There are many sources of mortgage money available. Mortgage companies act as brokers for institutional investors such as the Federal National Mortgage Association (FNMA) and others. There is competition between lenders and you should shop for financing. Deal only with reputable, known and recommended lenders. If the lender you choose cannot deliver your loan on time, you may lose your new home. We have not had good experiences with Internet lenders and lenders located out of state.
How long will application and approval take?
Most loans close in 40 to 50 days, which is standard for the mortgage industry regardless of the type of financing.
What will the interest rate be?
Mortgage rates will always fluctuate and depend on your credit rating. You are able to chose a conventional loan with a 30 or 15 year fixed rate or if you can pay off the home much sooner or if you don’t plan to stay in the home very long, you may want to chose an Adjustable-rate mortgage (ARM).
How do you “lock in” the rate and can it float down?
Mortgage lenders typically offer rate locks for 30, 45 or 60 days, though it’s possible a rate lock with a longer term could be available. Check with your lender about their rate lock options.
Fees for rate locks vary by lender, but the longer the rate lock term, the more you will pay for it. It can also be costly if you find that you need to extend your rate lock past the original term. It’s also important to note that if you lock in your mortgage rate and then rates drop, you won’t be able to take advantage of a lower rate—in most cases.
Will you need private mortgage insurance? What will that cost?
Lenders will require mortgage insurance when you put less than 20% down. This does not pay the loan off if you die or become disabled. It only serves to protect the lender against your default. One option to avoid mortgage insurance is to place an 80% first trust and a second trust to provide the additional financing you need.
Will there be a prepayment penalty if you pay the loan early and how much will it be? Does the penalty apply to sales as well as refinances?
A prepayment penalty is a charge that the lender imposes on the borrower if the borrower pays all or part of the loan principal before its due date. For example, if you pay off your loan, refinance, or sell your home before a certain date, you could be subject to a prepayment penalty. For many new mortgages, the lender cannot charge a prepayment penalty. For instance, you can pay off your VA loan early with no fear of getting hit with any prepayment penalties.
Bottom line: if your lender can charge a prepayment penalty, it can only do so for the first three years of your loan and the amount of the penalty is capped. These protections come thanks to federal law.
Will the loan be “assumable” and under what circumstances?
Conventional mortgages are not assumable. Two types of loans are assumable: FHA loans, which are insured by the Federal Housing Administration, and VA loans, which are guaranteed by the US Department of Veterans Affairs. An assumable mortgage is a financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain their own mortgage.
Be sure you understand the terms of the loan you assume.
When making application, be sure you understand the terms of the loan and fees the lender will charge you. These may include service charges, points, appraisal fees, escrow fees, tax service fees, document preparation or lender’s attorney fees. The lender should provide you with a good faith estimate of all of your closing costs.
Certain charges collected when you apply for the loan may be non-refundable. If the lender turns down your loan, or you change your mind and transfer or withdraw your application, you will not get back the appraisal or credit report fees.
- Arrangements for financing. Most contracts contain a contingency that will cancel the contract if the lender denies your loan or the property does not appraise for a high enough value. You must diligently pursue loan approval and apply for a loan within 5 days of contract ratification or you are in default. Many builder contracts do not contain these contingencies.
- You may apply for financing other than as specified in the contract, but you must obtain a contract addendum signed by the seller or you will waive the financing contingency.
- Set the settlement date and date of possession. Avoid the last few days of the month, if possible. They are the busiest and delays may result.
- If you need to sell a house in order to buy a new one, your contract can be made contingent on the sale of your house but you will need to add contingency language.
- Ask for termite, well, radon, home and septic inspections, if needed, and warranties.
- Consider carefully the choice of settlement agent.