Seven Questions To Ask The Lender Of Your Choice
Thursday, February 25, 2010
Unless you have enough cash to cover the purchase price of a property you want to buy, you’re going to need to get a mortgage. But how do you select the lender, much less the loan program, that will work best for you?
We suggest you ask the following questions when you talk with (interview) various lenders. If you do not like the answers given, continue shopping until you find a lender whom you feel comfortable. But, also remember to be nice! You may discover your expectations cannot be met and the first lender you spoke with actually is the best fit for you!
1) What kind of loan is best for me?
First of all, know that a lender needs to ask you a lot of questions before they can answer your question of “which loan is best for me?”. Also, don’t be shy! Ask the lender to describe the pros/cons concerning:
Fixed Rate Loans (The principal and interest payment does not change over the amortization period of the loan. The only thing that would alter the payment amount due to the lender might be interest and/or tax escrow amounts and perhaps Private Mortgage Insurance [PMI]. Fixed rate loans will typically charge an interest rate greater than the initial rate offered by Adjustable Rate Mortgages [ARMs].)
Adjustable Rate Mortgages (The initial interest rate is typically lower than a fixed rate, but the interest rate and resulting payment amount will change each, pre-determined, adjustment period. [One-year and three-year are most common.]
Interest-Only Loans (Run like the wind! [in our opinion] This type of loan has gotten a lot of people in trouble over the last few years. Only go here if you have a very good understanding of the financial marketplace.)
2) What is the Interest Rate?
The interest rate quoted will be the ‘simple interest rate’, not the ‘Annual Percentage Rate’ (APR). The APR is a fairly complex calculation that includes the simple interest rate and many of the fees received by the lender in the way of ‘closing costs’. So our recommendation is to focus on the ‘simple interest rate’ and find out about ‘closing costs’ and ‘discounts points’, etc. separately.
Also, make sure you find out the answers to the following when you discuss an Adjustable Rate Mortgage (ARM):
What is the Index? (The basis used to determine the future increases or decreases of your interest rate (Cost of Funds Index and Average of One-Year T-Bills are two of the more common indexes.)
What is the Margin? (The lender’s Profit Margin or ‘spread’ that is added to the ‘index’ to determine the resulting simple interest rate charged.)
What are the ‘Caps’? (The maximum amount your interest rate can fluctuate each adjustment period AND during the life-time of the loan. [ You will hear “1 and 3” for example; which means your rate can change, up or down, a maximum of one percent each adjustment period, and a total of three percent, up or down, over the lifetime of the loan.)
What is the interest rate the Caps are based upon? (Sometimes we hear of a lender who bases Caps on an interest rate different [usually higher] than the initial rate quoted. So ask this question just to be on the safe side.)
3) What are the Discount Points and Closing Costs?
“Discount Points” are an optional, up-front, expense that is used to lower the interest rate charged. (Many refer to Discount Points as ‘interest paid up front’.) Each ‘point’ is the equivalent of 1% of the loan amount and will ‘buy down’ the mortgage’s interest rate anywhere from 1/8 of a percent to 1/4 of a percent, dependant on the type of loan and amortization period. Currently, with interest rates so low, it is rare that we see someone willing to pay cash up front to lower their interest rate. However, if you do pay Discount Points, they are fully tax deductable.
“Closing Costs” is a term we use to lump in many additional fees that go to the lender and other closing-related services such as the appraisal, credit report, recording fees, escrow establishment charges, the Lender’s Title Policy, closing attorney fee. The lender’s commission, or ‘origination fee’, accounts for a majority of the closing costs.
Do not be shy to ask for explanations of some fees that will show up that we often refer to as ‘junk’ or ‘garbage’ fees. A lender may be willing to waive a few fees in order to keep your business!
An estimate of these fees is duly noted on the “Good Faith Estimate”, which federal law requires lenders give you.
4) If I make a loan application, how long will it take for me to receive my Good Faith Estimate?
The Real Estate Settlement and Procedures Act (RESPA) requires lenders to give you a “Good Faith Estimate” which shows all the costs associated with the loan for which you are applying. Currently, lenders are not required to guarantee the Good Faith Estimate. However most reputable lenders do tend to honor what they give you unless there are changes to the loan, who the third-party vendors are (for example - closing attorney and the appraiser), or changes were made to the Purchase Agreement after the initial estimate was calculated. (It is a good idea to hold on to the Good Faith Estimate and have it with you at the closing table in case there are discrepancies. This heightens the chances the lender will adjust charges to come closer to, or meet, the original estimate.)
5) Is there a pre-payment penalty for the loans being quoted?
It is rare that we see a pre-payment penalty. If the lender says there is a pre-payment penalty, we suggest you look for another lender.
6) Can I lock in my loan interest rate at time of application?
Interest rates do fluctuate. If you think rates will get higher after you make your full loan application, you may want to lock in your rate. However, lenders are not required to allow you to lock in your rate, and, if you do lock in your rate then interest rates move downward, do not expect lenders to also allow you to receive the lower rate, although some lenders will allow you to have a ‘one-time-drop privilege’.
Most lenders will require you to have negotiated a binding Purchase and Sale Agreement before they will lock in your rate
Also, when interviewing lenders, ask if the lender charges a fee for locking in rates, how long a lock-in is good for, and to give you the lock-in in writing.
7) How long will it take to get loan approval after I make loan application?
Today, we are finding lenders can process a loan in 30 to 45 days on average.
YOU control a lot of this aspect of getting a loan. You must be organized and able to get to records needed by the lender (two years tax returns; current pay stub; all account numbers and mailing addresses for ALL credit cards held in you name regardless if these are rarely, if ever, used accounts; etc.) Also, notify your employer that you are making a loan application and you sure would appreciate them turning around the VOE (Verification of Employment) quickly!
Ask the lender what potholes might be lying in wait and how can we avoid these problem areas!
- Scott Askew
Posted in: Intown Atlanta Real Estate News