The first time I met with a lender, I couldn’t have been more clueless. I was a doe-eyed 22-year-old, looking to finance my first condo and I couldn’t tell you the difference between a principal payment and an interest rate. Luckily, I made it out of that experience unscathed and vowed to smarten up. A lot has changed since then. As I became engrossed in the real estate industry, learning about the mortgage business was par for the course.
When it comes financing your home, there are no dumb questions to ask or things to consider.
As a buyer, the mortgage business is a tough nut to crack. There are many products and programs to wade through and every loan officer that you speak to will have a different value proposition. It’s easy to feel lost and outside of your comfort zone when going through the process. The truth is, unless you work in the mortgage industry, you’re not expected to know the ins and outs or have all the answers. When it comes financing your home, there are no dumb questions to ask or things to consider. That said, if your goal is to be a smart shopper than you’ll want to be prepared.
Be a Smart Shopper
Speaking of being a smart shopper, first let me state the fact that to find the best deal and program you will need to actually shop, i.e. talk to several lenders. I can’t stress this enough. You can click on the first mortgage brokerage company that pops up on Google, apply for a loan and scratch it off your list. However, without actually going through the effort of comparing your options, how will you ever know if you are getting a good deal? There’s no shortage of mortgage lenders and no single institution is a catch all for every type of real estate transaction.
Find a Reputable Lender
With over 500,000 individual state-licensed mortgage entities, you won’t have to search hard to find an active loan officer. Although, you don’t want just anyone who promises to hand you a loan, you want to team up with the right financial partner. You can start by asking friends, colleagues and your real estate agent for recommendations. You can search for local credit unions and banks at yellowpages.com or scope out industry outlets like the Scotsman Guide for experienced mortgage originators.
What Makes a Lender Reputable
Customer service is always a biggie. Quality lenders are approachable and available to answer your questions. They should be able to explain programs in a straightforward way. You shouldn’t need a Ph.D. in mortgages to understand what’s being offered.
Talk is cheap. Some people will tell you what you want to hear to get your business, but do they have a proven track record of providing mortgages on properties that are similar to the home you plan on buying? What good is a low interest rate if the sweet talking loan officer couldn’t get you to the closing table?
A local team increases your chances of working with knowledgeable appraisers and professionals who have a pulse on your micro market.
When in doubt, stay local. Although, the mortgage industry is changing and internet-based companies are breaking down geographical barriers, I am always wary of those who want to send your application to a far-away land. A local team increases your chances of working with knowledgeable appraisers and professionals who have a pulse on your micro market and who understand the nuances of the housing types in your area.
Think long-term. If you are planning on making several real estate investments over the course of your life, building a quality relationship with a financial partner is even more critical. As you evaluate loans and programs, you always want to think about the long-term impact. Be sure to discuss your plans with your lender and how one loan may impact future attempts at securing additional mortgages down the road.
Questions to Ask Your Lender
Once you’ve narrowed down your list of lenders to screen, you’ll want to come up with your list of questions to help you compare apples to apples. Here are my go-to questions to keep the conversation focused.
Q: Based on our goals, which program(s) would you recommend?
This is a loaded question. It’s impossible for a lender to answer without first understanding your real estate goals. If he or she immediately launches into a canned pitch, that’s never a good sign. If the person takes the time to learn about your situation, he or she should be able to explain the pros and cons of various programs.
For residential buyers, a 30-year fixed mortgage is a popular choice. However, there are other ways to approach your loan, including mortgages with adjustable rates and/or shorter terms. Just be careful if you choose a non-vanilla program and particularly one with an adjustable rate. It’s important to understand the conditions of the loan, including the adjustment frequency, rate cap, index and margin.
Q: What is the interest rate?
The most obvious way that lenders make money is by renting borrowers cash and charging interest. Even small differences in rate can make a big difference in the long term, which is why shopping and negotiating the rate is key. That said, do keep in mind that interest rates frequently fluctuate, so you’ll want to keep tabs on them during your home search.
Q: Do you offer rate locks?
Since rates can change quickly, at some point during your home search, you may want to lock in your rate. This is particularly helpful if you believe rates are increasing and you want to secure the lowest rate while you can. Before you lock it in, you’ll want to find out if there’s a fee involved, how long the lock lasts and what happens if rates actually go down.
Q: What are the points?
In addition to interest, lenders charge “points.” One point is equal to a percent of the loan amount. For example two points on a $400,000 property is $8,000. Can you negotiate the points? There’s no harm in trying. For example, if you offer to pay more points, the lender may lower the interest rate. This tactic is called “buying down the rate.”
Q: What are the all-in costs?
Buyers are often surprised by the extra fees that tend to crop up throughout the loan process. For example, an origination fee is a one-time payment that some lenders charge to process an application. Some other sunk costs can include pulling your credit report, the appraisal, recording fees, etc. Ask for the all-in costs or a loan estimate so that you aren’t blindsided.
Q: Will my loan have any pre-payment penalties?
What if you win the lottery and decide to pay off your loan? Or, what if you decide you want to refinance the loan in a few years? You don’t want to be penalized for cutting out of your mortgage early. How long do you have to wait and are there any hidden costs for these scenarios?
Q: Where does the underwriting process take place?
Before your loan can get approved, it needs to go through a process called underwriting. Most would argue that the underwriting can be faster and more streamlined when it takes place in-house as opposed to off-site.
Q: What’s your typical timeline?
In competitive situations or if you need to hit a certain deadline, time is of the essence. How quickly can the lender process your file? Six weeks isn’t uncommon, but some lenders can expedite a loan to get it done in half the time. Having a speedster lender can give you a leg up when it comes to negotiating offers.