Buying your first home is exciting – until you realize how difficult the mortgage pre-approval process can be. A mortgage broker can help you, but ask these five questions first.
1. Do you have insurance?
Among other questions, ask your mortgage broker about liability insurance. Financial expert Adam Hayes says, “Some professionals should carry liability insurance, including those involved in financial and legal services, such as financial advisors, insurance agents, accountants, mortgage brokers, and attorneys.”
This type of insurance shows that this person understands the seriousness of their mistakes or the consequences arising from giving faulty advice. If they make an error, this insurance kicks in to address the civil claims filed against them by affected clients. This means that if you sue them and win, it is likely that damages will be collected up to the limits of their insurance. This is positive for clients who have hundreds of thousands of dollars in mortgage loans hanging in the balance.
2. What is the best interest rate you can find – for me?
It is important to ask about the interest rate for which you will qualify. You cannot assume that the interest rate mentioned on the bank’s website will apply to you. This rate is typically reserved for people with very good credit histories and consistently high incomes. Your personal rate will depend on your debt-to-income ratio, credit history, property location and type (condo vs. single-family home), and other credit factors. Mortgage brokers are of great interest to people who see the big difference between the advertised interest rate from loans and the rate the bank actually approves.
Ultimately, your mortgage balance, loan term, and interest rates will determine your monthly payments, so you will want to know your exact annual percentage rate – not just an estimate. You can also ask your broker to inquire if you will be able to pay points – to lower your interest rate further.
3. What is the lowest down payment I can make?
The down payment is the cash amount you will need to pay upfront to buy a home. The type of mortgage will dictate the minimum down payment. Lenders typically require a 20 percent down payment to ensure the borrower’s seriousness, but in exchange for an additional amount added to your monthly payment – called private mortgage insurance (PMI) – you may be able to put down less towards your down payment.
Many lenders and first-time homebuyer programs offer loans with 3 to 5 percent down. Federal Housing Administration (FHA) loans are considered the most affordable mortgages because they only require a 3.5 percent down payment as a minimum. Similarly, veterans and service members can opt for VA loans, which come with low rates and low down payment terms.
Remember, a lower down payment means higher monthly payments, so ask your broker to help you find the optimal point that allows you to keep upfront costs low and manage monthly payments at reasonable rates.
4. What are the different common fees?
Aside from the interest rate, there are many common fees involved in the home buying process. Each lender may charge different amounts, which can significantly affect the cash amount you need to bring for closing. So, you should ask your mortgage broker about the fees related to pest inspection reports, credit reports, origination fees, and appraisal fees. The broker should be able to compare fee structures among lenders to help you find the one that best meets your needs.
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You should also ask who pays the mortgage broker fees. In many cases, it is the mortgage lender you ultimately choose who pays the broker’s fees, but in other cases, the broker may pass their fees directly to you. Some lenders do not work with brokers at all, so it is important to clearly ask how much the broker’s commission is and who is responsible for paying it.
The Consumer Financial Protection Bureau requires lenders to provide borrowers with a loan estimate. This document outlines all the necessary information and costs that will be added to the final payment at the closing of the deal. Here you will see a formal breakdown of all your expenses, but you can also take proactive steps to reduce the costs you can control – such as home inspection and registration fees. These services are performed by vendors you can choose, so you have the ability to shop around for the best value.
5. Should I choose a fixed or adjustable-rate loan?
A fixed-rate mortgage features a fixed monthly payment – without any increase or decrease throughout the life of the loan. This is the most predictable, as only taxes and insurance amounts may change. If you receive a steady monthly income, this is generally the preferred type of rate. Fixed-rate mortgages are best for people who plan to live in their homes for a lifetime and who like to budget their money regularly for long-term plans.
On the other hand, an adjustable-rate mortgage (ARM) means that your monthly payments will be affected by market indicators. These loans are attractive because the initial interest rate for the ARM is typically lower than the current fixed-rate mortgage rate. When the initial period of 3, 5, 7, or 10 years ends, the rates adjust according to the market. Since no one has a financial crystal ball, future monthly payments can vary greatly.
If market rates rise, your monthly payment will also increase. But if market rates fall, most ARM lenders stipulate that your payment will not change. Each mortgage company has a different policy in this regard, so ask your broker to explain the details.
It is common for people with ARMs to try to refinance their homes to a fixed-rate mortgage before the initial period ends, but this means paying closing costs again. In many cases, adjustable-rate mortgages are best for people who plan to sell their homes before the rate changes. Ask your mortgage broker to help you understand all of this by crunching the numbers over the ideal timeframe for you.
Source: https://www.realsimple.com/work-life/money/home-finance/questions-to-ask-mortgage-broker
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