The Mortgage Process

For most people, their home is their biggest asset. Before you sign any papers, you need to ask the right questions and know all the costs associated with the mortgage itself as well as those associated with obtaining it.

You need to compare products offered by different lenders and brokers. To the extent possible, ask for information about the same loan amount, loan term, and type of loan. You can also contact a home-buying counselor to help you get started.

Prospective home buyers should also be aware of common pitfalls and potential unethical practices. If you're uncomfortable going through the mortgage process alone, then seeking professional advice makes good financial sense.

Review the list of questions below and from them, begin to prepare you own. Before you even start looking for home, you should pretty much know the answers to them all.

• First and foremost - how much house can you afford? To figure this out, you need to establish a monthly budget to determine what you'll be able to afford as a monthly payment.
  
  Before getting a mortgage (borrowing money to buy a home) or taking out a loan with your home as collateral (home equity loan), be sure that you are able to pay back the loans according to the agreed repayment schedule, including the principal, interest, taxes, insurance and any assessment fees. Be sure you can make payments under the most expensive rate chargeable under the loan. This is important because the lender has the right to take your home away from you if you are unable to pay off your debt. 
   
• Second, how much of a down payment you can afford? Lenders do offer products with lower down payments by wrapping the down payment into amount of the loan. You may be required to carry loan insurance to cover the balance in the event you default on the loan.
• Interest rate
  Ask each lender and broker for a list of their current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
  
  Ask whether the rate is fixed, adjustable or a hybrid. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
  
  If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
  
  Ask about the loan’s annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees and certain other credit charges that you may be required to pay, expressed as a yearly rate.
  
  When shopping for a mortgage, check if it is an interest-only loan, which means that the payments will go toward the interest due and not the principal. Some mortgages require that borrowers pay only the interest on the loan and not the principal until the loan matures (reaches a certain date). When the loan matures, the full principal is due.
  
  
• Points – Points are fees paid to the lender or broker for the loan and are often linked to the interest rate.  Usually the more points you pay, the lower the rate.
  
  Ask for points to be quoted to you as a dollar amount—rather than just as the number of points—so you actually know how much you'll have to pay.
   
• Fees - A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates.
  
  Ask what each fee includes. Several items may be lumped into one fee.
  
  Ask for an explanation of any fee you do not understand.
  
  
• Down Payments and Private Mortgage Insurance - Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.
  
  Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available.
  
  Ask your lender about special programs it may offer.
  
  If PMI is required for your loan:
  • Ask what the total cost of the insurance will be.
  • Ask how much your monthly payment will be when the PMI premium is included.

To compare products offered by different lenders and brokers, to the extent possible, ask for information about the same loan amount, loan term, and type of loan. You can also contact a home-buying counselor to help you get started.