Rick Richter
I have been a lender for over 10 years now and have spoken with thousands of clients and potential home-buyers. Over the years I have noticed there are five questions that borrowers always ask, I am going to offer up the questions I hear the most and then give you my two cents on why they are important, and how they can be asked so you get the information you are truly looking for.
#1 What is your interest rate? This is a very important aspect of shopping for a loan, but just asking about rates can be misleading. There are lenders charging excessive fees so they can offer lower then market rates. There is one large lender in Michigan who offers below market rates but every loan comes with two discount points charged (2 points = 2% of your loan amount).
A better way to ask this question is – what are your rates and fees? More specifically, what is the Annual Percentage Rate (APR)? Shopping by APR is the best way to go about making sure you are getting the best deal available. The APR takes into consideration the rate at which interest is accrued over the life of the loan, but in addition to that it will also take into consideration certain closing costs associated with the loan and calculate them as interest. For example, you tell me which one is better for the following scenario of a client buying a $250,000 house, putting 20% down as a down payment.
Rick Richter, Guaranteed Rate
1. 30-year fixed loan 4.25% with an APR of 4.33%
2. 30-year fixed loan 4.00% with an APR of 4.43%
Option 1 with the lower APR is the better option, with clearly much lower costs. If you simply asked what is your rate, you may have decided to go with option 2, only to have paid excessive fees that might not have worked in your benefit in the long run.
#2 What are the closing costs? This is another great question that is very important but needs some defining as well. Shopping for a mortgage is just one aspect of getting a loan on a new home. There are many other services that are combined into buying a home with a loan that are not controlled by your lender. For example, title insurance, appraisal, and county recording fees are all required when taking out a loan secured by a house. I like to compare it to asking a car dealership what the price of gas is going to be. You absolutely need gas for your car but the dealer has no control over that.The fees to specifically focus on when shopping for a mortgage are the origination charges. These are the fees that are directly related to the loan and the lender you are working with, and are the best representation of the true cost of just your loan.
#3 How long does getting a loan take? I have always said the same thing, in a perfect world we can get a loan done in 10 days. Where this comes up short is that we are all human, and if you are anything like me, you do not keep the required documents organized nicely in your top desk drawer. Right now at Guaranteed Rate we average a 21 day turn time to close a loan. When we send you or hand you your loan paperwork for the first time we will also give you a list of items we need in order to secure your approval. Where things start to take longer is when there are delays in getting those documents back to us, or in some cases there is something outside of our control. I have worked on loans that for no fault of the borrower took two months to get done because there were liens on their title they knew nothing about. We had to work with the title company to remove those liens so we could proceed with the loan. That scenario is rare but it does happen.
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#4 What is the process? Typically a loan application starts with a brief consultation, where we as a lender get to identify your goals and any specific requests for the loan. Then once we understand your goals, we will take a formal application. At this point we understand where you stand in a financial sense. I like to reserve a moment to give my input, there are times when a borrower is asking for one loan program when what would really work better for them, and their goals might be a completely different loan program. At the end of the day what you want will be done, but sometimes there may be a solution you did not even know of that is perfect. Its my job to put all relevant options in front of you. Once we have the application completed and the program identified, we will get the loan package in front of you for signatures. This is also the time where we will ask for all the supporting documents to get you approved. Supporting docs are typically your bank statements to verify the down payment, pay stubs, W2s, tax returns, a copy of your drivers license, and any contracts or agreements that pertain to you. From here the loan file will go through to our processing department where all of the documents and third party tasks (appraisal, title work etc.) are completed. From here the underwriter will take a look at all relevant documents and make a lending decision. Really at this point in time, we know where the loan stands and it is just a matter of dotting the Is and crossing the Ts. Once the loan is formally approved or cleared to close, the file will move its way to the closing department. This is where we will get a look at the settlement page, which breaks down all costs and credits of the transaction and gives you the bottom-line costs. Once we have approved the settlement page we will order the funds for your loan and wire them to the title company for the closing. This is an overview obviously but I think it sheds enough light on the process for you to be dangerous.
#5 How much do I qualify for? This is a valuable question but it should be more about how much would you be comfortable borrowing. Every scenario is a little different but with Government lending guidelines limiting a borrowers Debt to income ratio or DTI at 43% for conventional loans gives a new ceiling. Government loans like a FHA loan can go a bit higher and I have seen approvals at 50% DTI. One can calculate your debt too income ratio by taking your monthly debt obligations and dividing that # by the total amount of monthly total household income. To make the how much do I qualify for question a little easier to understand the average borrower can multiply there Total household income by 4 and that gives you a fairly good target for the total amount you can have outstanding on loans.
If you would like to add another question to this list feel free to reach out to me directly and I will do my best for you.
