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Are you thinking about purchasing a home in the near future or have you already begun the home buying process? If so, you’re going to need to figure out how you plan on financing the purchase of your future home.
Questions you need to consider are if you’ll use government loan programs such as Federal Housing Administration (FHA) loans, Veterans Administration (VA) loans, or USDA loans. Or will you opt for a Conventional loan with more stringent requirements to qualify for but doesn’t come with mortgage insurance in many cases?
If you are unsure of which type of financing is right for you, then you’ll want to talk to a qualified mortgage broker.
Read on to find out the 5 most important questions you need to ask your mortgage broker before purchasing your next home.
1. What loan program is best for me?
Asking a trained mortgage professional this question is the first thing you should do before starting your home search.
Your mortgage broker will take a holistic approach and find out what your credit profile looks like as well as your income, assets, and liabilities. Using this information, the mortgage broker can then determine which loan programs you qualify for and which would fit your needs the best.
As we mentioned, your credit history and profile will be a major factor in deciding which loan program is the best for you.
To qualify for a conventional loan, you will need a credit score of at least 620, but to get the best interest rates on the market, you will want to have a credit score of 750 or above.
The Federal Housing Administration (FHA) has less stringent credit requirements, as borrowers with scores as low as 580 can qualify for an FHA loan.
If you have previous bankruptcies or foreclosures, it’s important to tell your broker this right away, as if they are found out later in the process, it could cause your loan to get denied.
2. How much house can I afford?
Before you start looking for homes, you need to know how much you can afford to spend.
You need to know this because the price of the home will be a factor in determining what your monthly mortgage payment will be. If you end up purchasing a home that is out of your price range, your monthly mortgage payments will likely be more than what you can afford.
Getting pre-approved is the first step to finding out how much you can afford, as the lender will provide you with a letter that shows you are preapproved to take out a mortgage up to a specific amount.
Preapprovals are typically good for 90 days and give you the confidence that you’ll be approved for a mortgage before you decide to purchase the home.
3. Will I need to pay mortgage insurance?
Depending on the loan program you choose and the down payment you bring to closing, your monthly mortgage payment may come with mortgage insurance premiums added on.
The reason that monthly mortgage premiums get added onto mortgages is to protect the lender in case of default on the loan. The monthly mortgage premium is essentially an insurance policy for the lender to mitigate the risk of lending to a borrower putting a low down payment at closing.
All Federal Housing Administration (FHA) loans require a mortgage insurance premium as well as an Upfront Mortgage Insurance Premium (UFMIP) at closing, regardless of your down payment size.
Conventional loans will require private mortgage insurance (PMI) if you put less than 20% down at closing. The PMI will automatically drop off once you pay your loan down and reach 78% Loan-to-value (LTV) on the mortgage.
4. Do you charge origination fees?
An origination fee is a fee that goes directly to the Loan Officer who takes your loan application. This origination fee can range from 0.5% to 1% of the total loan amount.
This means if you were to purchase a home for $500,000, the loan officer would then pocket $2,500-$5,000 on top of their earnings based on their commission structure.
Some lenders will waive the origination fee or simply not charge the origination fee on any of their loans in an effort to attract more borrowers and establish a competitive advantage that will appeal to more borrowers to do business with their brokerage.
However, having an origination fee should not be the deciding factor in which broker you choose for your loan. You need to consider other things such as your interest rate, discount points, and down payment assistance programs.
5. What is the best amortization term for me?
A traditional mortgage has an amortization term of 30 years. However, there are other amortization terms that you can choose which have advantages and disadvantages that you need to consider.
Other amortization terms that are available to borrowers include:
- 10 years
- 15 years
- 20 years
- 25 years
So, why would someone choose a shorter term?
The reason that many borrowers would want a shorter loan term is that you are paying less money in interest over the life of the loan.
For example, on that same $500,000 loan over a 30-year amortization period, you will be paying approximately $360,000 in interest at a 4% interest rate.
In comparison, with a 15-year amortization term, you would only be paying about $160,000 in interest over the life of the loan. That’s a huge difference that would save you about $200,000 over the life of the loan!
The disadvantage to shortening your loan term is that this will increase your monthly mortgage payment.
On a $500,000 loan over 30 years, your monthly mortgage payment would be about $2,387 at a 4% interest rate. This is compared to a monthly mortgage payment of $3,698 on a 15-year term also at 4% interest.
A qualified mortgage professional will be able to look at your current household income and recommend which term would be the best for your situation.
The Bottom Line
Talking to a qualified mortgage professional is essential if you want to get approved for a mortgage when purchasing a new home.
It’s also important to do your own research on the loan programs available to you and to shop around different lenders, as some may offer better interest rates or lower fees.
By asking your mortgage broker these five questions, you’ll be on your way to getting approved for your dream home in no time.
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