Here it is a new year and maybe this is the year for your new home. Whether you’re looking for your first mortgage or you’ve been down this road before, it’s crucial to review the ins and outs of the mortgage world. Here are some questions you need to ask to be sure you get all your ducks, as they say, in a row.
What kinds of mortgages do you offer and what would be the best one for me?
Not all lenders offer every type of mortgage. Loans can vary in length, the amount of down payment they require, whether or not interest rates are fixed during the life of the mortgage, and other factors.
The most common mortgages include those guaranteed by the Federal Housing Authority (FHA) or Veterans Affairs (VA), as well as Fixed-Rate Mortgages (FRMs), Adjustable-Rate Mortgages (ARMs), and Interest-only Mortgages. Reserve Mortgages are somewhat different, but many of the questions are the same.
It’s important to know which loans you can qualify for. For example, only honorably discharged veterans and their spouses with a valid Certificate of Eligibility, enough income, and suitable credit can qualify for a VA-guaranteed loan. In addition, property guaranteed by a VA loan must be for personal occupancy. Other loans have their own requirements.
A first step to finding your best fit on a mortgage is to complete an application—which does not create an obligation. The application must include information such as your employment, income and assets, your credit rating and existing debts, how much you have available for a down payment, and the source of that down payment. Proof of these financial figures can come from paystubs, at least a year of income-tax returns, and reports from credit agencies. With this information in hand, a lender can determine the best type of mortgage for you.
How long will it take to process my mortgage loan application?
This depends not only on the lender’s staff, but also on the availability of inspectors, appraisers, and others involved and can take from a few weeks to a couple of months. On your part, be sure you have all your required documents and do a careful check of your credit report for errors or situations you may need to explain. In addition, this is definitely not the time to change jobs or incur new debts, either of which could create significant changes in your financial situation.
What will be the cost of the mortgage and what additional closing costs should I expect?
Lenders are legally obligated to provide a Good Faith Estimate (GFE) of expected closing costs within three days of the loan application and buyers should plan on spending between 2 and 5 percent of the cost of the property. The GFE will include a complete estimate of mortgage costs such as prepaids and fees charged by the lender and other parties.
In most cases, the GFE will include “points.” Discount points—one point equals one percent of the mortgage—are tax-deductible and reduce the interest rate paid on your mortgage. Origination points include the costs of establishing the loan.
Additional closing costs might include a title search and title insurance, recording fees, property appraisal, survey, home inspection, upfront mortgage insurance premium, and other items. The actual closing costs will be itemized on the settlement statement (called a HUD-1) and will be reviewed for you as part of your closing.
You can use several GFEs to compare costs from several potential lenders and also use GFEs for possible negotiations of fee sharing with the lender and/or the seller.
What is this mortgage going to cost each month?
It’s also important to know what your monthly payments will be once the loan is closed and the new place is yours. Are these payments fixed or might they change? Will the payments include insurance on the property, mortgage insurance, and escrowed tax payments?
A large down payment often means a lower interest rate and better loan terms. With a down payment of less than 20 percent, however, you will probably be required to obtain mortgage insurance, increasing your monthly payment—possibly by a significant amount. Mortgage insurance is generally paid with both an up-front premium at closing and an annual premium that is included in monthly payments. These are based on the type of mortgage and the value of the property. Remember, mortgage insurance provides coverage for the lender, not the borrower.
Some lenders charge a penalty if you prepay on the mortgage. This might make a big difference if you think you may be able to retire your loan early. (Especially in the early days of a mortgage, interest is by far the largest portion of each payment, and paying several months of principal each month can significantly decrease the length of the loan.) Some lenders might offer a lower interest rate if you accept a loan with a penalty.
Can I choose the title company or attorney used for the closing?
Yes, and while it may seem like a lot of extra work to check on this when you’re already dealing with seemingly endless paperwork, it might be worthwhile to make a few calls to be sure you have the right Settlement Agent. While some buyers retain a real estate attorney to conduct their closing, in Virginia, other registered Settlement Agents, including title companies and financial institutions, are also legally allowed to do so.
Buying a home is one of the biggest investment decisions of your life, so it pays to ask the right questions and get the best deal possible.
Marilyn Pribus and her husband live in Albemarle County near Charlottesville.