We've collected a list of the most notable ones below on questions to ask your mortgage lender before you commit to anything. So please print this out and take it with you when you meet with your lender!
What’s the Difference in Loan Types?
Before you sign anything, it's important to understand the different types of loans and what each entails. There are several types of mortgages, each with its benefits and drawbacks.
The fixed-rate mortgage is the most common type of mortgage. Loan. This is a loan in which the interest rate remains constant for the life of the loan. This is a good option for borrowers who want predictability and want to avoid any potential surprises down the road.
Another common type of mortgage is the adjustable-rate loan. This is a loan in which the interest rate can change over time, depending on the market conditions. This loan can be a good option for borrowers who plan to move or refinance within a few years.
There are also several other types of mortgages, including government-backed loans and jumbo loans. It is critical to consult with your lender to decide which type of mortgage is best for you.
What Are the Differences Between Fixed and Adjustable Rates?
When shopping for a mortgage, you'll quickly realize that there are two main rates: fixed and adjustable. So what's the difference?
Fixed-rate mortgages carry the same interest rate for the loan's full term. If you wish, this is an excellent alternative. Predictability and want to avoid any potential rate hikes in the future.
On the other hand, adjustable-rate mortgages have an interest rate that can change over time. This means your monthly payments could go up or down depending on how the market changes. This type of mortgage is cheaper to start with, but you'll want to make sure you can afford any potential hikes in the future.
What’s the Maximum Loan-to-Value Ratio?
When shopping for a mortgage, one of the first things you need to ask your lender is the maximum loan-to-value (LTV) ratio. This is the percentage of your home's value that the lender will loan you. So, for example, if you have a $200,000 home and the LTV ratio is 80%, the lender will loan you up to $160,000.
This number is important because it will help you determine how much house you can afford. If your LTV ratio is too high, you may not be able to get a mortgage at all. Or, if you do qualify, you may have a high-interest rate and unaffordable monthly payments. So it's important to know the maximum LTV ratio and compare it to the houses you're considering.
How Much Is My Deposit?
Your deposit is the sum of money you put down and need to save up before you can start the mortgage application process. The more money you have for a deposit, the better. But how much is enough?
The minimum deposit amount is usually 5% of the property's purchase price. But if you can save up more than that, it'll put you in a better position when negotiating with the lender and potentially getting a lower interest rate.
So, how much should you aim for? If you can manage it, a 20% deposit is ideal. But if that's not possible, don't worry – plenty of options are still available. Just be prepared to pay a higher interest rate and potentially additional fees.
What Documents Will I Be Asked to Provide?
Your mortgage lender will ask for a lot of documentation to approve your loan. This includes tax returns, W-2 forms, pay stubs, bank statements, and more. They want to see that you have a steady income and good financial history.
They'll also ask for a copy of the purchase agreement for the home you're trying to buy. This is so they can ensure that the property is worth what you're paying. And if you're planning on renovating, you'll need to provide proof of those plans.
So before you even start looking at properties, it's a good idea to get your financial documents in order. That way, when you find the perfect place, you'll be ready to make an offer immediately.
Are There Any Prepayment or Payment Penalty Options?
This is a huge one. Many lenders will penalize you if you try to pay off your mortgage early, which needs clarification. After all, shouldn't they want you to pay off your debt as soon as possible?
The answer is no; they don't want you to do that because they make money off the interest you pay on your loan. So, if you can prepay without penalty, that's a huge plus.
Also, find out if any payment options will allow you to pay less each month. Some lenders offer this, but it's only sometimes advertised. This could be a lifesaver if you ever hit a rough patch and can't make your full payment.
Important Tips
Asking the right questions will help ensure that you're getting the best deal possible and that you understand all the terms of your mortgage agreement. Here are eight essential questions to ask your mortgage lender before you sign anything.
- What is the interest rate?
- What are the loan origination fees?
- What is the annual percentage rate (APR)?
- What is the loan-to-value ratio (LTV)?
- What is the term of the loan?
- What is the monthly payment?
- What are the prepayment penalties?
- What are the escrow requirements?
Asking your mortgage lender these questions will help you better understand the terms of your loan agreement. Being an informed borrower is important, so don't be afraid to ask questions and get clarification if you need it.
Conclusion
You'll want to ask about the interest rate, the loan term, the monthly payment, and the down payment. You should also ask about closing costs and determine when the loan closes. You'll also want to ask about the prepayment penalty and whether the loan is assumable.