5 Important Questions to Ask Your Lender
While there are many ways to purchase a home, your financing options are based largely upon your long-term investing goals and available capital. The financing that you choose for a rental property would differ from what you might use for a rehab property. Between the record low interest rates and reasonable closing costs, lender financing makes sense for long-term investments. No matter what type of financing you are thinking about, it’s important to know as much as you can about the process. Before you get in over your head, check out the following five important questions to ask your lender.
What are the Terms?
One of the biggest changes in the mortgage industry in recent years is the amount of transparency in every transaction. You no longer run the risk of a bait and switch because you will be emailed and informed of the summary of all fees and terms before your loan application goes to underwriting. In general, the number of loan programs has significantly diminished in recent years. There are still a few adjustable rate loans available, but the standard 15, 20 and 30-year fixed options are the most prevalent. You need to know if there is anything out of the ordinary with the terms of your loan, such as a balloon payment or a prepayment penalty.
What is the Rate and how Long is it Good for?
Interest rates change daily and in high market volatility, they can change several times during the day. Once your credit has been pulled and your lender receives some preliminary information, you will be given an estimated interest rate, which is based on your credit score, your down payment amount and your debt-to-income ratio. Should your application be lacking in any of these areas, you will be quoted a higher than advertised rate. In addition to your quoted rate, you need to know how long your rate is good for because your interest rate will not last forever. Typically, your interest rate will be locked for 30, 45 or 60 days and the longer the lock term, the higher your rate. It is absolutely imperative that you know everything about your rate because it is the most important factor in determining your monthly payment.
What is the Timeframe?
No two loan applications are the same and two loans submitted to the same lender could close weeks apart. There are a number of factors that contribute to this difference such as the type of income you receive, the appraisal on the property and the title of the property. Prior to committing to a lender it’s important to have a timeframe for closing. There are certain times when lenders are overwhelmed with new submissions, which can cause the average loan to close weeks later than what may be available with another lender. There may also be issues with your credit profile or application that can add extra days to closing. Having an idea of the timeframe will impact the offer you make and the rate lock you accept.
What are the Closing Costs/Fees?
One of the greatest benefits of complete transparency is that you know exactly what your closing costs and loan fees are; the number is no longer a best estimate. It is required by law that the total fees disclosed at the time of submission be within a certain percentage of the actual numbers on the HUD statement. If the numbers are above the allowed variance, they must be changed before the loan goes into closing. This gives you a chance to shop closing costs. Typically, average loan fees to the lender are 15 percent of the loan amount, but this number can change based on specific loan size and application profile.
What are the Total Items Needed?
Before you get too far in the process, you want to know which items are needed in order to more forward. Generally, you are looking at tax returns, bank statements and documentation of current income. However, if you are a self-employed borrower, the items needed will be completely different. If you are self-employed, you will need all the pages in your tax returns, accountant’s letters, profit and loss statements and possibly any current leases. Due to the changes made in recent years, you will probably be asked to provide far more documentation that you feel necessary. If your loan requires items that take more than a few days to obtain, you will need a good amount of time to gather everything.
While there is a lot to the process of closing a loan, it is often far less difficult than you perceive it to be. In order to get the best deals and make the best decisions for you, it’s important to have as much information about the process as possible. Ask your lender the above questions before you get started so you know what to expect.