Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
A house is the biggest purchase that not everyone has the privilege to experience in life. However, it is an exciting accomplishment once you know that you are ready to buy your first home.
Due to the large amount of money involved with real estate transactions, though, the home buying process can get very complicated. You might even wish there was a handbook around so you can learn all the rules.
Today, let’s take care of some of your worries by listing the ten essential questions your lender needs to answer once you sit down at the table.
Table of Contents
1 – Who do I talk to about buying a house?
If you’re lucky enough to have the liquidity to buy with cash, you will only need to negotiate with a real estate agent. On the other hand, if you need a loan to secure your home purchase, you need to speak to a mortgage lender.
Some people will need to speak to multiple lenders, although this is not advisable because you lose a few points each time your credit report is pulled.
When you go directly to a lender, you will meet a loan officer who can approve or reject your loan application.
Since the loan process can take quite a bit of paper and leg work, you can also consider talking to a mortgage broker.
Mortgage brokers can talk to multiple lenders to shop around for the best loan on their clients’ behalf. With enough experience, some brokers can even tell you what loan you can qualify for with one look at your application.
2 – Do I need a preapproval letter?
A document that’s nice to have before you face real estate agents is a preapproval letter. You can get this from a lender even before getting approved for a loan.
You can think of the process to get this letter as a rehearsal for the actual mortgage application. If you can score this document, this can confirm that you are financially stable enough to buy a new house. In addition, this letter will indicate how much the lender is willing to let you borrow, which can serve as your budget as you go looking for a home.
You technically don’t get approved just yet, but once you are at the bargaining table, this letter provides excellent assurance for the home seller that you can readily come up with the funds for the purchase.
3 – What are the credit score requirements?
The most critical number in your application is your credit score.
It would be best if you already knew your credit score before you start house hunting. As we mentioned, once a loan officer makes a single inquiry on your credit report, this can dock some points from your credit score.
Aside from establishing whether you can incur this mortgage debt, your credit score will also determine your mortgage type.
Some lenders don’t offer some kinds of home loans. And the mortgage you’ll get will also have its own set of requirements. You’ll want to ask the lender about their credit score expectations and the options that can be made available to you.
The Ideal Credit Score
If you want the best chance of getting approved, it would be good to have a credit score of at least 620. With this credit score, you’ll be able to choose between conventional loans or government-backed mortgages.
4 – Are they able to do manual underwriting?
What if you don’t have enough credit background and don’t have a credit score?
This is a matter of concern, especially if you cannot afford to pay for a house in full.
These days, however, there are already many lenders who might be willing to offer manual underwriting. In fact, if you’re getting a USDA loan, you’ll eventually have to go through this process if your credit score is below 640.
For this process, the underwriter will need to ask for such documents as your tax returns, pay stubs, and recent bank statements.
5 – How much down payment should I prepare?
Of course, your buying power depends on how much money you have saved up to this point. This can serve as your budget when looking for your dream home. Your down payment amount will also depend on your qualifications and the type of mortgage.
For example, if you are a service member and VA loans are available at your lender, you won’t even be obliged to make a down payment. If you buy a home in a rural area, you can also apply for USDA, which similarly does not ask for this initial payment.
At the end of the day, though, the amount you pay upfront will ultimately be up to you.
Remember, the less money you pay at the beginning, the more money you pay down the road. So a higher down payment means more savings through lower monthly payments.
6 – What are the closing costs?
Aside from the down payment, you also want to save up for mortgage closing costs. These fees are on a case-to-case basis, so it is imperative you get it straight from your mortgage lender.
Typical fees included at closing are origination fees, tax service, and underwriting fees. Most lenders will also want to make sure that the appraised value of the home is not far from the amount you’ll be paying for the property. So you’ll also get a home inspection and home appraisal fees.
If you’re getting the help of a mortgage broker, you should also ask whether you will be charged for their services at closing or if they will get a commission through the mortgage lender.
7 – What is the best rate that I can get?
When you borrow money, you have to pay interest. It’s how the lender makes money. But there is good news. You can control how much you’ll be paying by choosing how much down payment to make at the start.
Still, the lesser expense you incur, the better. One of the critical questions you’ll need to ask your lender is the best mortgage rate they can offer. Unfortunately, this information is not always readily available on lender websites or brochures, and the rate may depend on your profile.
You also have to decide whether to get an adjustable or fixed rate of interest. If mortgage rates are generally low, the best plan of action is to get a fixed-rate mortgage.
8 – Does my debt-to-income ratio qualify for a loan?
If you have an established credit score, this means you already have experience with loans. You’re probably paying for some every month with funds from your income.
Another qualifying factor for mortgages is your debt-to-income ratio (DTI). This is a percentage that illustrates how much of your income goes towards loan repayments every month.
Some lenders can be flexible when it comes to this criterion, especially if you are capable of paying a higher down payment and have a high credit score. On the other hand, if they are a little strict with this loan requirement, you can work towards improving your DTI by paying down some of your debts before you push through with a mortgage.
9 – Will it be possible to get a refinance in the future?
Say you got an adjustable-rate mortgage. This type of mortgage means you pay an initial fixed interest rate for a certain period before the rate gradually increases at set intervals. Interest rates are highly dependent on the national economy and government policies. Therefore, it’s possible to be charged a much higher interest rate than lower ones available in the market. The ideal move is to refinance your loan to get a lower or more favorable interest rate if this happens.
Now, lenders might mention at the beginning that it is possible to do this down the road, but it’s better to be sure. Refinancing a mortgage can be very difficult depending on the lender you borrow from and your eventual situation. It will be conditional on whether you can afford another set of closing costs and whether this will be the cheaper option.
We also recommend getting feedback from other clients of your lender. For instance, you can ask them if the closing costs were worth it and how long they had to wait to get a refinance. You can use their experience to your advantage.
10 – How soon can you close your home loan?
Finally, you want to get an idea from your loan officer how fast you can close your mortgage.
Based on current circumstances, how long is the timeline that you should expect? Will it take weeks, or do you have to wait months? This will set your expectations for their services and tell you how honest the lender can be with you.
This is necessary for you to ask, especially if you are already in talks with a real estate agent and other buyers are interested in the house. If you need to make a move on fast, you have to ensure that the lender can approve your application in time.
And that’s basically it!
Since a real estate purchase is a very personal decision, you might discover more questions that you want to ask. So, as you prepare, make sure you write these down and bring this list on your visit to the financial institution.
We recommend reading up as much as you can about mortgages, especially if you are a first-time homebuyer. The more you can learn about home loans, the lesser chance of overpaying for your new house.
We wish you luck as you embark on this once-in-a-lifetime experience!