Key Takeaways
- It’s not about asking a lot of questions, but rather the right questions when it comes to mortgages.
- The mortgage questions one should ask will vary depending on their particular situation.
- Only once you are confident you know the mortgage process can I recommend moving forward with one.
Asking the right mortgage questions, as far as I am aware, is one of the single most important things a first-time homebuyer can do. If for nothing else, the mortgage process is a lengthy and confusing one. It only stands to reason that the more you know about it, the better, especially with so much on the line. As such, it’s absolutely in your best interest to familiarize yourself with every nuance obtaining a mortgage can coincide with. And while there are plenty of books on the topic, I find that asking the right mortgage questions (to the right people, of course) is the most efficient way to get the answers you are looking for.
If you are interested in learning more about the process of getting a loan, don’t forget to ask the following mortgage questions.
Mortgage Questions You Would Be Wise To Address First
When it comes to mortgage questions, there’s no such thing as a bad one. In fact, I would argue that the more questions you ask, the better. Fortune will favor the prepared, and there is no reason you can’t benefit from asking the right questions. It’s worth noting, however, that not all questions are created equal; some are certainly more important than others. That said, even the simple questions need answers, too.
Here are four simple mortgage questions every first-time buyer needs to have lined up, and the best answers for each:
1. Is there a difference between pre-approval and pre-qualification?
Despite popular consensus, the answer is objectively yes. While these two words may exhibit similarities, they are far from analogous. Each has a specific meaning, and it’s in your best interest to be able to differentiate between the two.
To be clear, pre-qualification has become synonymous with one of the first steps in the mortgage process for one simple reason: it is the most elementary step one will make when seeking out the perfect loan. In return for a few credentials (financial status, debt, income and assets), those seeking a pre-qualification will be made privy to an amount they could expect to borrow, but I digress. The numbers thrown out at pre-qualification are far from written in stone, and are more like an educated guess, not a specific number. Due to their relatively simple nature, pre-qualifications can be done over the phone or online — for free, nonetheless.
The idea of the pre-qualification process isn’t to land you the mortgage itself, but rather to facilitate discussions on how to proceed. Only those potential buyers that have an idea of how much money they are working with will be able to plan for their impending purchase. It’s at this point that you might evaluate individual loans and mortgage options that best suit your needs.
If you are more interested in learning exactly how much your financial background entitles you to, however, I recommend going beyond the simple pre-qualification process. More specifically, it’s the pre-approval process that takes the pre-qualification process a step further. In providing more intimate details about your financial past (and a processing fee), you can gain insight into how much money you will be able to borrow, down to the dollar. Not only that, but you’ll also have a better idea of interest rate obligations.
Unlike the pre-qualification process, those that are pre-approved will receive a conditional commitment in writing for a specific loan amount — not a ball-park figure like pre-qualifications have become synonymous with. I maintain that it’s absolutely critical for buyers to be able to distinguish between the two; for it’s only in knowing the exact amount you have been approved to borrow that you’ll be able to facilitate a future purchase.
2. What is private mortgage insurance?
In its simplest form, private mortgage insurance — or PMI to the seasoned real estate professional — is an effort on behalf of lenders to protect themselves from default. Private mortgage insurance is tasked with protecting the lender’s financial interests in the event a borrower falls into foreclosure. You see, banks lose money when homeowners become delinquent on their mortgage obligations. Private mortgage insurance is, therefore, a cost lenders levy on “risky” borrowers to offset potential future losses. Let me explain.
In order to offset the potential for default, banks will charge borrowers what has become known as private mortgage insurance when they put less than twenty percent down. Since lower down payments typically coincide with larger monthly payments, those homeowners that aren’t able to come up with twenty percent are more likely to default. That said, it stands to reason that those who don’t come up with twenty percent are more of a risk to banks.
Not unlike their insurance counterparts, private mortgage insurance fees vary, depending on the size of the downpayment itself and your current credit score. It’s not uncommon for private mortgage insurance to land somewhere in the neighborhood of 0.3% to 1.5% of the original loan amount. While private mortgage insurance will likely take many years to pay off, it is not intended to last for the duration of the loan. In fact, once your outstanding loan balance drops to 78 percent of the home’s original value, you can have PMI removed. More specifically, you can request the PMI to be canceled once your loan-to-value ratio reaches a certain point.
It’s worth noting that those buyers capable of putting more than twenty percent down can avoid having to pay PMI, effectively reducing their monthly obligations from the onset of their purchase.
3. What exactly are closing costs, and how much are they?
As their name suggests, closing costs are the costs a buyer will incur upon closing on a property. And while I wish there was a clear definition as to what one could expect to pay in closing costs, or even what their money will be going towards, the truth remains: closing costs vary between every purchase and property. In fact, not every buyer will be saddled with the same closing costs, as different scenarios call for different costs. What I can say, however, is that closing costs tend to rest somewhere in the neighborhood of two percent to four percent of the loan amount.
Some of today’s most common closing costs include (but are not limited to):
- Appraisal fees
- Title insurance fees
- Attorney fees
- Pre-paid taxes
- Insurance
- Escrow fees
4. How many lenders should I talk to?
There’s no doubt about it: real estate is a numbers game. The more leads you happen across, the more likely you are to find more deals. The same concept can be applied to shopping around for lenders. The more lenders you inquire with, the more likely you are to come across terms you like. That said, I maintain that every potential buyer needs to mind due diligence and shop around for a mortgage until they are completely comfortable with one. Do not limit yourself to the first mortgage provider you come across. Despite how attractive the terms are, there is absolutely nothing wrong with shopping around. You may very well return to the initial offer, but at least you are certain you are getting the deal you want.
I won’t sit here and tell you a specific number of mortgage providers to visit, but one or two isn’t enough. In fact, the more you inquire with, the better off your loan will be. Just be certain to do your “shopping” in a short period of time. According to The Motley Fool, there is a “special provision in the FICO credit scoring formula that allows you to shop around for the lowest mortgage rate,” without incurring a penalty for too many credit inquiries. As long as your inquires are made within a period of two weeks or so, all of them will only amount to a single credit search for scoring purposes. So don’t be afraid to shop around and find the perfect rat; just be sure to do so in a reasonable amount of time.
Knowledge Really Is Power
Few things are more valuable to today’s real estate investors and homebuyers than the acumen they demonstrate for this particular industry. In no other field is the education you possess more integral to your success than real estate, and buying a home is no exception to the rule. The more you know about the mortgage process, the better. That said, I recommend asking as many mortgage questions as it takes to get your bearings.
Are there specific mortgage questions you want answered? Have you had better luck asking different questions? Feel free to let us know about your experiences in the comments below.
