(Updated November 2014)
When shopping for mortgage quotes and mortgage loans, we're presented with a dizzying array of loan packages, promotions, mortgage rates, and lenders who'll happily make us an offer. But sometimes, there's very little difference between the actual loans themselves, whereas there may be a vast gulf of difference between the lenders and their follow-up customer service performances.
Here are three key questions to ask potential mortgage lenders before you enter into a business relationship with them regarding your home purchase or refinanced mortgage rate.
1. How long have you been in the mortgage loan business, and how long has your company been around?
Your loan officer may be a newbie, and that's okay, as long as he's a knowledgeable and professional newbie. But if the company he works for is the new kid on the block, it may not be around next year. Your loan could be passed along to another organization whose location or service doesn't suit you.
2. What kind of loan do you have on your own home?
Ask what kind of loan he has and why, because insiders will generally pick the smartest mortgage loans and mortgage rates for their own properties.
3. What kind of educational experience do you have and what is your background in the mortgage industry?
As you would do with any professional, whether it's a lawyer, doctor, or CPA, ask mortgage lenders to explain their qualifications to you until you're confident and satisfied with their expertise.
4. What type of company do you represent?
When you shop for a mortgage, you could be dealing with any of a number of different types of institutions. A mortgage banker represents a financial institution that lends directly to borrowers and offers other traditional banking services. A mortgage broker is a middleman that doesn't actually make loans, but works with a variety of lenders to help borrowers find one that best suits their needs. A consumer finance company is a non-bank lender that typically specializes in niche lending products, such as high-risk loans to borrowers with poor credit, high-value mortgages to wealthy individuals or other loans the major banks aren't interested in. A loan officer is an employee who may represent a mortgage banker or broker and is the person who works with the borrower to arrange the loan.
5. How do you get paid?
A loan officer may get a flat fee or earn a commission based on the mortgages he or she sells. In some cases, they may earn a higher commission for certain types of more profitable loans or for loans that are structured with higher fees built in. Ask which particular fees contribute to the loan officer's compensation.
If you're dealing with a broker, the way brokers get paid is by charging an additional fee on top of what the lender charges. Brokers get a wholesale discount on the loans they originate, so their fee doesn't mean you'll pay more than if you dealt with that lender directly. However, the broker's fee may be negotiable, particularly on a higher value mortgage.
6. What different mortgage products do you offer?
Not every lender offers the full range of mortgage products. Some may offer fixed-rate mortgages in only 15- and 30-year terms; others may also provide them in lengths of 10, 20, 25 or even 40 years. Some do not offer home equity loans. Not all lenders are authorized to offer FHA, VA or USDA mortgages; if they don't, you not be getting the offer that's best for you.
A lender with only a narrow menu of loan choices will likely seek to direct you to what they have to offer, rather than helping you find the best fit for their needs. Then again, if they have particularly good terms on the products they do offer, they may be a good choice if they have the type of loan you need.
7. What would this loan cost with no points?
This is a crucial question when shopping for a mortgage. Mortgage advertising features a dizzying array of loan offers, with a variety of rates that make it difficult to compare. One of the primary reasons those advertised rates vary so much is because they include various levels of discount points, which are a way of buying down your mortgage rate. Asking for a quote with no points is getting the loan as stripped down as it can get - then you're looking only at fees and the interest rate. You can then ask about buying points later if you wish.
8. Can you explain the tax implications of mortgage interest?
It's a trick question! He or she should instead refer you to your financial advisor.
Once you've interviewed a few lenders and found one who's a good match for you, start asking the right questions. They're important to help both of you understand which mortgage quotes or loans are appropriate for you and your unique situation.