depending on the length of the term, you may save a substantial amount of interest over the life of your loan. Ask your mortgage lender about points — whether they are available to you and whether buying them would save you money based on your particular mortgage loan.
How do mortgage interest rate and APR differ?
When estimating your mortgage loan, a lender should provide you with both an interest rate and an annual percentage rate, or APR. The interest rate is a percentage that represents the amount you must pay to borrow the money — not including any fees or other charges. The APR reflects the more comprehensive cost of borrowing the money — the interest rate plus any points on the loan, mortgage broker fees and other charges associated with the loan.
Getting a mortgage doesn’t have to be complex. Knowing what questions to ask and understanding what to expect will give you the edge.
If you’re interested in learning more about pre-qualifying, pre-approval or applying for a mortgage, contact your local Dollar Bank mortgage expert today.
*Consult your tax advisor as to the potential deductibility of points as home mortgage interest.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.
Posted: March 22, 2022