Five questions for your mortgage lender before you sign on the dotted line

June is National Homeownership Month. This month celebrates the benefits that homeownership provides individuals, families and communities. The process of purchasing a home can be a lengthy one. You go through the steps to build your credit. You search endlessly for the perfect home. Then you see what your lender offers for a mortgage loan.

The main thing most people focus on in a mortgage loan is the monthly payment. However, it is important to look over all details before committing to a mortgage. Since this is going to be the biggest loan of your life, it is important to understand everything that goes into the mortgage and what will be expected of you to avoid any surprises down the road.

Here are five questions you will want to ask your lender before you sign a loan agreement:

1) Can You Walk Me Through the Loan Estimate in Detail?

The Loan Estimate is a three-page document with important information: the type of loan, interest rate, monthly payment and total closing costs. While Loan Estimates are generally straightforward and easy to understand, it’s still a good idea to have your lender address any potential gray areas.

The Consumer Financial Protection Bureau (CFPB) has an example of what a common Mortgage Loan Estimate looks like.

2) Do You Charge for a Rate Lock?

This is an agreement between you and your lender, stating that the interest rate will not change regardless of market fluctuations. It’s like having insurance on the interest rate before your purchase because it prevents you from being blindsided by a potential increase in payment at the time of closing.

While many lenders will offer rate locks for 30 or 60 days at no additional charge, some will charge for them to begin with or will for an extended lock period.

3) Do I Need Private Mortgage Insurance?

If you put less than a 20% down payment on the purchase of your home and use a conventional or Federal Housing Administration mortgage, you will be subject to private mortgage insurance (PMI). The reason for private mortgage insurance is to protect the lender in case you either default on or stop paying the mortgage.

If you do need PMI, look at how you want to pay for it. The CFPB suggests asking lenders what choices they offer. Three common ways include:

• Monthly premiums.
• Upfront premiums.
• A combination of both upfront and monthly premiums.

Additionally, the CFPB mentions that some lenders might offer conventional loans with smaller down payments that WILL NOT require private mortgage insurance. However, the catch here is that you will pay a higher interest rate instead, which might be more expensive than PMI. If you are considering this alternative, consult a tax advisor about whether paying more in interest or paying PMI might affect your taxes differently.

4) Is There a Prepayment Penalty or Penalty for the Early Mortgage Payout?

Some lenders have clauses in their contracts that state you will be charged a fee if you pay off all or part of your mortgage early. These types of clauses differ depending on the lender. They range from penalizing you for selling your home or refinancing your mortgage within a few years of getting the loan to paying off most or all of your mortgage all at once. 

While these practices were commonly associated with predatory lending during the foreclosure crisis of 2008, they still exist today. Federal law does not allow penalties for prepaying loans from the Federal Housing Administration, Veterans Administration or U.S. Department of Agriculture, but other loans (e.g., conventional loans or investment property loans) can still contain prepayment penalties. Federal law permits time and financial limits on the fees for these other loans.

5) How Long Will It Take from My Application to Closing?

The period of time from applying for a loan to the closing date on your house is important for a variety of reasons. For one, if you are currently renting, you will want to figure out when you can break your current lease/cut ties with your landlord and prepare for your move.

In addition, despite real estate markets going through hot and cold periods, homes still can receive multiple offers, and there is a chance yours might not be as competitive as others’. If your offer/s aren’t competitive, you might need a longer period of time to close on your loan.

Finally, closing times can vary quite a lot, depending on how busy a lender is at the time you apply.  

In conclusion, always ask as many questions as you can before committing to a mortgage, regardless of how good it looks. In addition, look at multiple loan proposals before settling on one particular mortgage.

As part of your homeownership journey, LSS Financial Counseling offers homeownership counseling. Our team of HUD-certified housing counselors can guide you through any stage of the process. We can also work with you to get your finances ready to purchase your home, through budget and debt counseling, student loan debt counseling and support to improve your credit. Call us to set up a free, confidential appointment at 888.577.2227.

Author Ray McCoy is a Certified Financial Counselor with LSS Financial Counseling.