First time homebuyers currently represent approximately 32% -36% of the housing market, according to various industry experts. That means that approximately 32% – 36% of the home buying public has little if any experience working with mortgage lenders.
To help your first time buyer clients get the best information, service and deal on their first home loan, think about passing along these questions for them to ask their mortgage lender. Some of these questions have “built in” answers but they would be wise to get their own answers.
- How much house can I/we afford to buy? The fastest way to find out the answer to that question is for your first-time homebuyer(s) to get pre-approved. Buyers are not committed to “sign up” with that pre-approving lender if and when they decide to go ahead with the pre-qualifying process for a loan on a specific house. The general rule of thumb suggests that homeowners spend 25% – 30% of their net income on a mortgage.
- What kind of loan should I have? There are two types of home loans, a fixed interest loan (payments remain the same over the life of the loan because the interest rate on the loan remains the same) and a variable interest loan (payment amounts of the loan vary or fluctuate over time with interest rate fluctuations). Variable interest loans often start off quite low and then rise in the future. Make sure your first-time buyers ask for advice from the lender as to which type of loan makes the most sense. For example, if the buyer intends to resell the house in the short run, 2-3 years, it may make sense to get a variable interest loan.
- Is the lender a mortgage broker or a direct lender? A mortgage broker takes the buyer’s application and shops that loan application with different lenders. A direct lender processes your buyer’s loan application in-house. That lender could, however, shop the loan on the secondary market once the sale of the house closes.
- What do monthly payments include? Mortgage payments generally go towards paying the interest on the loan first. Then, over time, payments go towards paying off the principal. The more principal payoff there is, the more equity accrues on the home.
- Who pays taxes and insurance? Some mortgage payments include taxes and insurance and some don’t. When the mortgage payments do include taxes and insurance, the lender will put those funds into an escrow account specifically to pay those bills from that escrow account.
- Will I/we have to pay Private Mortgage Insurance? Yes, if your buyer puts down less than 20% in the down payment. Once the equity in the home reaches 20%, your buyer can eliminate that PMI and reduce her/his/their monthly payments.
- What costs do I/we pay at closing? Closing costs often include loan application, appraisal and home inspections fees along with additional miscellaneous charges. Sometimes, the seller will pay closing costs. Ask you real estate agent and ask your lender.
- Am I paying (discount) points? Points relate to prepaid interest. The more the buyer pays in prepaid interest, the more the buyer reduces the monthly mortgage payment. Each point equals 1% of the loan amount.
- Does the lender charge an initiation or origination fee? This is a fee that covers the lender’s administrative cost to process the loan application. Charges vary from 0% to approximately 1% of the loan’s value. Because mortgage brokers “shop” the loan, this is a key question to ask.
- Can your buyer lock in the interest rate? Yes, when the buyer applies for the loan, the buyer can lock in the interest rate if the loan closes on time and if no changes are made to the loan application. Ask.
- Is there anything the buyer can do to lower the interest rate on the loan? The buyer can make a bigger down payment.
- How long does it take for a loan to close? It usually takes 40-45 days, according to Ellie Mae, a software provider to the residential mortgage industry.
- How can the lender guarantee that the buyer’s loan will close on time? The lender usually puts that guarantee onto the borrower. If the buyer does and provides everything needed on time and on schedule, the loan is likely to close on time. “Everything” translates into the buyer providing stable verification (W-2 form, pay stubs, employment history, credit account statements, bank account statistics, tax returns, credit score, etc.) Buyers, ask what is needed and when.