Purchasing a new home can be overwhelming, especially if it’s your first time. Proper preparation is vital, and this includes asking the right mortgage questions. Given that moving house is consistently ranked as one of the most stressful life events, anything you can do to minimize this stress will make the process run more smoothly.
Understanding the loan process is key to streamlining your experience. Here are 10 questions you should be asking your mortgage lender:
1. How much can I afford to borrow?
Before you begin looking for a new property, the first question you should ask is how much you can afford to borrow.
Mortgage lenders use a range of factors to calculate your affordability, so it’s not something you can quickly gauge online. That said, some key factors do tend to apply with the majority of lenders. These factors include:
Understandably, the amount of money you earn is an essential consideration for mortgage lenders. The amount of money you will be able to borrow should be directly proportional to your income to ensure you can make the repayments.
In addition to your income, most mortgage lenders will need to know how much debt you have outstanding. The lender will compare this debt level to your income, which may affect the amount you can borrow. This consideration doesn’t mean you won’t get a mortgage if you have debt outstanding, but — if you can — clearing some debt before you apply may increase your affordability level.
As well as your income, your employment status will shape your affordability calculations. As a mortgage is usually a long-term commitment, secure employment will likely act in your favor.
Mortgage lenders use historical information to guide their decisions, considering several years of information about your financial circumstances. A good credit history means you’re reliable in the lender’s eyes, and it will likely increase the amount you can borrow. Conversely, problems with your credit history may reduce the amount.
We recommend you discuss this with your lender beforehand and get prequalified for the amount you can borrow. This prequalification helps ensure you only view properties you can afford and speeds up the rest of the buying process.
2. Which type of mortgage is right for me?
As well as finding out how much you can afford to borrow, it’s crucial to spend some time at the start of the process learning about the different types of mortgages available. There are many options to choose from, all with varying risks, advantages, and potential disadvantages. Some examples include:
- Fixed-rate mortgages
- Adjustable-rate mortgages
- Interest-only mortgages
- Negative amortization mortgages
Besides learning about the different types available, ask your mortgage lender which loans are best for your circumstances. We are all unique, with different tolerances for risk, so it’s essential to carefully consider what type of mortgage will best suit your needs. Mortgage lenders can help with this, so make sure you ask.
3. How much will I need for the down payment?
Unless you’re eligible for certain types of loans, you will need to make a down payment. The minimum amount required varies, with down payments for some kinds of home loans starting at 3%. However, the typical amount is usually around 20%.
Although not all mortgage lenders require this amount, there are downsides to taking lower down payment options, so it’s essential to weigh up the short-term affordability against the long-term consequences. For example, some mortgages with lower down payments mean higher closing costs and higher monthly fees. So, while the initial offer seems appealing, it may cost you more in the long-term.
If you can afford to, putting down a higher down payment can also work in your favor. Talk to your mortgage lender about this to find out what the recommended down payment for you is.
4. What interest rate should I expect to pay?
By their nature, interest rates fluctuate. But your mortgage lender should be able to estimate how much you will pay, especially in the first few years of repayments.
That said, there are several things you can do to make these interest rates more stable for you. For example, some mortgages may give you the option to lock in a low-interest rate, which can work in your favor, especially if it’s a short-term lock-in. However, if you choose to do this, you should ensure that your mortgage advisor clearly explains the implications. Does it mean you will pay a higher interest rate over the long term?
Many mortgage lenders also have two interest rates — the base rate and an annual percentage rate (APR). If there’s a vast difference between the two rates, your lender is likely charging you a significant amount in fees. Ask them about this if you’re unsure.
5. What is the mortgage approval process?
When you choose a mortgage lender, don’t assume you know what the approval process is — even if you’ve bought a house in the past. Procedures change regularly, especially in the current climate.
Ask your mortgage lender to set out their process, informing you about each step that must take place before you own your home. Make sure you know your responsibilities and obligations throughout the process. This knowledge will enable you to gather all your resources promptly, reducing any delays from your end.
Typically, a mortgage application must proceed through the following stages before you’re able to move into your new home:
In the preapproval stage, you will provide some preliminary information to your mortgage provider to calculate a more precise value range for you to work with as you’re searching for a property.
Finding your new home:
Next comes the part you’re no doubt looking forward to — finding your new home. Of course, you may start doing this before you have your preapproval, but you can ensure your search falls within your affordable range once you have the preapproval in place.
Making an offer:
Have you found your future home? Next, you need to make an offer. For some, this stage is straightforward. If you make an offer and it’s accepted straight away, great! If not, you may need to renegotiate the price. Whatever happens, make sure you know what your upper limit is ahead of your first offer, so you’re not tempted to go above what you are willing to pay.
Mortgage loan application:
Once you have an offer accepted, you need to apply for the mortgage formally. This step kickstarts the legal process that will ultimately lead to you moving into your new home.
Mortgage loan processing:
When they receive the application, your chosen lender will process it and ensure they have everything they need to complete the process.
Underwriting is the most crucial part of your application. During this stage, the underwriters will look at the information and documents provided in the earlier stages so they can formally decide whether to approve your mortgage agreement.
The final hurdle! Once you receive the approval, the legal contracts can be completed, and, ultimately, you will receive the keys to your new home.
The precise details of each step will depend on your mortgage loan provider, so make sure you understand what needs to happen and when. This knowledge will help you chase up any slow movement and get to the closing stage faster.
6. How long should I expect the process to take?
Again, the time it takes to reach your mortgage application’s final stages varies depending upon several factors. However, your mortgage provider should give you some estimates to work with as you’re making plans to move.
They will provide approximate timescales at the start of your application, according to the type of mortgage you’re applying for and the current demand on their services. As the application progresses, you will need to agree on a closing date for inclusion in the purchase contract. All involved parties mutually agree on this date, so this is often an opportunity to coordinate a time frame that works for you.
When asking about timescales, you should also inquire about any obstacles that may slow down the application and delay closing. These delays are usually the biggest frustrations encountered by homebuyers, so it’s essential to be upfront about your needs.
Sometimes, mortgage lenders will guarantee a closing date — or reimburse you for any costs you incur if they’re unable to close on time. If this feels important to you, make sure you bring it up with your mortgage provider before you begin the application.
7. What documents do you need to progress my mortgage application?
You will likely need to provide several types of documentation to progress your mortgage application. If you want your house purchase to progress quickly, ensuring you have everything they need can significantly reduce timescales.
Each mortgage provider has its own set of requirements. But you should expect to provide proof of your income early in the process; the provider will use this to calculate your affordability. This proof could be in your pay stubs, a proof of income letter from your employer, last year’s tax return (1040), or a wage and tax statement (W-2).
Your provider will also need to gather documentation from you during your application’s mortgage processing stage. The exact documents required vary between the providers but may include credit reports, information about any assets or debts, and a valuation of the property you’re buying. The underwriter will receive these documents to assist them with their calculations and support your mortgage approval case.
The underwriting stage is the most vital part of the application process, and, as it happens closer to your closing date, delays can mean you won’t be able to move into your property as planned. Talk to your mortgage provider early about the documentation they require and ensure you have everything ready before getting to this crucial step.
8. Are there any additional costs I need to be aware of ahead of closing?
Mortgage providers aren’t always transparent about their fees when you start your application. Make sure you understand all the costs you will incur as a result of the application so you can budget accordingly.
As well as the fees charged by the lender, consider any costs relating to third parties. You may need to pay for them to run credit reports, property inspections, and escrow. You will also likely incur additional costs related to closing, such as attorney fees. The mortgage provider must legally give you these costs in a Loan Estimate, but you may not receive this until your application’s approval.
Make sure you ask your lender about all the costs before you start your application, so you don’t find out when it’s too late to back out without losing your dream home.
9. Will I be able to pay off the mortgage early?
A mortgage is a long-term commitment. You should never enter into an agreement without the intention to see it through. However, what happens if you decide you’d like to pay off the mortgage early?
This early repayment may happen for many reasons. The most obvious is if you want to sell your home to move elsewhere, taking out an alternative mortgage.
But there are other reasons you may wish to repay early. What happens if you receive a large amount of money and decide you’d like to pay for your house in full? Alternatively, your circumstances may change. If you receive an increase to your salary, you may decide you want to pay more than the specified monthly amount to pay off your balance ahead of schedule.
These are all critical mortgage questions to ask your mortgage lender before you take out a loan. If you don’t, you risk ending up stuck in an agreement you can’t escape from — even if you want to.
Dependent on your location, you may incur prepayment penalties. These penalties could see you paying an additional six months of interest if you end your mortgage early, including if you’re selling the property.
They’re not legal in all states, and some only last for the first few years of your agreement, so make sure you fully understand your lender’s rules before you take out the mortgage.
10. How will you keep me up to date as the mortgage progresses?
This final question seems like a no-brainer, but it’s vital to ask this question. Some mortgage providers aren’t forthcoming with updates, which can be a source of frustration for buyers.
Set out your expectations for communication at the start of the process. Most reputable mortgage providers have established procedures for keeping you up to date. Familiarize yourself with these procedures to ensure you keep track of the latest developments and respond to queries in good time.
In summary, buying a house is a stressful time for many reasons. Your mortgage lender is an invaluable source of information as you start the process, so make sure you use your time with them wisely. And remember — there’s no such thing as a stupid question. They are the experts in home buying, so use their expertise to help guide you through the process and reduce delays.
Do you want to know how we can help make the process even less daunting? Contact us to discuss how we can help you find your dream home in Rhode Island.