What Should I Ask a Lender?
By Michelle ‘Mikki’ Cardoza
Home buying is a process, and the very first step is to find out your purchasing power. In order to do this, a good place to start is to interview lenders and ask questions. There are different types of lenders out there, and I am not referring to good, bad, ethical, or not (though there are all of those too). Some lenders work for a bank, others a credit union, and still others as a Broker. You may also have heard of private lenders and hard money lenders, and seller financing.
1.) What kind of lender are you?
A bank lender typically has products and specials offered by that bank. Often buyers will say, “I have been at my bank as a customer for a long time, of course they will loan me money at a great rate….” Unfortunately, this is not always true, but a good place to start. The previous relationship often has nothing to do with what they will lend to you, however often they will offer a small discount on your mortgage interest rate if you set up a bank account and have auto payments for your monthly mortgage payments.
A credit union works much like a bank, but will have its own criteria, and sometimes will shop around, but often they are lending their own funds.
A broker has the benefit of being able to shop for the best loan package that fits your needs, and a more experienced broker will have more access to different types of loan products.
A hard money/private lender has incredible flexibility on what they lend on and whom they lend to, however most ask for 50% down and charge very high interest rates. Hard money loans come in handy when you need access to quick cash or have a particular reason you cannot qualify for a more conventional loan. Sometimes a private “bridge” loan can be worth borrowing to close a transaction while waiting for your more conventional loan. This is expensive though, and should be considered carefully.
Seller financing is another potential source of loan money. Often they want a significant down payment for security, still have a right to see your credit score and understand where your money is coming from, and can provide a good source of financing if the seller is willing and able. You and the Seller would negotiate the terms of your note. If the seller owes money, you could negotiate a “wrap loan” or “All inclusive trust deed” but these come with more risk. Ask us for more information if you are interested in this route.
Family loans can be another way to go. And if you don’t have a rich uncle, do consider asking normal family members… A few words of advice when asking… Offer as a business transaction, where you get the loan recorded like a bank, you pay an interest rate, and you have a formal note. For more tips on how to ask family, ask us. Family loans are a great way to go, as your family earns the income on the mortgage interest, not the bank. Often family will not charge extra fees, and your family can feel good about helping, but not “giving” the money to you.
2.) What are your fees?
Lender fees vary significantly and is an important question. Often fees will vary slightly depending on your loan package, but ask this question early and often. The lender needs to disclose fees early in the process, and there should be no surprises. Ask if you can “wrap” those fees back into the loan.
3.) Can I buy down my interest rate?
Often a lender will offer a reduced interest rate by asking you to pay “Points” up front. A “point” is simply 1% of your loan amount. Ask if you can reduce your interest rate by “buying it down with points”. Then calculate how much that would save you over time. Ask your lender and your Realtor if you can include a seller credit in your contract to buy down your rate. Weirdly, sometimes offering more for the property and then asking the Seller to buy your rate down will save you a significant amount of money over time.
4.) What kinds of loan programs do you offer, or do I qualify for?
Ask about VA, FHA, Rehab, 3% conventional, Cal Vet, service loans, 80/10/10, and of course, a blanket question; What is best for my situation?
Often a best scenario is 80% loan, 20% down payment. But if you don’t have the 20% down, ask about zero and low down payment programs. They are out there in abundance. Here is where a great FICO credit score can really come in handy to get the best value!
5.) Should I have an escrow impound account?
We recommend an escrow impound account for first time homebuyers, however the choice is yours. An escrow impound account will collect 1/12th of your taxes and property insurance each month included in your mortgage payment, and then the lender will pay those annual bills for you. If you choose not to have an impound account, we HIGHLY recommend setting up a savings account and saving 1/12th of those bills each month, so when it comes time to pay those larger bills, you already have the money set aside.
6.) What is my interest rate, and when do I lock in my rate?
Interest rates vary over the course of the day, so each day, several times a day, the rates will adjust slightly. Every now and then, the “Feds” will increase or decrease the general rate specifically. Lenders will often charge a rate which includes the rate at the moment plus their rate on top of it. Don’t be fooled by “teaser rates” which lenders will often advertise, but then once you get deep into the loan process, tell you that that rate no longer exists or you specifically don’t qualify. Once you are good with your rate, discuss with your lender the best time to “lock” that rate, so it stays secure until you close your escrow. Often the lender will lock the rate for a few weeks. If the lock “expires” you can pay a fee to hold it longer or start over with more current rates.
7.) How much Seller credit can I ask for if I need it?
When negotiating your purchase contract, there is a way to have the “Seller credit back funds” so you don’t need as much cash at the closing table. This can help to pay loan fees, buy down points, escrow fees, and other small fees for closing. It is important to use all your credit negotiated, as anything not spent goes back to the seller. Ask us about ways to include the credit in negotiations. And ask your lender what the limits are for those credits, as often they are limited to a percentage of your purchase price.
8.) What do I need to provide to my lender during the process?
Lenders will often ask for 2-3 years of tax returns, bank statements, pay stubs, and P&L if you are self employed. This part can get tedious, as they will continually ask for updated statements until the loan is funded. Just get into the habit of submitting everything to the lender. They will most likely also ask you to submit a form that allows them to compare your tax returns with those on file at the IRS, so make sure you are handing over true versions and not drafts of your tax returns.
9.) What is my debt to income ratio, and how do I keep that in check during the escrow process?
Lenders will often qualify you for your loan amount based on your credit, your debt, and your income.
Debt to income ratio is the amount you owe on loans, cars, credit cards, etc compared to the income you earn. The lower this number, the better loan you will qualify for. Keep this number low! DO NOT shop on your credit card or have any abnormal spending or large purchased during the escrow process. No new appliances, no new cars until AFTER closing. And then of course,
be careful to not overspend so you can continue to afford your home. If you need to make a large purchase during the process, talk to your lender first. It is very sad to have a loan fail at the last moment because a new home buyer was not aware of this.
10.) How do you communicate?
Communication is key! You will have a much smoother transaction if you, your lender, your realtor, and your escrow officer all communicate well together. You should stay in touch with your lender often, and your lender should be providing you with updates along the way, regularly and often.