When you buy a house, the vast majority of us will need to apply for a mortgage. This can seem daunting, especially for first time buyers, new to the Phoenix housing market and the process involved.
When you apply for a mortgage, your lender assesses the risk and collects proof that you, the borrower, can and will repay their loan in a timely manner. Part of this assessment involves looking into your employment, income, debts and assets. You’ll need to be prepared to provide your lender with documentation about your finances.
You, on the other hand, will likely have questions about the mortgage process. It’s important that you understand the process so you can be prepared for the road ahead.
Here are some questions you should ask your lender:
- What type of mortgage do you recommend for me?
There’s no one type of mortgage loan that’s right for everyone. Multiple loan programs may work for you, so it’s crucial that you discuss your options with your lender. Common types of loans are:
• Conventional Fixed-Rate Mortgages. A 30-year conventional fixed-rate loan is the most common type of mortgage. In this loan your monthly payments will be lower than with other types of loans because the term is so long. And the fact that your rate is “fixed” means that your interest rate will remain the same throughout the life of the loan.
• Adjustable Rate Mortgages (ARMs). Unlike fixed-rate mortgages, the interest rates of ARMs change over the life of the loan. Your interest rate will increase or decrease as the market fluctuates. This means that your mortgage payments can be different each month, which can make budgeting a challenge. Fortunately there are caps built in which limit the extent to which your interest rate and monthly payment can increase.
• FHA Loans. Borrowers who have lower credit scores, incomes and savings can benefit from a Federal Housing Administration (FHA) mortgage. FHA loans have lower credit score minimums and down payment requirements than conventional loans. However there are limits to how much money you can borrow and you’ll be required to pay a mortgage insurance premium.
• VA Loans. These loans are backed by the U.S. Department of Veterans Affairs (VA), so they’re only available to veterans, active service members and eligible surviving spouses. These loans have lower interest rates and don’t require down payments but there are some restrictions and fees with these mortgages.
- What credit qualifications do you require?
Your credit score is one of the first things that lenders look at. It indicates how likely you are to be able to pay back the money you borrow. The higher your score, the easier it is to get a mortgage loan. However, there are still ways to buy a home if your credit is less than stellar—you may just have to pay more for your mortgage.
Each lender sets its own standards for what they consider an acceptable credit score. That’s why it’s vital that you talk to your lender early in the process. They may have steps that you can take to be better qualified for a loan.
- What interest rate/annual percentage rate (APR) can I expect?
It’s essential to ask your lender about your interest rate. Your interest rate depends on multiple factors including your credit score, the location of the home you’re buying, the size of your down payment and your loan type. It’s a good idea to speak with several lenders and compare their rates. Even a slight difference in mortgage rates can make a difference in how much you will pay and you’ll want to get the best possible rate.
You should also ask your lender about the Annual Percentage Rate (APR). The APR includes both the interest rate and the fees that the lender charges to originate the loan. This gives you a better understanding of what your loan is going to cost you.
- What is a rate lock?
A mortgage rate lock is an agreement between you and your lender that says that your interest rate will stay the same until closing, regardless of what the market does. Rate locks are important because they keep your loan costs predictable. When you get a rate lock, you don’t have to stress about finding a home immediately because you know that your interest rate won’t go up. You’ll need to ask your lender about whether you should lock your rate and how long the lock lasts. Some lenders will drop your interest rate if market rates go down after you lock your rate so be sure to verify this with your lender.
- What are mortgage points?
Mortgage points, or “discount points” are an optional fee that you can pay at closing to “buy” a lower interest rate. The cost of each mortgage point is equal to 1% of your total loan. For example, if your loan amount is $200,000, you may have the option to buy mortgage points for $2,000 each at closing. Mortgage points can save buyers tens of thousands of dollars over their loan term. Be sure to ask your lender if it makes sense to buy mortgage points, how much each point will lower your interest rate and what the maximum number of points is that you are allowed to buy.
- What will my monthly payments be?
As a home buyer, one of the things you need to think about is your budget and it’s important to know what your monthly payment will be. Your lender will be able to provide you with the potential cost of your monthly payment and break down the expenses involved. These will include your loan principle, interest, property taxes, and mortgage insurance (if required). This will help you to figure out how much home you can afford.
- How much will closing costs be?
Closing costs are the processing fees you pay to your lender to finalize your loan. Some typical closing costs include appraisal fees, loan origination fees, underwriting & processing fees, and homeowner’s insurance. You will also have escrow fees that include title fees and title insurance. Closing costs will typically run 3%-6% of the total value of your loan.
The Bottom Line
It’s important to have a list of questions when you meet with your lender. Knowledge is power, and being fully informed about the mortgage process and all the requirements you will have to meet can help make purchasing a home easier and less stressful.
Contact the Donnelly Group
If you are considering buying a home in metro Phoenix, the Donnelly Group has lending partners we can connect you with, and the expertise to help you all the way through your purchase. Please don’t hesitate to contact our team at 480-792-9700 or by email, we’d love to help.
