10 Crucial Questions To Ask Before Choosing A Mortgage
The Pre-Qualification & Pre-Approval Processes
• Which Type of Loan is Best?
• Pre-Qualification versus Pre-Approval
• What Does my Monthly Mortgage Payment Include?
• What Are All the Costs?
• What Factors Affect What I Can Afford?
• How Much is My Down Payment?
• How Much are Closing Costs?
• What is the Loan Estimate?
• Is There a Prepayment Penalty?
• Do You Offer Loan Rate Locks?
• What is the Interest Rate and Annual Percentage Rate?
• What are the Discount Points and Origination Fees?
What Are All the Costs?
All the costs of a loan include not only fees that go into the lender's pocket but also related third-party vendor
fees such as:
• Credit report
• Lender's title policy
• Pest inspection reports
• Escrow (where applicable)
• Recording fees
What is the Loan Estimate?
Lenders are required to give you a loan estimate, accurately containing all of the costs of your loan. Lenders
are required to deliver the loan estimate when an application has been completed. The following 6 items are
typically required to be received first:
• Name of borrower
• Social Security number
• Property address
• Estimated value of property
• Loan amount
Is There a Prepayment Penalty? In some states, prepayment penalties are no longer allowed, so
ask. Typically, prepayment penalties let the lender collect an additional six months of "unearned
interest" if you pay the loan off early through a refinance of sale of the property. Be sure to ask:
How much is the prepayment penalty?
What are the terms of the prepay? Some are in effect only during the first 2 to 5 years of the loan.
Would the prepayment penalty apply if I refinanced through you at a later date?
Do You Offer Loan Rate Locks?
Interest rates fluctuate and change daily. If you have reason to believe that interest rates are moving
up, you might want to lock your loan. Lenders typically charge zero to one point to lock a loan
rate and points. Ask your lender:
• Do you charge a fee to lock my interest rate?
• Does the lock-in protect all the loan costs?
• For how long will you lock this rate?
• Will you give me the loan lock in writing?
The alternative is to pay the prevailing rate and points on the day your loan funds
Now that you know you want to buy a house, how do you know how much you can afford and if you can
qualify for a loan? The way to get started is to go through the pre-qualification and pre-approval process with
a lending specialist.
Pre-Qualification versus Pre-Approval
1. Pre-Qualification is how much money a bank will lend you based on your income, assets, and debts. Pre-
Qualification is typically done over the phone with a lending specialist. This is the first step to get started in
the buying process. The lending specialist will do a minimal credit review over the phone which means
discussing your credit background. When you begin the Pre- Approval process the lending specialist will
actually check your credit but during Pre- Qualification they will simply gather basic information regarding
your financial and credit situation.
2. Pre-Approval is a more formal process and includes completing a loan application on-line and providing
documentation regarding income and assets. During the Pre-Approval process the lending specialist will ask
for authorization to check credit in order to analyze debt ratios. Pre- Approval is typically done when you start
looking for houses with a real estate agent or prior to writing an offer.
What Factors Affect What I Can Afford?
There are three factors that affect how much you can afford when you decide you would like to buy a home.
1. The down payment - do you have enough liquid cash to make a down payment?
2. Your ability to qualify for a loan - as mentioned earlier this is determined during the Pre- Qualification & Pre-
3. The associated closing costs on your home.
How Much is My Down Payment? Most loans today require a down payment between 3.0% to 20%. Contrary to what many people think, there are still loans that have lower down payment requirements depending on the type and terms of the loan. Keep in mind, if you are able to come up with 20-25% down you will eliminate mortgage insurance.
Which Type of Loan is Best?
How Much are Closing Costs?
You will be required to pay fees for acquiring the loan and other closing costs. These fees must be paid in full
at the closing unless you are able to include them in your financing. Typically, closing costs will range
between 3-6% of your mortgage loan.
What Does my Monthly Mortgage Payment Include?
Most lenders require that your monthly payment range between 29-36% of your gross monthly income. Your
mortgage payment to the lender includes the following:
• The principal on the loan (P)
• The interest on the loan (I)
• Property taxes (T)
• The homeowner's insurance (I)
This is what we call PITI and your total monthly PITI and all debt (from installments to revolving charge
accounts) should range between 36-45% of your gross monthly income. These key factors determine your
ability to secure a home loan: Credit, Assets, Income and Debt Ratios.