Finding a lender that you can trust is important. You are going to bear the consequences of a bad mortgage selection for a very long time, probably until you become completely debt-free.
How can I select a good lender? What questions should I ask a lender to choose the best loan program? Is there a way to compare offers from two or more lenders?
Well, it’s time to ask a lender rather than to yourself. What you can do is to prepare a list of questions, the answers to which will help you decide which lender to select and what loan program to choose, after a careful comparison of details.
The first question will obviously be about the loan products that a lender has to offer. There are basically three types of loans with varying term options.
- Fixed-Rate Mortgage
- Adjustable-Rate Mortgage
- Interest Only Mortgage
A lender may offer a range of other loan options as well, such as FHA loans, VA loans, special loan programs, etc. You need to talk to a loan officer or a mortgage broker and ask questions pertaining to different aspects of these loan programs, such as the loan terms, monthly payments and whether the loan has a prepayment penalty associated with it. A payment typically has four components – principal, interest, taxes, insurance, and possibly a fifth one known as PMI.
The most important aspect of mortgage shopping is rate comparison. Keep in mind that a lender, for the same loan program, might quote different rates to different borrowers who all have the same loan qualifications. The mortgage rates in itself do not remain static, but keep on changing every few moments.
You must ask a lender for a list of its current mortgage interest rates. Further, you should ask whether the rates being offered are the best and the lowest for that day or week. Besides, your questions should also seek information about the rate lock-in period and fee, and the annual percentage rate (APR) that represents the overall cost of the loan.
You must seek a disclosure on points being charged by a lender. Points are fees paid to the lender or broker for the loan. A point typically equals one percent of the amount being borrowed. There are two kinds of points – origination and discount. A borrower must pay for origination points as they represent the fees of the lender.
Discount points, on the other hand, can be purchased to lower the interest rates. You may want to use a calculator to see if purchasing points can help you lower the cost of loan in the long run. Ask your lender if you need to pay points for the best rates.
A borrower must have enough to pay down at the closing. Typically, a lender asks for a 20% down payment. However, you may find a lender who can accept lower than that. Ask a lender if there is a special loan program for the people with low down payment.
A lender may agree to accept a low down payment on the condition that you agree to pay for private mortgage insurance (PMI). If this is the case, you must know the duration during which it is necessary. Besides, you must also ask how this extra expenditure will affect your monthly payment.
Sometimes, a better way is to consider FHA loans. With FHA-insured loans, you only need to put down 3.5%, but you are required to pay for two insurance premiums – one upfront and the other annually. You may want to enquire if your lender can offer FHA loans, and if yes, then at what cost.
The closing costs typically range from 3 to 7 percent of the loan amount. Another important aspect of mortgage shopping, besides rate comparison, is to compare fees charged by different lenders.
If you have already applied at more than two lenders, you will receive the Good Faith Estimate and Truth-in-Lending Disclosure Statement from each lender. These documents can help you compare settlement costs and various fees.
Prior to application, you can visit different lenders and ask for an estimate of different fees and charges. These may typically include loan origination fees, underwriting fees, broker charges, credit repot fees, appraisal fees, several other fees and closing costs.
You may want to use a questionnaire to keep with you when visiting a lender.