Ready to find a home? Because you and your mortgage will be together for some time—7 to 10 years on average, according to U.S. News & World Report—you’ll want to fully understand what you’re getting into. Here are 10 questions to ask your lender before purchasing a new home:
1. What can I comfortably afford?
Your lender will pre-approve you for a specific loan amount based on an analysis of your creditworthiness, assets and debts. When discussing what's comfortable for you, be sure to consider all of the home's expenses, including taxes, homeowners insurance, any homeowners association dues, utility costs and maintenance. A good rule of thumb: Keep your total housing payment, including taxes and insurance, below 28 percent of your gross monthly income (the amount of your paycheck before taxes are taken out).
2. What loans do I qualify for?
Your lender will talk with you about your options, each with its own pros and cons. Some offer fixed interest rates, meaning your payment will stay the same over the life of the loan, while others are adjustable, meaning your payment can change. Some, like VA loans, may not require a down payment. Ask your lender about the mortgages they offer and the requirements of each.
3. What's the minimum down payment?
Your lender can help you determine if you qualify for loans, such as VA loans, that offer options for a low or no down payment. A higher down payment, however, will lower your monthly payments and help you secure a lower interest rate.
4. Can I use gift money for my down payment?
You can use money that's been given to you as a gift, with some restrictions. For example, your lender may ask you to prove the money isn't a loan. Ask your lender for the minimum amount that must come from your own funds, as it depends on the type of loan. The gift giver may need to pay a gift tax if the amount of the gift is greater than $14,000; a tax advisor can offer guidance on the IRS rules. Gift recipients are never subject to gift tax.
5. What's PMI? Do I have to pay it?
Private mortgage insurance, or PMI, is sometimes required when the down payment is less than 20 percent of the home's sale price. Exceptions include VA loans and some other special mortgage options, like many of Navy Federal's mortgage products. PMI may be eliminated on some loans when equity reaches a certain percentage of the appraised value.
6. What's my interest rate?
The interest rate has a direct impact on your monthly payment—the higher the interest rate, the higher your payment. To compare lenders, ask for the annual percentage rate (APR) of the mortgage interest, which includes the lender's fees. It's a good idea to estimate your monthly payment to assess your options.
7. How can I lower my interest rate?
Your lender can help you determine how your down payment can help you secure a lower interest rate. In addition, discount points—essentially interest that's paid up front—can be used to lower your interest rate. One point is a fee equal to 1 percent of the loan amount (for example, on a $300,000 mortgage, one point would equal $3,000).
8. What are the closing costs?
Some up-front costs may be due at closing, such as origination and discount fees, an appraisal, document preparation, title insurance, a home inspection and other fees. Ask your lender for a written "good faith estimate" of closing costs.
9. Is my interest rate guaranteed? When does that happen?
Interest rates can fluctuate between the time you submit your loan application and when you go to closing. To prevent your rate from changing, you can lock it in for a specified period of time, typically 30 days. Ask your lender if any fees apply.
10. Will the monthly payment include taxes and homeowners insurance?
For some loans, you may have the option of paying property taxes and insurance payments on your own or having it included in your payment. The latter option, called escrow, means the amount you owe for the year is divided into 12 parts and added to your payment each month. Your financial institution then makes these payments when they're due out of the escrow account.