9 Questions to Ask Your Mortgage Lender

Buying a home in California can feel overwhelming, but being prepared with the right questions can simplify the process. Whether you're a first-time buyer or refinancing, this guide outlines what to ask your mortgage lender to help you make confident, informed decisions.

• Discover the best mortgage type based on your goals and finances
• Understand the difference between preapproval and prequalification
• Learn how down payments, APR, and closing costs affect your loan

So, you want to buy a home in California? Whether you are a first-time home buyer, an experienced buyer, or just looking to refinance a home loan, obtaining a mortgage can be stressful. To make your home-buying process as seamless as possible, it is important to do your research and have a list of questions ready. At The Police Credit Union, we work hard to make sure your next home purchase can be as easy as possible. Here are some of the most common and important questions to ask your mortgage lender.

1. What is the right type of mortgage for me?

There are many factors that go into choosing your mortgage. Some key items to think about are: Should the rate be fixed or adjustable? How long should the loan term last? Should you choose a conventional loan or a government-backed loan? How much will you be borrowing? Here’s a breakdown of the different types of loans you may consider when buying your next home:

·       Fixed-Rate Mortgage: The interest rate for a borrower’s loan is set at the beginning of the loan term and cannot be changed.

·       Adjustable-Rate Mortgage: The interest rate is periodically adjusted based on an index and margin.

·       Short-Term Loan: Terms can range from 10-15 years. Short-term loans typically have a higher monthly payment at a lower interest rate.

·       Long-Term Loan: Terms can range from 15 all the way to 40 years (although rare). Long-term loans typically have a lower monthly payment, but a higher interest rate.

·       Government-Backed Loan: Loans insured by a government agency. Examples of these loans could be FHA loans or VA loans. These loans typically have more lenient credit score requirements; however, they may have restrictions and additional fees.

·       Conventional Loan: This is the most common type of loan. This type of mortgage is backed by private lenders like The Police Credit Union and typically has better interest rates and flexible term options. However, they do normally require a higher down payment and a higher credit score compared to government-backed loans.

·       Conforming Loan: Equal or less than the amount set by the Federal Housing Finance Agency. For borrowers with good credit, conforming loans are great due to their low interest rates.

·       Jumbo Loan: Exceeds the loan limit established by Freddie Mac and Fannie Mae. Due to the high loan limit, borrowers are expected to have stellar credit scores and put down a larger down payment.

2. How do I qualify for a mortgage loan?

Before a borrower is approved for a mortgage, the lender will assess the borrower’s credit score, debt-to-income ratio, income and down payment. The threshold for each of these categories will vary, depending on the type of loan and the lender.

3. Is there a difference between preapproved and prequalified?

In short, yes. Prequalification is one of the first steps in the home-buying process when you receive an estimate for how much you can borrow based on the financial information you provide. Preapproval is a later step, after you fill out a mortgage application, when your lender will verify your information and hopefully preapprove you for a specific loan amount.

4. How much can I afford?

To determine how much you can afford, two key factors to consider are your income and your debt. A general rule of thumb is to follow the 28%/36% rule, which means do not spend more than 28% of your gross annual income on housing costs and no more than 36% on debt (including housing, credit card, student loans, etc.). This is typically a good rule to follow when dealing with conventional loans.  You can use Bankrate’s Debt-to-Income Ratio Calculator to help determine how much you can truly afford.

5. How much money do I need for a down payment?

Depending on the type of loan, down payments can range anywhere from 0% to over 20% of the value of your home. If you qualify for a VA government-backed loan, a down payment will not be necessary when purchasing a home. On the other hand, if you qualify for a conventional loan, then the minimum down payment is around 3%. If you can afford it, making a higher down payment can be beneficial in the long run by decreasing your monthly mortgage payments and avoiding additional fees.

6. What is the annual percentage rate?

A loan’s annual percentage rate (APR) is calculated by your lender by dividing the interest rate and lender fees by the loan term. Not all APRs are calculated the same way; therefore, it is important to get this percentage from your lender.

7. What are discount points?

Discount points, also known as mortgage points, are interest fees paid to the lender at closing in exchange for a lower interest rate. Make sure you ask your lender how many points are included in your quoted interest rate, if applicable.

8. What are the estimated closing costs?

Closing costs consist of various fees, insurance, taxes, and upfront interest, or points. On average, closing costs can range anywhere from 3% to 5% of your total loan. Prior to closing your loan, you will receive a Closing Disclosure which will list out all your costs.

9. How long will it take to close?

Closing dates can vary based on a variety of factors, and can take anywhere from a week to two months. Asking your mortgage lender for an estimated timeframe can help you plan accordingly. And, as always, be sure to keep in close contact with your lender because delays can happen.

Buying a home in California is a huge milestone that is a cause for celebration. So long as you do your research and are not afraid to ask questions, you’ll be on your way to closing in no time. At The Police Credit Union, our Mortgage Lenders are ready to help. Contact us today to get started.