What to Ask When Getting a Loan
Before you start looking at homes, it’s wise to get your selection of a lender squared away first. Part of being prepared to get a loan is asking your mortgage company the right questions.
When you first start looking for a lender to help you buy a home, it is normal to feel like it’s a one-way street—you need the money, so anyone who will offer it to you seems like a someone you should do your best to listen to.
But in reality, you are an essential customer for your lender. Your business is critical to the company. It’s how they make their money and how they stay in business. So it is worth stepping back for a moment to orient yourself correctly.
As with any business deal, you need to look out for your best interests and act with confidence. Understanding how to pick a lender is a critical element in shopping for a home.
The terms and conditions you get on your mortgage will be a crucial factor in your financial picture for years to come. It makes sense to do your best to vet not only the actual mortgage company but the interest rate and other loan terms.
The following questions are ones you should be able to ask any lender or mortgage broker. They are questions you need to ask because you deserve to work with a lender that treats you with respect and has something to offer beyond just a loan.
They may be questioning you—but you are also interviewing them.
Questions Worth Asking Lenders and Mortgage Brokers
1. What Documents Will I Need to Get a Loan?
One of the most important questions you will ask your loan officer or mortgage broker is what documents they will need. If the mortgage officer is worth their salt, they’ll tell you before you even ask.
Depending on the loan program you end up you’ll more than likely need these things:
- Identification – either a driver’s license, passport or official state/federal ID.
- Income – including 30 days of pay stubs, your previous two years of federal tax returns, your last two W-2s, proof of any additional income.
- Accounts – such as bank statements for the last two cycles, investment or retirement accounts.
- Property – a statement showing the settlement of your prior home if you had one.
- Additional documents – forms such as a gift letter from a family member helping financially, landlord contact info (if applicable), letter of explanation for such problems as credit issues and divorce-related documents (if applicable).
2. Can you explain which types of loans are best suited for my needs?
Watch out for loan officers who start peppering you with options before listening to your story. Different types of loans make sense for different types of borrowers. Give the lender your financial picture and have the loan officer explain a breakdown of what options are available and how they would meet or not meet your needs.
There are tons of mortgage programs for buyers. Not every mortgage option is going to be suitable for your specific financial situation. Should you opt for an FHA loan? Does a conventional mortgage make the most sense? Are you a veteran? Maybe a VA loan will be your best option?
Quite often buyers will ask if they should go with an FHA loan or a conventional mortgage.
An exceptional mortgage broker will go over in detail which loan programs make the most sense for you and why. Getting the best mortgage terms for your needs are going to come down asking the lender the right questions. The mortgage officer should then have the ability to plug in the best package for you.
Buyers who rush into getting a loan can find themselves stuck with bad financing terms.
3. Do you approve loans in-house?
You will find a wide variety of lenders out there, some with more capabilities than others. The loan officer is the person you interact with, but there will be others involved, like the mortgage underwriter, who will determine if you get the loan.
A company that approves loans in-house is going to be better equipped to adapt to potential hurdles in your mortgage. For example, if there is a problem in your credit report, an in-house underwriter could discuss it with the loan officer and get it ironed out.
An out-of-house underwriter might just deny the loan and move on with the next application.
4. What kind of down payment will I need to get a loan?
The standard 20% down is still desired by lenders, but that does not mean it is required to get a mortgage. In fact far from it. The need for a twenty percent down payment is a myth that’s traveled far and wide for years.
There are some lenders who will work with you even if you have as little as 3% down. There are in fact three percent down conventional mortgages now available. And with specific specialized loan programs like FHA or VA loans, you can also get a loan with zero to 3.5% down. Whatever the circumstances, you need to know what the requirements are for getting the loan before you can move forward.
Keep in mind that if you have twenty percent to put down, it might be wise to do so. By having a twenty percent down payment, you will avoid paying private mortgage insurance which can be costly.
Those who put less than twenty percent down will see how much of a burden the PMI payments can be. They will end up researching how to stop paying private mortgage insurance as soon as they are able.
5. Are there any special programs available to me?
There are approximately 2500 specialized programs around the country that help buyers get a home. That’s a lot of options, and most of them probably won’t apply to you. But maybe one or more of them do apply to you.
An outstanding lender will have the knowledge necessary to guide you to programs that fit your situation. If the one you are talking to has no information or seems to have little interest in helping you in this area, find another lender.
Like any other business, there are going to be good and bad eggs. If the mortgage officer is more concerned about “closing a deal” then you know, you’re in the wrong place.
6. Do you charge an origination fee?
The origination fee is an expense charged by most lenders for setting up a loan. The lender you are dealing with may or may not have a fee. If they do, this expense may vary compared to the fee charged by other lenders. You may be able to negotiate on the origination fee. It can’t hurt to try!
Again it is vital to keep in mind the total cost of the loan. If one lender has an origination fee higher than another that should not preclude you from choosing them. It is all about the total financial output on your part.
7. What other fees do you charge as a lender?
Lender fees are pretty much unavoidable. They will attempt to make money where they can above, and beyond the interest, you pay on your loan. But that does not mean every lender charges the same fees.
You should compare lender fees across several different providers and weight those fees along with other factors before you choose who to go with. An important question to ask the lender upfront is how quickly they can put a loan estimate together for you. Years ago this used to be called the Good Faith Estimate.
The GFE was created to encourage buyers to shop and compare fees before deciding on a lender. The original purpose was to educate consumers on what services to bargain for, so they get the best interest rate, closing costs, and other terms.
The Good Faith Estimate would list all the costs associated with obtaining the mortgage. Lenders are supposed to get the GFE to borrowers within three days of the completion of a loan application. The GFE is now simply called the loan estimate. The change was made under the current TRID guidelines.
8. What is the interest rate I will be paying and what is the APR?
The interest rate you are charged on the loan is a significant factor you need to consider when picking a lender. You also need to pay attention to what the APR or annual percentage rate will be. The APR adds up the lender fees and the interest rate and divides them by the term of your mortgage.
9. How do you calculate the adjustments made to your adjustable rate mortgages?
An excellent question to ask a lender will be whether or not you should choose a fixed or adjustable rate mortgage. If you don’t plan to be in your home long, an adjustable rate may be the best option. For example, you may know you’re definitely going to be transferred within a couple of years.
You may or may not be interested in an adjustable rate mortgage—the kind that has an interest rate that changes periodically. If you are interested in this kind of loan, you definitely want to get clear answers on when and how the rate might change over the term of your loan.
Some things to consider include:
- How regularly is the rate adjusted?
- Do you give notice of when the rate will be adjusted, and if so, when?
- Is there a cap on how much you can increase the rate?
- Is there a limited on how much you can raise it in a year?
- What if rates go down, does my rate go down, too?
The answers to questions could determine whether you’re better off with a fixed rate loan.
10. How does your rate lock policy work?
When we are in a period of uncertainty with interest rates, the rate lock can become a vital decision point in the loan. Many borrowers will want to have the comfort of locking their interest rate.
These are the questions you should be asking regarding rate locks:
- Do you charge a fee to lock in my interest rate and if so what will it be?
- How long will the rate lock be for?
- Will there be a cost to extend the rate lock? How much will it be?
- Will you give me the loan lock in writing?
11. Do you charge a penalty if I repay early?
Although some states have made it illegal to charge an early payment penalty, some states still allow it. You want to be aware of the consequences in case you try to pay the loan offer early.
Even getting the home refinanced or going to another lender could lead to penalty fees with certain lenders. With the number of choices in lenders today, you’re probably better off skipping any mortgage companies who would charge a pre-payment penalty.
12. Can I get a pre-approval for the loan?
A pre-approval letter can make you more competitive when you are trying to buy a home in a hot market. Once a buyer sees that you have pre-approval, it makes the deal more likely to go through. Pre-approval is not a guarantee, but it is a big step in the process.
Keep in mind that pre-qualification is not the same as pre-approval. Pre-approval is harder to get but is much more reliable than pre-qualification. With a mortgage pre-approval, a lender will verify your income, employment, and credit. With many lenders, a pre-qualification does none of these things.
If you are purchasing a home, the seller and listing agent are going to want a pre-approval letter. A pre-qualification is worthless.
13. What should I avoid doing to preserve my pre-approval?
Making changes to your finances can cause a lender to say no, even if you have gotten pre-approval. Ask the lender for a checklist of things not to do so that you can avoid losing your loan. One of the most common ways buyers end up losing their loan approval is by purchasing a car at the same time their buying a house.
An excellent mortgage broker will go over all the things a borrower should not do so the loan goes through without a hitch. If you are buying a home for the first time, it is effortless to make mortgage mistakes. The article shares ten things NOT to do. Make sure you read it!
14. How likely do you think I am to get the loan I want?
The loan officer is one of the best-qualified people to ask about the likelihood of getting the loan you are after. He or she can give you informed advice on what to do to get the loan and should be able to look closely at your circumstances to tell you whether or not you are likely to be approved.
Asking is essential, because if you are told no it means you need to make some changes before moving forward with buying a home.
15. What will my mortgage payment be?
A simple question but one you’ll probably be very interested in finding out for financial planning purposes.
16. What are my closing costs?
Most buyers will want to know what monies they will need to bring to closing. This will obviously be a very important question for your banker. You will more than likely need to bring a certified check.
17. Do you have any references?
This last question is an important one. Like any other company, you are hiring doing your due diligence is vital. The loan officer you are using should be able to provide you with some satisfied clients. While you may think the loan terms are the most important aspect, the service you receive should never be discounted.
Ask any real estate agent, and they are bound to be able to convey mortgage broker horror stories.
When you are meeting with your lender take this series of questions with you. By having the list, there will be no questions you’ll forget to ask. Never underestimate the importance of who you pick to write your mortgage.
Additional Helpful Real Estate Articles
The above resources are all worth a look when you are purchasing a house for the first time.
About the Author: The above Real Estate information on questions to ask your lender or mortgage broker was provided by Bill Gassett, a Nationally recognized leader in his field.