Interviewing Your Mortgage Lender
1. Which Type of Loan is Best?
Reputable lenders will find out more about you before throwing out loan options. You wouldn’t expect a doctor to suggest surgery before she assessed your medical situation, would you? Choose a lender who gathers enough information from you before she suggests a certain type of loan. Don’t be afraid to ask a lender to explain the pros and cons about:
2. What is the Interest Rate & Annual Percentage Rate
The annual percentage rate (APR) is derived by a complex calculation that includes the interest rate and all the other related lender fees divided by the loan’s term. However, bear in mind that:
- Many lenders do not compute APR correctly.
- There is no way to accurately compute an APR rate for an adjustable loan.
- It does not account for early payoffs.
If your interest rate is adjustable, ask about its:
- Adjustment frequency
- Maximum annual adjustment
- Highest rate (Cap)
- Index
- Margin
3. What are the Discount Points and Origination Fees?
Each “point” is equal to 1 percent of the loan amount. Therefore, 2 points on a $100,000 loan cost $2,000.
- Sometimes lenders charge origination fees in addition to points.
- Points “buy down” the interest rate, meaning the more points you pay, the lower the interest rate.
- Points are also tax deductible, even if the seller pays some or all of the points.
4. What Are All the Costs?
All the costs of a loan include not only fees that go into the lender’s pocket but also related third-party vendor fees such as:
- Appraisal
- Credit report
- Lender’s title policy
- Pest inspection reports
- Escrow (where applicable)
- Recording fees
- Taxes
An estimate of these fees constitutes the Good Faith Estimate or GFE, which the lender is required by federal law to give to you.
5. Will the Lender Guarantee the GFE?
According to the Real Estate Settlement and Procedures Act (RESPA), lenders have three days after you’ve applied for a loan to give you the Good Faith Estimate, containing all the costs of your loan. Points to consider:
- Since lenders are not required to guarantee GFEs, this document is worth about the cost of the paper on which it is printed.
- However, there is a lot of pressure on lenders by consumers to guarantee their GFEs.
- If your lender refuses to stand behind its estimate, go elsewhere.
6. Do You Offer Loan Rate Locks?
Interest rates fluctuate and change daily. If you have reason to believe that interest rates are moving up, you might want to lock your loan. Lenders typically charge zero to one point to lock a loan rate and points. Ask your lender:
- Do you charge a fee to lock my interest rate?
- Does the lock-in protect all the loan costs?
- For how long will you lock this rate?
- Will you give me the loan lock in writing?
The alternative is to pay the prevailing rate and points on the day your loan funds.
7. Is There a Prepayment Penalty?
In some states, prepayment penalties are no longer allowed, so ask. Typically, prepayment penalties let the lender collect an additional six months of “unearned interest” if you pay the loan off early through a refinance of sale of the property. Be sure to ask:
- How much is the prepayment penalty?
- What are the terms of the prepay? Some are in effect only during the first 2 to 5 years of the loan.
- Would the prepayment penalty apply if I refinanced through you at a later date?
8. Are You Equipped to Approve Loans In-House?
Underwriters review loans and issue conditions before approving or rejecting a loan.
- Ask if a lender can handle its own underwriting.
- VA and FHA loans typically take longer to process, but some lenders meet government requirements to automatically approve or disapprove a loan without sending it to the VA or FHA.
9. How Much Time Do You Need to Fund?
Average loan processing time periods fall between 21 and 45 days. To properly write a purchase contract, you will need to include a closing date, and that date should be coordinated with your lender. Find out:
- What is your anticipated turnaround time?
- What obstacles could possibly hold up closing?
- How long after final application approval will the loan fund?
10. What is the Yield Spread Premium?
If your loan officer is receiving a yield spread premium (YSP), a commission paid directly by the lender to your representative, this fee will be disclosed on your settlement statement at closing. YSPs are a controversial matter because:
- Lenders say if borrowers are happy with the terms, the fact the loan officer receives a bonus is not relevant.
- Borrowers say if the loan officer did not receive a YSP bonus, the loan would have cost less.
- You should negotiate upfront; at closing is too late.
Where to Get a Mortgage
Most home buyers finance real estate, which means almost all home buyers will need to get a real estate loan. So what are your lending choices? Where can you get a real estate loan? Which type of real estate lender is best?
Unfortunately, there is no pat answer because the best choice for you depends on your personal situation, the type of property you want to buy and how the lender’s rates compare within the lending community. You can get a loan from a variety of sources such as:
Mortgage Brokers
More than half of all the real estate loans made in the United States originate from mortgage brokers. A mortgage broker is a middle-person who brings together lenders and borrowers. Mortgage brokers each work with different lenders, sometimes 200 or more. It’s important to ask about the variety of products offered as this will vary from broker to broker. Your choices are dependent on the broker’s number of working relationships.
- Fees are paid by the buyer or lender or both.
- Loans at “par” mean the buyer is not paying a fee.
- Yield-spread premiums (YSPs) are typically disclosed at closing and paid by the lender.
- Mortgage brokers can also operate as “up-front” mortgage brokers, meaning they will negotiate a fee directly with the buyer in exchange for shopping for the lowest (wholesale) interest rate & fees.
Mortgage Bankers
Mortgage bankers, as you may have guessed, work for a bank. They may represent more than one bank but the loans they make are bank loans, funded by the bank.
- Fees are generally not negotiable and are set by bank policy.
- Loan products are limited to those the bank offers.
- The banker may not be licensed.
Commercial Banks
Citigroup, Bank of America, and Wells Fargo are good examples of well known commercial banks. Commercial banks offer a wide variety of services. In fact, you probably have a bank like this in your neighborhood.
- Primary source of business is not making mortgage loans.
- Bank rates are competitive.
- Your bank may offer a discount or incentive on your loan if you maintain a checking or savings account at that institution.
Savings & Loan Associations
Savings and loans accept deposits from customers into savings / money market accounts and pay interest on those accounts. To prevent a relapse like the S&L crisis in the 1980s, President Bush in 1989 signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Many savings and loans are now regulated by the Department of U. S. Treasury, Office of Thrift Supervision.
- Primary source of business is making real estate loans.
- Savings and loans do not make business or commercial loans but lend for construction, purchase or home improvement purposes.
- The process for obtaining a mortgage is a bit easier than going to a commercial bank.
Credit Unions
These institutions are regularly under attack by lending competitors because credit unions do not pay federal taxes and enjoy certain taxable advantages that other lending institutions do not. They are formed by a group of individuals with a common interest such as state government and community education employees or religious groups.
- Customers must meet qualifications to be eligible for membership.
- Interest rates and terms are typically very attractive and competitive.
- Many credit unions do not sell their mortgage loans on the secondary market.
Anybody with money in the bank can make a real estate loan to you as long as they comply with federal and state regulations regarding such items as interest rates, fees and charges, and provide legally required disclosures.
- The seller can carry back common financing instruments such as a mortgage, trust deed or land contract.
- No appraisal or title policy may be required, but you should still obtain an appraisal and title protection.
- Owner financing works best on properties that are free and clear because an existing loan will most likely contain an alienation clause.
Stock Brokerages & Online Lenders
You might be astonished to learn that the company handling your IRAs or mutual funds or online savings also makes mortgage loans. A few easily recognizable names are HFC Home Loans, INGDirect, Charles Schwab, and Ditech.
- If you need to shake hands with your loan officer in person, an online lender might not be for you.
- Internet lenders seem to work best for sophisticated borrowers with great FICO scoreswho know exactly what they want.
- Contact only reputable and known companies with secure sites, and stay away from fly-by-night operators.
- Click to go to page two… Mortgage Broker Answers to Your Interview Questions
