Top Questions To Ask Your Mortgage Lender, Answered

So, you’ve decided to invest in your first home. Congratulations! Purchasing a house is one of the biggest financial undertakings you’ll face, so it’s understandable if you’re feeling overwhelmed. The process may seem long, drawn out and confusing, but there’s no need to stress. You’re not in this alone.

To help you navigate your first home purchase, we’ve created this guide complete with the questions you should ask before closing on a mortgage.

6 Questions To Ask Your Mortgage Lender

Buying a house is a complicated process, and for first-time home buyers, sometimes the hardest part is knowing what questions to ask. To help you prepare, let’s take a look at some of the crucial questions you should start with.

1. What Is A Good Down Payment On A House?

The down payment needed to buy a home varies depending on your loan type. For instance, FHA loans only require you put down 3.5%, and the minimum down payment required for a conventional loan is 3%. However, it’s recommended you put down at least 20% of a home’s value so that you will not be required to pay private mortgage insurance (PMI). Furthermore, your principal and interest will be lower if you put down more, meaning you can save big on your monthly payments.

2. How Do I Determine My Budget For Buying A House?

The next question you might want to ask is how much of your income should be dedicated to mortgage payments. Most financial advisors will suggest you spend no more than 28% of your gross monthly income on mortgage payments, but your lender may preapprove you for up to 50%.

Keep in mind that while your lender can tell you how much you can qualify for, it may be different from what you can comfortably afford. You’ll need to dig deeper, crunch the numbers and ensure that you can actually afford your monthly payments – even if times get tough. While certain factors like the principal and interest of the loan are clear in terms of monthly expenses, there are other costs to consider, from home maintenance to private mortgage insurance (PMI).

3. How Do I Calculate How Much I Can Afford For A House?

In order to figure out how much house you can afford, the first thing you’ll need to consider is how much money you’re earning each month. Don’t just look at your pretax salary – find out what you’re earning after taxes because that’s the actual money you have to spend. Next, make a list of all your monthly expenses from credit cards and loans to TV and internet, home heating and cooling costs and everything in between.

Once you have a comprehensive list, subtract your monthly expenses from your monthly income to determine how much you can afford to spend on a mortgage payment. Also consider your other savings goals as well as any planned renovations to ensure you’ll have a little wiggle room in your budget for any minor financial emergencies that will inevitably pop up. Life happens and you want to be financially ready when it does. If you’re looking for additional help in creating your home budget, try using the home affordability calculator.

4. How Do I Qualify For A Home Loan?

While every lender is different, you’ll generally need a reliable source of income, a solid credit score, money set aside for a down payment, a low debt-to-income ratio (DTI) and a few assets. The two most important factors considered by the lender are your credit score and DTI.

Your credit score is a number ranging from 300 – 850 which shows lenders how risky of a borrower you are. Factors like your oldest line of credit, payment history and debt balances are all combined to create your credit score. In general, you’ll need a median FICO^® Score of 620 or higher to qualify for a conventional loan; 580 for an FHA loan.

Your DTI ratio represents how much of your monthly gross income is going to debt payments. While the specific DTI requirement may vary based on the type of loan, most lenders consider a DTI of 43% or less to be good. However, the lower your DTI, the better. You may be able to qualify for certain programs with a higher DTI, but your mortgage options will be more limited.

5. How Does Closing On A House Work?

Once you’ve found your home and agreed to purchase, you’ll need to close on the sale. This simply means that you and the seller will sit down, sign a purchase agreement and finalize the sell. On closing day, the ownership of the home will be transferred to the buyer. For this to happen, closing costs will need to be covered and the deed will need to be updated.

Asking your lender about how much you should expect to pay in closing costs is another important step toward understanding the financial commitment you’re making. There are many factors that go into closing costs, including loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges, just to name a few.

6. What Is The Best Mortgage Term Length?

Like houses, mortgages come in all shapes and sizes, with the most common ones lasting for 15 or 30 years. In general, 15-year mortgages have lower interest rates and higher monthly payments. 30-year mortgages offer lower monthly payments but come with higher interest rates. We recommend talking with your lender about the pros and cons of a 15-year versus a 30-year mortgage to determine which option is best for you.

5 Mortgage Questions Only You Can Answer

1. How Much Should I Spend On A House?

While a lender may approve you for up to 50% of your gross monthly income, it’s crucial that you sit down and consider how much house you can actually afford. Most financial advisors will suggest you follow the 28% rule, meaning you should aim to spend no more than 28% of your gross monthly income on mortgage payments. Your budget will depend entirely on your situation, so it’s up to you to determine what you can afford.

2. How Big Of A House Do I Need?

The size of your family, your long-term plans and your budget should be the ultimate factors you consider when determining how much house you need. Do you have young kids who can share a room, or do you have angsty teens who need their own space? How long do you plan to stay in your home? Is it a starter home or forever home? These are all questions you should ask yourself before buying a house that’s too small or too large for your needs.

3. Should I Rent While Saving For A House?

You should also ask yourself if renting while you save is a good idea. If you have enough cash set aside to put down 3% on a house that’s “good enough”, can you continue renting until you’re able to afford your dream home? Are you in a rush to buy, or can your one bedroom apartment work for a few more months? If you’re not paying rent at all because you’re staying with a loved one until you’re ready to leave the nest, could you stay with them for a bit longer until you have more money to make a purchase?

When it comes to renting versus buying, every situation is unique, but it almost always makes more sense to buy than rent if you can afford it. Even if you know you’re just buying a temporary starter home, owning property means it can increase in value, build equity and even become your first investment property.

A rent vs. buy calculator can help you look at your specific situation to decide which option is best for you.

4. What If I Have Less Than 20% For A Down Payment?

If you don’t have the money to put a 20% down payment on a home, there are still options available to you. You can get a conventional loan with a down payment as low as 3%, and Federal Housing Administration (FHA) loans only require a 3.5% down payment. Some loan types, like USDA or VA loans, don’t even require a down payment, although there are more stipulations on who qualifies for those options.

You can research the difference between conventional and FHA loans as well as down payment assistance programs available for first-time home buyers before you talk to your lender.

5. When Should I Buy A House?

Are you actually ready to purchase a home, or are you just sick of your upstairs neighbors blasting techno at all hours of the night? Before you make such a serious commitment, it’s important to sit down and have an honest conversation about whether buying makes the most sense for you right now. This is a question that only you can answer, because the right time to buy is whenever you’re ready.

That may seem simple but understanding what it means to be financially and emotionally ready to buy a home can be tricky. Family considerations like whether kids need to change schools or if you need to be close to aging parents are just a couple examples of things to consider. Real estate agents can tell you how the housing market is trending, and lenders can tell you what you can afford, but the only person who really knows when you’re ready is you.  

The Bottom Line

Before you decide to purchase a home, it’s important to understand the commitment you’re making. Before buying a home, take into account all of your future plans. This might include saving for retirement or a trip around the world, but no matter what your goals are, it’s important to have the funds you need on hand.

If you’ve run the numbers, thought about your plans and know that you’re ready to buy your first home, start the mortgage application process today.