Once you've narrowed the lender field to a short list of finalists, it's time to compare their offers. Here are the 10 key questions to ask at application time to help you find the best overall loan. If you have already selected a lender and are ready to apply, make sure you have the answers to these questions first.
To determine exactly what you'll pay over the life of the loan, you need to know the rate. Rates change quickly, and if your credit is less than perfect, you may not be offered the lender's lowest rate.
To compare different lenders' programs well, ask for the annual percentage rate (APR) of the mortgage interest, which is always higher than the initial quoted rate because it includes some fees. And beware: The APR you might see in advertisements can be misleading. Mortgage lenders don't always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points, and fees may end up comparing apples to oranges.
Lenders may charge prepaid mortgage interest points to lower your interest rate or other points that have no benefit to you at all. Find out how many you'll be expected to pay and which kind of points they will be.
Setting up a mortgage costs money. Lenders will charge fees for their own services and those of third parties. As early as possible during mortgage shopping, you want to know what those fees will be. Lenders are required to provide an official written loan estimate within three days of receiving a loan application, and it must show closing costs and other figures.
Your interest rate might fluctuate between the time you apply and the closing. To prevent it from going up, you may want to lock the rate—and even the points—for a specified period. Ask your lender if lock fees apply (they usually do). Also, research a bit online to see whether experts forecast rates to rise or drop over the next several weeks. Obviously, a lock makes the most sense if rates are expected to rise in a month or two.
There may be a prepayment penalty on your loan. Some penalties are 1% of the loan amount, while others are equal to six months' interest. Some penalties apply only when you refinance or reduce the principal balance by more than 20%, and some kick in if you sell your home. Find out the duration of any penalty period and how the penalty is calculated. Some lenders offer lower interest rates to buyers who accept prepayment penalties.
The rate and terms of your loan will be based on a down payment amount, typically 3%-20% of the buy price. If you can put more money down, you may be able to lower your rate and improve your terms; if you come up short, you may be required to carry private mortgage insurance.
These requirements relate to your income, employment, assets, liabilities, and credit history. First-time home buyer programs, VA loans, and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.
Most lenders will require proof of income and assets before approving your loan, and may require other documents as well. Buyers with excellent credit may qualify for a no-documentation, or "no-doc," loan, but they can expect to pay a hefty down payment and a higher interest rate.
The answer depends on a number of variables. When the loan business is brisk, underwriters get backed up, verification takes longer, appraisals move slower, and other bottlenecks develop along the loan pipeline. Lenders may advertise “two weeks,” but 45-60 days is probably more realistic. You'll need their best guess to determine whether to lock the rate and for how long.
If you provide the lender with complete, accurate information, the loan process should run smoothly. If the underwriter discovers credit problems, however, there could be delays. Make sure you notify your lender if you change jobs, increase or decrease your salary, incur additional debt, or change marital status between the time you submit an application and the time the loan is funded.
Put these 10 questions to your leading candidates and compare their answers. The results should lead you toward the mortgage lender that is right for you.