Looking to obtain a home loan? Then be looking to ask questions. FHA mortgages can be especially complex. Here are the top ten questions to ask before committing to a home loan.
Top Ten Mortgage Questions That Must Be Asked
Especially if you are a first time homebuyer, the home loan process can be complicated and opaque. Paperwork piles up fast, but understanding doesn't always follow. Asking these ten questions can add to your understanding, and may even save you a lot of money.
1. Fixed rate or adjustable rate--and, more importantly, why?
Adjustable rate mortgages, or ARMs, feature an interest rate that starts out low and eventually adjusts at a certain time in the future. When rates are low, those with ARMs are happy because they don't have to refinance to get a lower rate. But ARMs can be riskier when rates are on the rise.
While these cautionary tales should be heard, ARMs can work for certain situations. For instance, if you know that you are not going to live in this home for more than five years, a hybrid adjustable rate mortgage that is fixed for five years may be a great option--especially if it means a lower payment and easier qualifying terms.
2. How and how much are the mortgage finance people getting paid?
This is a great way to gauge the honesty of the finance people you're working with.The finance fee may come in the form of a discount point or a yield spread premium rebate from the lender or a loan origination fee.
You should know what you're paying to get this loan.
3. Is there a prepayment penalty attached to this loan?
A prepayment penalty means that if you pay off the loan prematurely, you may owe an extra fee to the lender. A typical prepayment penalty might last for three years and cost six months' of interest. Prepayment penalties can get you a lower rate, and come in different guises--hard, which kick in if you refinance, sell, or prepay more than 20% of the balance in a year--or soft, which don't apply if you sell your home, only if you refinance. Plan accordingly--if a penalty kicks in it can be very expensive.
4. Is this interest rate locked and what could unlock it?
Ask whether or not the interest rate is locked, and ask what could unlock it. Rate locks are typically executed in writing so there is no misunderstanding. If you are at the start of the loan process, there are doubtless conditions that must be met in order for the locked rate to be valid at closing. For example, if you lower your down payment or your credit score declines, a locked rate can get unlocked in a hurry.
5. What's the turn-around time for getting a response from the lender?
Out of courtesy (mercy?) for borrowers, most lenders will designate a specified turn-around time for getting back to you after you submit documents. Know this number.
6. Can we close on time? Are you sure?
Written into most purchase contracts is a little thing called a "closing date." If you cannot get funding by that date, you can lose your deposit and your house. Therefore, you want to impress upon the lender that this loan process needs to be timely.
7. Why are you recommending this particular loan for me?
A mortgage is an important part of your entire financial plan. See if your loan agent has put any thought into your situation or is just pushing the product he is most familiar with.
8. How good is this "Good Faith Estimate"?
Lenders are required to provide borrowers with a Good Faith Estimate, or GFE, which shows the itemized closing costs of the proposed home loan. Sometimes, the estimated closing costs are pretty spot-on accurate. Sometimes, they're way, way off. Ask your mortgage pro to tell you how good this Good Faith Estimate really is.
Some lenders may even guarantee the GFE if you demand it.
9. Are FHA rates and terms comparable to conventional financing rates and terms?
The main appeal of an FHA loan is the ability to qualify for a mortgage with a low down payment. FHA rates are usually comparable to conventional rates, but sometimes not. Consider also that not every lender is approved to do FHA loans. Even if it's a better product for you, you won't hear about it unless your lender can do it.
10. What can we do to lower the cost of this loan?
Some people get into an adversarial relationship with their mortgage pros. It's better to work together. Whenever possible, use the word "we." What can we do to lower the cost of this loan?
Whether it's to come up with a ten percent down payment rather than a five percent down payment or a gentleman's agreement to use the same lender for future needs, there is often something that can be done to lower the cost of this loan. But if you don't ask, how will you know?
Andrew Freiburghouse is a writer and businessman. As a partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc., Andrew has advised thousands of clients on a variety of financial matters.