Finding the right mortgage lender is vital to the homebuying process, as this could turn into a business relationship lasting from 15 to 30 years. The goal is to find a trustworthy lender offering the best deal; choosing the wrong product could cost you tens of thousands of dollars extra over the life of the loan. Find out how you need to prepare for the loan and the right questions to ask lenders.
Collect These 12 Essentials Before Shopping
Last three paystubs
Lenders require proof of income to start the loan process, so the Consumer Financial Protection Bureau recommends photocopying your three most recent pay stubs to put in a folder of documents for the lender. Human resources or the accounting office at work should be able to provide a printed statement of recent stubs if you don't have them handy. If your paystubs are electronic, check with HR to get online access so you can print copies.
Pension and Social Security income statement (if applicable)
Some lenders want to document any pension or Social Security income the borrower receives. Freddie Mac recently introduced a rule allowing pension and retirement income to be used for qualifying for a loan.
Bank statements for the last three months
Borrowers need copies of three consecutive months of bank statements in their loan folder. Lenders use these to verify assets - to ensure you have the money you say you have in your account and that it wasn't deposited just before you applied for the loan. They will scrutinize any large or unusual deposits.
Stock, bond, mutual fund or retirement statements (401K, etc.)
Plan to provide a full accounting of savings and investments, such as compounding savings accounts, shares of stock and details of any retirement fund. Lenders use their value as a way to try to establish a borrower's ability to repay a mortgage, so it's to your advantage to provide this information.
Life insurance face value statement (if applicable)
Under Assets on the personal financial statement, you can note the face value of any life insurance policy. If a borrower dies during the life of the mortgage, insurance helps ease the lender's risk.
Tax returns for the last year
Photocopy tax returns, including all attached schedules and anything else sent to the IRS.
State-issued picture ID
A copy of your driver's license or state-issued identification card, including a photo. Aside from verifying the borrower's identity, the state-issued ID also contains a current address and other identifying information.
Copy of recent mortgage statements (if applicable)
When selling a home to buy another, or when acquiring additional property, prospective borrowers are usually expected to show three consecutive mortgage statements to the lender. Mortgage underwriters use the information to assess debt level and payment history on all properties.
Divorce papers
Lenders want to see a divorce decree to identify any financial obligations, such as alimony, that won't show up on credit reports. If a copy of the final divorce decree cannot be found, go to the court that granted the divorce and make a copy of the decree on file in the clerk's office.
Explanation of recent large deposits
Large deposits appearing in a bank account may trigger a red flag for lenders, who'll want to know the source of the money. Lenders are looking for warning signs such as opening a credit card, taking out a cash advance, and then depositing the money in a bank account to cover living expenses or some other need.
Estimated property value
Lenders require one or more valuations from a licensed real estate appraiser on a house for sale to determine their exposure and price the mortgage accordingly.
Desired loan amount
Amount of money the borrower expects to need to purchase the house, excluding closing costs. While a lender may approve a loan for a larger amount, perhaps to make approved improvements on a property, the total will be in line with your ability to make monthly payments.
Also, don't forget to pull your credit reports and review the information carefully before meeting with a lender. It's free to check your credit scores once a year through the three major credit reporting companies: Experian, TransUnion and Equifax. Credit scores are key in determining the interest rate a homebuyer will get on a mortgage from a lender. By checking these scores in advance, borrowers can correct any mistakes on the credit reports before applying for a loan.
However, if you need to correct mistakes on your credit report, start this process well in advance of trying to lock in a mortgage. If you dispute an item with a credit bureau, it can take 30 days or more to resolve the issues, and your mortgage or refinance will be delayed until the dispute is resolved.
Ask Lenders the Right Questions
Don't choose a lender based solely on the lowest interest rate. The lender's experience and reputation are also important in evaluating whether this company can be relied upon. Check online reviews and reports of lenders to see how they rate in customer satisfaction and if there are any red flags.
Questions | Answers You Want to Hear | Red-Flag Answers | |
|---|---|---|---|
What home loan types do you offer? | The lender offers conventional and jumbo loans as well as FHA and VA for first-time buyers and individuals with a small down payment and who also need help with closing costs. | A lender that offers few or only a couple of loan options. Unless the desired loan is the company's specialty, having more options is generally better for consumers. | |
How much experience do you have in selling home loans? | The lender is registered as a financial institution, has positive consumer experiences and has been in business for a long time. | An unregistered lender or company that is reluctant to share consumer feedback. | |
Which loans do you recommend for my situation? Why? | Good lenders will take time to review each customer's unique situation and suggest a loan package meeting the customer's needs. | Lenders who push you toward specific loan products and are pressuring you into a quick decision. | |
What is the interest rate for the loans you recommend? | The lender should offer a competitive rate for the specific type of loans you want. Compare that rate to other lenders' offers. | Interest rates that are inconsistent for individuals at different credit-score levels. Beware of any rate offer that seems unusually low compared to rates from competitors. They could include hidden costs associated with a loan. | |
How much lower an interest rate can I get with discount and origination points? | For each discount point you purchase, you'll want to get between one-eighth to one-quarter percent reduction on the interest rate. (An origination point is a fee charged to write the loan that typically equals 1 percent of the loan amount.) | No clear gain. Buying discount points should provide anywhere from one-eighth to one-quarter of a percentage percent reduction in the mortgage interest rate. If the lender offers less than this range, buying discount points may not be a good value. The FTC also suggests asking how much you'll have to pay for each point. | |
When will I see the Good Faith Estimate or Loan Estimate? | A Good Faith Estimate (GFE), if you applied for a loan before Oct. 3, 2015, or a Loan Estimate if you applied on or after Oct. 3, 2015, must be provided to you within three business days. Each lists basic information about the terms of your loan. | Delays in responding to you. Any response longer than three days could be a reflection of what it will be like dealing with the company for years to come. | |
How long will it take your company to process my application? | Lenders have three business days to process and respond to a mortgage application. | More than three days to process and respond to a mortgage application could be a sign of how the company treats customers over the life of the loan. | |
Who will handle the title and escrow? | You'll want to see that a licensed escrow and title company will handle the formal transfer of funds from buyer to seller. In some states, only a licensed attorney can handle the closing transaction. | Lenders who offer in-house escrow services. Licensed title and escrow companies are insured against loss so buyer and seller can depend on a clean and legal transaction. This way, the money for a house flowing to the seller and the title will be placed in the hands of the buyer or lender to be held in safekeeping until the mortgage is paid off. | |
If applicable: For conventional loans, who provides your private mortgage insurance (PMI)? | Lenders will typically work with one of the six major providers of PMI: Arch, Essent, Genworth, MGIC, National and Radian. | Mention of any PMI company not named at left. If the PMI named is unfamiliar, find out if they're affiliated with any of the big six. Quick tip: Lenders must automatically cancel PMI on a mortgage when the borrower's balance drops below 80 percent, says the Consumer Finance Protection Bureau*. | |
Who typically services your loans? | The loan servicer processes payments and answers borrower's questions over the life of the loan. Knowing the name of the servicer lets consumers check out its reputation. | A loan servicer with a bad reputation. While there is no right or wrong answer to who services the loan, consumers would do well to check out the servicing company to evaluate its reputation. |
Be Prepared. Lenders Ask Questions, Too
Predictably, mortgage lenders will predictably ask borrowers a lot questions as part of the evaluation process leading to mortgage approval. Being prepared is one key to success. While some questions will be obvious - i.e.: What's your Social Security number? - other issues will take some consideration, such as whether to buy discount points (prepaid interest) as a means of lowering the interest rate on a loan.
Resources
Conventional Loans
The most common type of mortgage offered by lenders, with details on the three main categories of conventional loans.FHA Loans
Another popular loan option, especially for first-timers and those with a small down payment.Federal Trade Commission
Advice from the FTC on homes and mortgages.Financing an Unconventional Home
Advice for financing, permitting and insuring the new American dream homes.Housing Counselors
Homeownership experts who advise on buying a house, catching up on late payments and preventing foreclosure, plus the pros and cons of owning versus renting.How-To Guides for Homeownership
Information for first-time homebuyers, buying a house when you're self-employed and how to buy property after a bankruptcy or foreclosure.J.D. Power's 2019 Primary Mortgage Servicer Satisfaction Study
Take a look at how several mortgage servicers were graded on customer satisfaction.Know Before You Owe
The Consumer Financial Protection Bureau's campaign for better understanding the homebuying process.Mortgage Payment Calculator
A tool to estimate monthly payments by inputting your loan term, income and interest rate.Today's Interest Rates
Check the prevailing interest rate on three of the most common mortgage types. Updated daily.
About Steve Evans
