Some of the biggest misconceptions held by buyers relate to the belief that all mortgage lenders, and all mortgages, are pretty much the same. Also, buyers tend to think that the mortgage process doesn’t start until AFTER you find the home you want and negotiate a successful offer. These misunderstandings are not surprising when you realize that the vast majority of buyers only experience the mortgage process once or twice in their lives. Unfortunately, in this situation, ignorance is certainly not bliss! If you fail to ask the appropriate questions of your potential mortgage lender, you may do serious damage to both your negotiating position and your pocketbook.
Questions you should ask every mortgage lender before you shop for a house:
- Will you pre-approve me? This is very important. Negotiating is much easier for the buyer when the seller KNOWS, ahead of time, that you will get your mortgage.
- How quickly can my loan go through? Again, if the seller knows you can close quickly, this may sway the negotiations in your favor.
- Do you carry Adjustable Rate Mortgages? The lower the rate, the more you can qualify for (and Adjustable Rate Mortgages have initial rates lower than fixed mortgages). While you may not choose this option is good to know it exist.
- Do you have Convertible Loans, or loans with a conversion option? If you do find the need to use the Adjustable Rate Mortgage, can you change it to a fixed rate in the future? At what cost?
- Do your mortgages carry a pre-payment penalty? Pre-payment penalties, which had all but disappeared from the industry, have recently reared their ugly heads again! ASK! And make certain you fully understand the circumstances under which you may trigger that penalty.
- Do you carry fixed-rate mortgages with 30-year terms? With 15-year terms? A 15 year term will offer a slightly lower interest rate. If no prepayment penalty exist a good mortgage lender will help you determine whether this option is in your best interest. The higher interest rate on a 30 year loan offers more flexibility should you experience an unexpected financial hardship.
- Are you an FHA direct mortgage lender? If FHA is an option (and many first-time buyers go FHA), then this is a good question to ask. Sometimes the processing time can really be shortened with a direct mortgage lender. Again, this is a good negotiating tool, since it may get you to the closing sooner.
- What is the difference between an FHA loan and conventional loan? Fees, interest rates, down payment and loan amounts may vary. An FHA loan allows for a smaller down payment but can be more restrictive. For example: An FHA lender may require the seller to make some home improvements prior to the closing.
- Are you a VA direct mortgage lender? For those who qualify, a VA loan can be a wonderful option. Again, dealing with someone who is a direct mortgage lender for this type of loan can really streamline the approval process and help you with the seller.
- Do you offer USDA loans? What is an USDA loan and how do I qualify? Eligibility for a USDA loan is based on income and the location of the property.
- Are you a portfolio lender? Some lenders keep the loans they make “in-house,” and some sell the loans to other institutions. While it does not impact you (or the terms and conditions of your loan) if it is sold, there is a good reason for asking this question. Portfolio lenders often have more leeway during the approval process and can tolerate past credit problems that others may not want.
- Are your fees negotiable? Let the lender know you are comparison shopping. Politely asked, this question will appear to be just one more factor in your decision-making process. If the lender really wants your business, you may be surprised by the answer! In any case, if you don’t ask, you can be certain that no one is going to just offer to drop their fees.
Taking a few minutes to ask these questions of a number of mortgage lenders can pay off big time. These benefits may come in the form of a more favorable negotiating position for you with the seller and/or as a direct savings in relation to your loan. In either case, doing your groundwork with mortgage lenders is a smart and important way to begin your home buying process.