Choosing a Lender

Now that you are familiar with the different types of mortgages, you are ready to start calling mortgage lenders. Ask to speak to the mortgage department or a mortgage loan officer. When you call potential lenders, have a list of written questions in front of you. Use Worksheet 4.1 to keep track of the information you learn. Some questions you should ask include:

  • What types of financing does the institution have available now? Do they offer both fixed-rate and adjustable plans? Are FHA and VA mortgages available? What other plans does that particular institution have to offer? Do they have the ability to both bank their own loans as well as broker them if they can find a better program elsewhere?

  • How long is the term they are willing to offer for each type of loan? Is the term of adjustable-rate loans fixed, or do they offer various lengths of terms? Is there a lower interest rate for shorter-term loans?

  • Can ARMs be converted to fixed-rate loans at some point? If so, what is the cost?

  • What guidelines do you use for loan qualifications? (The next section, “How Much Can You Borrow?” goes into more detail about qualification guidelines.)

  • What is the minimum down payment requirement for each type of loan?

  • Does the institution charge points? How many points do they charge for each type of loan?

  • Is a loan origination fee charged to cover the cost of processing the mortgage?

  • Is there an application fee? How much is it?

  • Can the lender give you a rough estimate of closing costs in relation to the percentage of the home's sale price?

  • Is there a prepayment penalty, or a fee for paying off a loan early, on any of the mortgages?

  • Does the lender offer preferred-customer benefits for customers who use the lender's other services, such as checking or savings accounts?

  • How long will a mortgage decision take after an application is submitted?

  • How long will a mortgage commitment remain effective?

  • Does the interest rate remain constant on the loan commitment?

  • The last two questions are important ones to ask. You need to know how long a loan offer will be available to you at the rates you're first quoted. Some lenders will make a commitment for ninety days, with renewals available. Some will make commitments for up to six months, especially on homes that are new construction. Without a commitment to a particular interest rate, you may still be assured of a loan, but the loan will be written at the interest rate prevailing at the time of closing, which may be higher than when you began your search.

    The Federal Reserve Bank of New York offers many free booklets for the homebuyer, homebuilder, and anyone refinancing a home. Write to their Public Info Department, 33 Liberty Street, NY, NY 10045 for their free catalog, “Public Information Materials.”

    On the other hand, you may find a lender who will guarantee the interest rate on their mortgage offer. But be aware that if rates go down before you close, they will hold you to the original rate. To get a better rate, you would have to begin mortgage shopping all over again. Some lenders will guarantee the best rate. This is the best deal of all. If interest rates go up before you close on a house, the lender will leave your interest rate the same as it was when they made their commitment to you. And if rates are down by your closing, they will write your mortgage loan at the new, lower rate.

    Many lenders inaugurate, from time to time, special mortgage plans unique to their institutions. No doubt, the officer you talk to will mention these programs, perhaps even open the conversation with them. If not, it cannot hurt to ask if that lender has any new mortgage programs on the horizon. Give the lender a chance to offer a mortgage that meets your needs. After all, they do want your business.

    Talk with four to six lenders to help you analyze and compare effectively. A few may quote attractive rates over the phone; then, when you make an application, you find that the rates have risen. Overcome this problem by asking to lock in the rate you want.

    Use Worksheet 4.2 to take notes on your loan options as you talk to prospective lenders. Be sure you are getting quotes on comparable loans. There are simply too many possible variations on rates and loans for us to cover them all in these pages. Here is one example of how offers that sound similar at first may be quite different in reality. You might be given a quote on a thirty-year, fixed-rate loan. But it could really mean the lender is offering a thirty-year loan with a low-interest fixed rate for the first seven years, with a balloon payment or refinancing at prevailing rates due at the end of that seven years for the final twenty-three years. Programs can be very narrowly defined, as you can see, and there are sometimes programs within programs.

    Worksheet 4.1 Lender Information Worksheet

    Lender                       Phone

    Address                    Fax

    Types of financing

    Current interest rates

    Term

    Minimum down payment

    Limit on loan amount

    Loan qualification guidelines

    Points

    Loan origination fee

    Application fee

    Appraisal fee

    Credit check fee

    Other fees (list)

    Prepayment penalty

    Preferred customer benefits

    Time needed for lender's decision

    Length of loan commitment (number of days)

    Renewable?

    Rate guarantee on commitment (if any)

    Late payment penalty

    Notes:

    The best offering for us seems to be:

    Cost of obtaining the loan (add all the fees payable at the closing): $

    Monthly cost of carrying the loan: $

    (Use mortgage tables to find the principal and interest payment at the named rate of interest for the named term. Or enter the lender's figure for fixed payments on an adjustable loan. Add mortgage insurance premiums, if any.)

    Worksheet 4.2 Lender Survey Worksheet

    Cost of Securing Loan

    Monthly Carrying Costs

    Lender 1

    Loan

    $

    $

    Loan

    $

    $

    Loan

    $

    $

    Lender 2

    Loan

    $

    $

    Loan

    $

    $

    Loan

    $

    $

    Lender 3

    Loan

    $

    $

    Loan

    $

    $

    Loan

    $

    $

    Lender 4

    Loan

    $

    $

    Loan

    $

    $

    Loan

    $

    $

    Lender 5

    Loan

    $

    $

    Loan

    $

    $

    Loan

    $

    $

    1. Home
    2. Home Buying
    3. Choosing the Right Mortgage
    4. Choosing a Lender
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