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List of Important Questions to Ask a Mortgage Lender Before Signing


Navigating the world of mortgage lending as a real estate investor can feel like trekking through an intricate maze. However, arming yourself with the right information is like having a map to guide you through. In our comprehensive blog post, we aim to clear the fog surrounding your most pressing questions, such as:

  • The ins and outs of the loan application process, including pre-qualification, pre-approval, and the role of a good faith estimate.
  • Decoding loan specifics, like interest rates, fixed versus adjustable rates, debt-to-income ratios, and loan-to-value ratios.
  • Understanding potential challenges like dealing with bad credit, managing multiple mortgages, or missing a mortgage payment.
  • Making strategic choices like whether to pay points, when to consider a balloon mortgage, how to handle PMI, and the use of an escrow account.

In addition, we also shed light on common mistakes that real estate investors make when dealing with mortgage lenders and how to avoid them. We weigh in on the pros and cons of dealing with mortgage lenders to give you a balanced viewpoint.

Our goal is to provide you with a thorough guide that leaves no stone unturned, making the process of dealing with mortgage lenders less daunting and more transparent. Whether you're a seasoned investor or new to the game, our blog post aims to offer actionable insights to assist you in your journey.

Stay tuned for these valuable insights and much more. We promise to bring clarity to your mortgage-related questions, so you can focus on making profitable real estate investments.

What type of loans do you offer?

Mortgage lenders usually offer a range of loans to cater to different buyer needs. Here are a few types:

  • Conventional loans: These are typical loans not insured by any government agency. They can be conforming (meeting the guidelines set by Fannie Mae and Freddie Mac, organizations that back most U.S. mortgages) or non-conforming (jumbo loans).
  • FHA loans: These are insured by the Federal Housing Administration and are more forgiving on credit scores and offer lower down payment options.
  • VA loans: If you're a veteran or active military, you may qualify for a loan backed by the Department of Veterans Affairs.
  • USDA loans: These are for rural homebuyers and are backed by the United States Department of Agriculture.

An example of when to use which loan: If you have a high credit score and can afford a 20% down payment, a conventional loan would be suitable. If you're a veteran, it's worth exploring a VA loan as they can offer significant benefits.

What are the benefits and cons of mortgage lenders?

Mortgage lenders offer several benefits to real estate investors.

  • First and foremost, they provide access to the capital needed to purchase properties. Without mortgage lenders, many investors would not have the necessary funds to invest in real estate.
  • Additionally, mortgage lenders offer a variety of loan products, allowing investors to choose the one that best fits their needs. For instance, some investors might prefer a fixed-rate mortgage for stability, while others might prefer an adjustable-rate mortgage for its lower initial rate.
  • Mortgage lenders can also provide valuable advice and guidance. They can help investors understand the different loan options and navigate the often-complicated process of obtaining a mortgage.

However, there are also cons to using mortgage lenders.

  • One of the main drawbacks is the cost. Mortgages come with interest and fees, which can add up over time. Some lenders also charge prepayment penalties if you pay off the loan early.
  • Another disadvantage is the risk of foreclosure. If you fail to make your mortgage payments, the lender can take possession of your property.
  • Finally, dealing with mortgage lenders can sometimes be a time-consuming and stressful process. The application process can be lengthy, and it often requires a lot of paperwork. In addition, some lenders may not provide the level of customer service that investors expect.

What is the interest rate and Annual Percentage Rate (APR) for the mortgage?

The interest rate is what you'll pay each year to borrow money, expressed as a percentage, not including any fees or charges. On the other hand, APR reflects not just the interest rate but also some other costs of acquiring the loan, like broker fees, discount points, and some closing costs. It's important to look at both. For instance, if one lender offers a lower interest rate but high fees, the APR could end up being higher than a lender with a slightly higher rate but fewer fees.

For example, a $200,000 loan with an interest rate of 4% will have a monthly principal and interest payment of $954.83. However, if the APR is 4.4% because of added fees, you're effectively paying more.

What are the origination fees and broker fees?

Origination fees are what lenders charge for processing the loan. This includes preparing loan documents, checking your credit, and underwriting and inspecting the property. They're generally 0.5% - 1% of the loan amount. So, on a $300,000 loan, expect to pay $1500 - $3000. However, these fees are negotiable and can vary widely between lenders.

Broker fees are charged if you use a mortgage broker rather than a direct lender. This can be a flat fee or a percentage of the loan amount. For example, a 1% fee on a $300,000 loan would be $3,000. Some people may choose to avoid this cost by dealing directly with lenders, but brokers can often negotiate better terms.

What other costs are included in the loan?

Besides the origination and broker fees, other costs might include:

  • Appraisal fee: The cost of having the property professionally appraised. Usually, it is between $300 to $400.
  • Closing costs: They can include a variety of fees like recording fees, title policy fees, escrow fees, notary fees, and more. They typically amount to 2-5% of the purchase price.
  • Discount points: These are optional payments to lower your interest rate. One point costs 1% of the loan amount and typically reduces your rate by 0.25%.
  • Mortgage insurance: If your down payment is less than 20% on a conventional loan, you'll typically have to pay private mortgage insurance.

Are the rates being quoted the lowest for that day or week?

Mortgage rates can fluctuate daily based on market conditions, similar to how stock prices change. Ask your lender if the rates quoted are the lowest they've offered that week. For example, if you were quoted a 4% interest rate on Monday, but the lender's rates have dropped to 3.75% by Thursday, knowing this could save you significant money over the life of your loan.

Remember, it's vital to have these discussions with your potential lender. Mortgage terms and conditions can vary greatly between different lenders and loan types, so it's important to understand every detail of your agreement before signing. Don't be afraid to ask questions or negotiate terms to get a deal that best fits your financial needs.

Is the loan rate adjustable or fixed?

Fixed-rate mortgages have an interest rate that remains the same throughout the term of the loan, making your monthly payments predictable. For example, if you have a fixed interest rate of 3.5% for a 30-year term, your interest rate will stay at 3.5% for the entire period, irrespective of market fluctuations.

On the contrary, adjustable-rate mortgages (ARMs) have interest rates that can increase or decrease over time, based on market conditions. They often start with a lower rate than fixed-rate mortgages for a specified number of years (like 5, 7, or 10 years), and then the rate adjusts periodically (often annually). So, if you have a 5/1 ARM with a starting rate of 3%, it will stay at 3% for the first five years, but then could increase or decrease annually. If you plan to stay in the house for a shorter period, an ARM could save you money, but if the rates increase, so do your payments.

If the loan rate is adjustable, how does it adjust?

ARMs typically have two key numbers: the first is the fixed period, and the second is the adjustment period. For example, a 5/1 ARM has a fixed rate for five years, and then the rate can change every year. The adjustments depend on various indices (like LIBOR or the Treasury Index) plus a margin added by the lender.

Furthermore, ARMs have caps to limit how much the rate can increase. They have three types of caps: (a) initial adjustment cap (how much the rate can change the first time it adjusts after the fixed period), (b) periodic adjustment cap (how much the rate can change in the periods that follow), and (c) lifetime cap (how much the rate can change over the life of the loan).

For instance, if your 5/1 ARM starts at a 3% rate and it has a 2/2/5 cap structure, the maximum it could ever reach is 8% (initial 3% + lifetime cap 5%), and in the sixth year, it can go up to a maximum of 5% (initial 3% + initial adjustment cap 2%).

Is there a prepayment penalty?

A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage earlier than the agreed term. Not all loans have these penalties, and they're more common in certain types of loans like ARMs. The penalty amount can vary, but it's typically a percentage of the remaining mortgage balance or a certain number of months' worth of interest.

For example, if your mortgage has a 2% prepayment penalty and you decide to pay off a $200,000 balance, you could owe an additional $4,000. If you're considering making additional payments or thinking about moving in the next few years, it's vital to understand any potential penalties.

Can the lender provide an estimate of the monthly payment amount?

Lenders should be able to provide an estimated monthly payment. This figure should include not only the principal and interest but also any applicable mortgage insurance, property taxes, and homeowners insurance.

For instance, on a 30-year mortgage with a loan amount of $250,000 at a fixed rate of 3.5%, your monthly principal and interest payment would be around $1,123. But if your yearly property taxes are $3,000 and your homeowners' insurance is $1,200, when these are escrowed (spread out and added to your monthly payment), your total monthly payment would be closer to $1,395.

How much down payment is required?

The down payment requirement varies based on the loan type and the lender's policies. Conventional loans typically require a 20% down payment, but some lenders may allow as little as 3% down. Government-backed loans can have even lower down payment requirements - for example, VA loans don't require any down payment at all, and FHA loans can go as low as 3.5%.

For example, if you're buying a $300,000 house and have a conventional loan requiring a 20% down payment, you'll need to put down $60,000. But if you're eligible for an FHA loan, you might only need to put down $10,500 (3.5%).

Remember, while a smaller down payment can make a home purchase more affordable in the short term, it will result in higher monthly payments and potentially a higher interest rate, so it's crucial to balance immediate affordability and long-term costs.

What are the qualifying guidelines for this particular loan?

Qualifying for a mortgage loan depends on multiple factors such as the type of loan, your credit score, income, employment history, and the amount of debt you have relative to your income. For example, conventional loans, offered by entities like Fannie Mae and Freddie Mac, often require a credit score of at least 620 and a debt-to-income ratio (DTI) of less than 43%. Some lenders may have even stricter criteria.

FHA loans, on the other hand, can be more lenient, accepting credit scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment. USDA and VA loans also have specific guidelines related to property location and military service, respectively. So it's crucial to discuss with your potential lender what their specific requirements are for the loan you're interested in.

What is the lender's process for loan approval and what documentation will be required?

The loan approval process generally involves prequalification, preapproval, and final loan approval.

  • Prequalification is a preliminary look at your creditworthiness, based on self-reported financial information. It gives you an idea of the loan amount and terms you might qualify for.
  • Preapproval goes a step further, where the lender checks your credit and verifies your financial and employment information. If preapproved, you'll receive a conditional commitment for the loan amount.
  • Final loan approval happens once an appraisal has been done on the property and the underwriting process is complete.

Typical documents required include income documents (like W-2 statements, pay stubs, and tax returns), credit information, employment verification, and information about your debts and assets. For self-employed individuals, further documents may be required such as business tax returns and a profit and loss statement.

How long will the loan approval process take?

On average, it can take anywhere from 30 to 45 days from the day of application to closing. However, this timeline can be influenced by multiple factors, such as your readiness with required documents, the lender's efficiency, the type of loan, and market conditions. Digital lenders and certain loan types may offer quicker approvals, while government-backed loans may take a bit longer due to their added requirements.

How long will it take to close the loan?

The time it takes to close a loan can vary significantly. On average, you can expect the process to take around 30 to 45 days from when your offer is accepted. Factors that can affect this timeline include how quickly a home appraisal and inspection can be completed, whether there are any title issues, and how busy the lender is. During busy times, when many people are buying homes or refinancing their mortgages, the closing process can take longer.

Are discount points included in the quote and what is the point to rate correlation?

Discount points refer to the fees paid to the lender at closing in exchange for a lower interest rate. Typically, one point costs 1% of the mortgage amount and reduces your interest rate by about 0.25%, but this can vary among lenders.

Whether discount points are included in your loan quote will depend on your lender – some may automatically include them, while others may not. Therefore, it's essential to ask your lender whether your quote includes points. If you're considering paying points, you'll want to calculate whether the upfront cost will be outweighed by the savings from a lower interest rate over the life of the loan.

Can the interest rate be locked, and if so, when can this be done?

An interest rate lock, or rate lock, is an agreement between you and the lender that allows you to secure a specific interest rate on your mortgage for a particular period, protecting you against potential interest rate increases during your loan process. Most lenders will allow you to lock in your rate once your loan application is approved or, in some cases, after you've found a home to buy and have an accepted offer.

Remember that rate locks aren't permanent—they typically last from 30 to 60 days, though some lenders offer extended lock periods. It's important to understand the terms of your rate lock, including when you can lock and how long the lock lasts. Ask your lender about the process and what happens if you don't close before the rate lock expires.

If the rate can be locked, how long will the lock-in last?

Typically, a rate lock-in lasts between 30 and 60 days, depending on the lender and the loan program. This period should give you enough time to complete the closing process. However, if there are delays—for instance, if home inspections reveal issues that need to be resolved, or if the underwriting process takes longer than expected—you could exceed the rate lock period.

In some cases, lenders may offer to extend the rate lock, but there may be a fee associated with this. It's crucial to discuss the specifics of the lock-in period with your lender, including what happens if you can't close within that timeframe.

Does the lender offer a rate lock-in guarantee?

A rate lock-in guarantee, as the name suggests, guarantees the interest rate and points for your loan during the rate-lock period, even if market rates rise. Most lenders do offer a rate lock-in guarantee, but it's essential to confirm this with your lender, understand the terms, and get everything in writing.

Rate lock-in guarantees usually come with terms and conditions, such as the requirement that the borrower complete the mortgage process within the lock-in period. If you fail to close within that period, the guarantee may become void, or you may have to pay a fee to extend the lock.

What are the closing costs?

Closing costs are fees associated with finalizing a mortgage and usually range between 2% and 5% of the loan amount. They can include a variety of charges, such as application fees, loan origination fees, appraisal fees, title search fees, credit report charges, and prepaid costs (like homeowners insurance, property taxes, and interest).

For example, if you're taking out a $250,000 mortgage and your closing costs are 3% of your loan amount, you would owe $7,500 in closing costs. Ask your lender for a Loan Estimate, which provides a breakdown of expected closing costs. Review it carefully and question any items you don't understand.

Can the closing costs be incorporated into the loan?

In some cases, closing costs can be incorporated into the loan, a practice known as "rolling in" closing costs. This can help if you don't have enough cash on hand to pay these costs out of pocket. However, it increases the size of your loan and your monthly payment. You'll also pay interest on these costs over the life of the loan, making them more expensive in the long run.

For example, if you roll in $7,500 of closing costs into a 30-year loan with a 3.5% interest rate, you'll end up paying almost $4,800 extra in interest over the life of the loan.

While this can make sense in some situations, it's important to consider the long-term financial implications. Your lender can help you analyze your options and make the decision that best suits your circumstances.

What is the minimum credit score to qualify for this loan?

The minimum credit score to qualify for a mortgage loan will vary depending on the type of loan and the lender's policies. For conventional loans, many lenders require a minimum credit score of 620 or higher. FHA loans, which are backed by the Federal Housing Administration, allow for lower credit scores - sometimes as low as 500, although you'll typically need a score of 580 or higher to qualify for the most attractive down payment options.

Keep in mind, the higher your credit score, the better the terms you'll be offered. That's because a high credit score indicates to the lender that you're a responsible borrower. It's important to note that credit score is just one factor that lenders consider when approving you for a mortgage. Your debt-to-income ratio, employment history, and overall financial stability are also significant factors.

How does the lender handle rate increases while the loan is being processed?

Interest rates can fluctuate between the time you apply for a loan and the time you close. If you haven't locked in your interest rate and rates rise, your loan will likely become more expensive. To avoid this, many borrowers choose to lock in the interest rate at the time of application or during the loan process.

However, the policies regarding rate increases during loan processing can vary widely among lenders, so it's crucial to ask this question. Some lenders may allow you to lock in the rate at application, while others may only do so upon loan approval. If rates decrease, some lenders offer a "float down" option, which allows you to get a lower rate, but this usually comes with additional costs.

Does the lender sell the mortgage or keep it in-house?

After you close your mortgage, your lender might continue to manage the loan, or they might sell it to another financial institution. This practice is pretty standard in the mortgage industry and shouldn't affect your loan terms. However, it could change where you send your payments and who you contact for customer service.

If your lender does sell mortgages, ask about their practices. Will they continue to service the loan (meaning you'll still deal with them for payments and customer service), or will all responsibilities be transferred to the new company? Knowing what to expect can help avoid confusion later.

What is the process if the appraisal value comes in lower than the selling price?

If the appraised value of a home is less than the sale price, it can complicate the mortgage process. That's because lenders use the appraised value to determine the loan-to-value ratio (LTV), which impacts the amount they're willing to lend.

If this happens, you have a few options. You can dispute the appraisal or request a second appraisal, negotiate with the seller to lower the price, or make up the difference in cash. In some cases, you might decide to walk away from the deal, particularly if you've included an appraisal contingency in your purchase agreement.

How often will the payment be adjusted and when is the adjustment made?

This question applies if you're considering an adjustable-rate mortgage (ARM). With an ARM, your interest rate and payment can change over time. The frequency of the adjustment depends on the terms of the loan. Some ARMs adjust annually, while others might not change for the first five to ten years, after which they adjust every year.

The loan agreement will detail when the adjustments occur and what they're based on — typically a specific interest rate index plus a fixed margin. Additionally, ARMs typically have caps that limit how much the rate can change during a particular period (like annually) and over the life of the loan.

By understanding these details, you'll know what to expect and can plan for potential increases in your mortgage payment.

How much can the interest rate and mortgage payments increase annually and over the lifetime of the loan?

For adjustable-rate mortgages (ARMs), the amount that your interest rate and mortgage payments can increase is typically capped, both annually and over the lifetime of the loan. These caps are designed to protect borrowers from drastic increases.

The specifics will depend on the terms of your loan. For instance, some ARMs may have an annual cap of 2% and a lifetime cap of 6%. This means that in any given year, your rate can't increase by more than 2 percentage points above the previous year's rate, and over the life of the loan, it can't be more than 6 percentage points above your initial rate.

Similarly, payment caps limit the amount your monthly payment can increase in a given year. It's essential to ask your lender about these caps to fully understand the potential changes in your mortgage payments.

Does the loan include a balloon payment?

A balloon mortgage is a type of loan that features smaller payments in the beginning and a large "balloon" payment at the end of the loan term. These loans can be risky because you must come up with the balloon payment when it's due, which can be a substantial amount.

If you're considering a balloon mortgage, it's essential to have a plan for how you'll cover the balloon payment. If you expect to have more financial resources in the future (for instance, if you're anticipating a significant raise), a balloon mortgage might make sense. Otherwise, you might want to consider more conventional loan options.

If an escrow account is required, what will it cover?

An escrow account is typically set up by your mortgage lender to pay certain property-related expenses on your behalf. These can include property taxes and homeowners insurance. Each month, you pay a certain amount into the escrow account along with your mortgage payment. When your property taxes and homeowners insurance bills are due, your lender pays them from your escrow account.

Requiring an escrow account can be a good thing, as it helps you spread out the cost of your property taxes and insurance over 12 months, instead of having to come up with large sums all at once.

Can I waive escrow services and handle my property taxes and homeowners insurance independently?

In some cases, you may be able to waive escrow services and handle your property taxes and homeowners insurance independently. This will depend on your lender and your loan type. For instance, some lenders may allow you to pay these costs on your own if you have a conventional loan and a certain amount of equity in your home.

However, keep in mind that handling these costs yourself means that you're responsible for setting aside funds and making large payments once or twice a year. If you're disciplined about saving and prefer to manage these payments yourself, waiving an escrow account might make sense for you.

What happens if I fall behind on payments?

Falling behind on mortgage payments can lead to serious consequences, including foreclosure. If you miss one payment, you'll likely be charged a late fee. If you continue to miss payments, your lender will eventually begin the foreclosure process, which can lead to you losing your home.

If you're having trouble making your mortgage payments, it's important to contact your lender right away. They may be able to offer a loan modification, refinance, or other solutions to help you keep your home. Don't wait until you're in foreclosure to reach out for help.

How much equity do I need to refinance?

The amount of equity you need to refinance your mortgage often depends on the type of loan and the lender. In general, you'll need at least 20% equity to refinance a conventional loan. This means that the current market value of your property minus what you still owe on your existing mortgage should be at least 20% of the home's value.

However, there are also government-backed refinance programs, such as the Federal Housing Administration's (FHA) streamline refinance or the Home Affordable Refinance Program (HARP), that allow for refinances with less equity. Some lenders may have more stringent requirements, particularly if you're looking to take cash out during the refinance.

What are the possible refinance options in the future?

Your future refinance options will largely depend on the market conditions, your financial situation, and your needs at the time. Common reasons to refinance include securing a lower interest rate, switching from an adjustable-rate to a fixed-rate loan, tapping into home equity, or changing the loan term.

Future options might include a rate-and-term refinance, which allows you to change your mortgage interest rate, loan term, or both. There's also the cash-out refinance, where you take out a new loan for more than you owe on your current loan and receive the difference in cash. However, this often requires a significant amount of equity in your home.

What will happen if I rent out the property?

Renting out your property can have implications for your mortgage. For instance, if you have a mortgage for a primary residence and decide to rent out the property, you should notify your lender as this could be seen as a breach of contract.

If you want to purchase a property specifically to rent out, you'll typically need to obtain an investment property mortgage, which often comes with higher interest rates and down payment requirements due to the perceived higher risk.

Additionally, if you decide to rent out your property, this could impact your homeowners insurance. You may need to update your policy or purchase landlord insurance to ensure adequate coverage.

What are the rules for large, one-time payments towards principal?

Making large, one-time payments towards your principal — often known as "principal prepayments" — can be a good way to pay off your mortgage faster and save on interest. However, some loans carry prepayment penalties, which charge you a fee for paying off your loan early.

Ask your lender about the rules for principal prepayments. If your loan does have prepayment penalties, you'll need to weigh the costs of the penalties against the savings from making a large payment.

What type of mortgage insurance is required?

Mortgage insurance protects the lender if you default on your loan. If you're putting down less than 20% on a conventional loan, you'll typically need to pay for private mortgage insurance (PMI).

FHA loans require two types of mortgage insurance: an upfront mortgage insurance premium (MIP), which is usually 1.75% of the loan amount, and an annual MIP, which ranges from 0.45% to 1.05% of the loan amount, divided into 12 monthly installments.

VA loans don't require mortgage insurance, but they do require a funding fee. The fee varies based on factors like your military status and whether it's your first time using a VA loan.

Remember, PMI and MIP are typically removed once you reach a certain amount of equity in your home, usually around 20%, but it's important to ask your lender about the specific rules.

What are some counter-intuitive points real estate investors need to consider?

  1. Understanding the Lender's Business Model: Real estate investors often overlook the fact that mortgage lenders operate on a business model designed to maximize profit. This doesn't mean they are out to take advantage of borrowers, but it does mean that their recommendations and advice should be taken with a grain of salt. For instance, lenders may push for loans with higher interest rates or more fees because these are more profitable for them. As an investor, it's crucial to do your research, understand your options, and make choices based on what's best for you, not what's best for the lender.
  2. Competition among Lenders: It is easy to assume that mortgage rates and fees are set in stone and that all lenders will offer you the same terms. In reality, there is a lot of competition among lenders, and they often have some flexibility in the terms they can offer to attract business. As such, negotiation can play a pivotal role in obtaining the best mortgage deal. Don't be afraid to shop around, compare terms from different lenders, and negotiate better conditions.
  3. Rising Interest Rates Could Be Beneficial: The common wisdom is that rising interest rates are bad for real estate investors because they increase the cost of borrowing. However, rising rates could also reduce competition in the housing market, as some potential buyers may be priced out. This could lead to a slowdown in price increases or even price drops, potentially creating opportunities for savvy investors.
  4. Fixed-Rate Mortgages Aren't Always Best: The general perception is that fixed-rate mortgages are better than adjustable-rate mortgages because they provide certainty about future payments. While this is true in many cases, there are times when an adjustable-rate mortgage can be more advantageous. For instance, if you plan to sell or refinance the property within a few years, you might save money with an adjustable-rate mortgage, which often has a lower initial rate.
  5. Consider Smaller Lenders and Non-traditional Financing: Large, well-known banks are not the only options for mortgages. Smaller, local banks or credit unions may offer competitive or even better terms. They may also be more flexible and willing to work with you if you have unique circumstances. Furthermore, non-traditional financing options, such as private money lenders or seller financing, can offer flexibility that traditional lenders can't match.
  6. The True Cost of No-Cost Loans: Some lenders may offer "no-cost" loans, which typically means they don't charge upfront fees or closing costs. While these can be attractive, it's important to understand that the costs are likely rolled into the loan in the form of a higher interest rate. Over time, you may end up paying more for a no-cost loan than you would have for a traditional loan with upfront fees.
  7. Leverage Can Be a Double-Edged Sword: Leverage, or the use of borrowed money, can significantly increase your return on investment if property values rise. However, if property values fall, leverage can magnify your losses. It's crucial to understand this risk and have a plan to manage it.
  8. The Impact of Loan Term on Total Interest Paid: While shorter loan terms typically come with higher monthly payments, the total interest paid over the life of the loan is usually much lower. Extending the term of a loan reduces the monthly payment but can significantly increase the total cost of borrowing.

Remember, these insights are intended to challenge common perceptions and encourage deeper thought about mortgage lending. They should be considered as part of a broader investment strategy and not taken as absolute truths.

What are the mistakes made by real estate investors when signing with a mortgage lender? And how to avoid them?

  • One common mistake real estate investors make is not thoroughly researching and comparing different lenders. Some investors may go with the first lender they find or choose a lender simply because they offer the lowest interest rate. However, other factors like closing costs, loan terms, and customer service should also be taken into consideration. Avoid this mistake by taking the time to shop around, compare different lenders, and understand the complete terms of the loan before making a decision.
  • Another mistake is not understanding the full cost of the mortgage. Interest is a significant cost, but there are also closing costs, fees, and potentially prepayment penalties to consider. To avoid this mistake, ensure you understand all the costs associated with the loan, not just the interest rate. Ask your lender for a full breakdown of costs, including any hidden fees.
  • Not being prepared for a rate hike is another common error, especially for those with adjustable-rate mortgages (ARMs). ARMs often offer lower initial rates, but they can increase significantly over time. This can be avoided by understanding the terms of the ARM, including how often the rate can change and how high it can go, and making sure you can still afford the mortgage if the rate increases.
  • Finally, some investors make the mistake of taking on too much debt. While leverage can boost returns in a rising market, it can also amplify losses in a falling market. Avoid this mistake by carefully considering your risk tolerance and ensuring you have a plan for managing your debt.

Frequently Asked Questions

What's the difference between pre-qualification and pre-approval?

Pre-qualification and pre-approval are two steps that can show how much a lender is willing to lend to you, but they mean different things. Pre-qualification is an informal and quick process where the lender gives you an estimate of how much you can borrow based on basic financial information you provide. On the other hand, pre-approval is a more formal process where the lender verifies your financial information and credit history to give you a specific loan amount you're approved for. The pre-approval letter can give you a competitive advantage when buying properties as it shows sellers that you are a serious and capable buyer.

What is a good faith estimate?

A Good Faith Estimate (GFE) is a document that a lender must provide within three business days of receiving your loan application. The GFE provides a breakdown of estimated closing costs and fees associated with the loan. By reviewing your GFE, you can compare costs among different lenders and choose the best option for you.

Can I have two mortgages at the same time?

Yes, you can have multiple mortgages at the same time. For example, you may have a primary residence with a mortgage and decide to buy an investment property with another mortgage. However, lenders will consider your debt-to-income ratio (DTI), which is your monthly debt payments divided by your gross monthly income. If your DTI is too high, you may have trouble qualifying for a second mortgage.

Can I lock my rate and how does it work?

Yes, most lenders offer a rate lock, which guarantees a specific interest rate for a set period, typically 30-60 days. Rate locks protect you from potential increases in interest rates while your loan is being processed. However, if rates fall, you'll still be locked into the higher rate unless your lender offers a float-down provision, which allows you to benefit from a significant drop in rates.

What is a debt-to-income ratio and why does it matter?

Your debt-to-income ratio (DTI) is a calculation that lenders use to measure your ability to manage your debts. It's the percentage of your monthly gross income that goes toward paying your monthly debts. A high DTI ratio could signal that you have too much debt for your income. Lenders typically prefer a DTI ratio of 43% or lower.

Can I get a mortgage if I have bad credit?

Having bad credit doesn't automatically disqualify you from getting a mortgage, but it can make it more difficult. Lenders typically prefer borrowers with good credit because they're seen as less risky. However, some lenders specialize in loans for people with bad credit. Additionally, government-backed loans, like those from the FHA, often have more lenient credit requirements.

What is the difference between a fixed-rate and an adjustable-rate mortgage?

A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. This offers stability and predictability because your monthly payment won't change. In contrast, an adjustable-rate mortgage (ARM) has an interest rate that can change over time. ARMs often have a lower initial interest rate, but the rate can go up or down in the future, affecting your monthly payment.

What happens if I miss a mortgage payment?

If you miss a mortgage payment, it's important to get in touch with your lender as soon as possible. Missing a payment can lead to late fees and potentially damage your credit. If you miss multiple payments, your lender could begin foreclosure proceedings. However, most lenders would rather work with you to find a solution than go through the foreclosure process.

What is a balloon mortgage?

A balloon mortgage is a type of loan that features low payments for a certain period, followed by a large "balloon" payment to pay off the remaining balance. While balloon mortgages can have lower initial monthly payments, they can be risky because you need to have enough money to make the large balloon payment when it's due.

What is PMI and can it be removed?

Private Mortgage Insurance (PMI) is insurance that protects the lender if you stop making payments on your loan. It's typically required if your down payment is less than 20% of the home's purchase price. However, once you reach 20% equity in your home, you can request to have the PMI removed.

What is an escrow account and how does it work?

An escrow account is an account that your lender sets up to pay certain property-related expenses like property taxes and homeowner's insurance. Every month, a portion of your mortgage payment goes into the escrow account, and when these bills are due, the lender pays them from the account. This ensures these expenses are paid on time and spreads their cost out over the entire year.

What is loan-to-value ratio (LTV) and why is it important?

The loan-to-value (LTV) ratio is a measure of risk used by lenders. It's calculated by dividing the loan amount by the appraised value of the property. The higher the LTV, the more risk the lender is taking on. A high LTV can lead to higher interest rates or even loan denial. A lower LTV typically means lower risk, which can result in more favorable loan terms.

What are points and should I pay them?

Points, also known as discount points, are fees paid to the lender at closing in exchange for a reduced interest rate. This is also known as “buying down the rate.” One point equals 1% of the loan amount. Whether or not you should pay points depends on your financial situation and how long you plan to stay in the home. If you plan to stay in the home for a long time, it might make sense to pay points to lower your interest rate and overall payment. But if you plan to move in a few years, your upfront costs might outweigh any benefit from a lower rate.

These questions provide a comprehensive guide to the questions real estate investors should ask their mortgage lenders before signing a loan. Understanding the answers to these questions can help ensure that you're choosing the right mortgage for your needs and are prepared for the responsibilities that come with home ownership.


In conclusion, understanding the mortgage lending process is a critical part of successful real estate investing. It's a world filled with complex terms, varied processes, and potentially costly pitfalls. But with the right knowledge, it becomes an empowering tool, enabling you to make informed decisions that can optimize your investment potential.

Throughout this comprehensive guide, we've dissected the key aspects of mortgage lending, providing detailed answers to the most important questions you, as a real estate investor, should ask a mortgage lender. We’ve shone light on common misunderstandings and shown how to sidestep frequent errors. Plus, we've provided insights into the potential advantages and disadvantages of dealing with mortgage lenders.

In essence, this guide is meant to be your compass, steering you towards profitable investment decisions. It's our hope that by understanding these core concepts, you'll be better prepared for your next interaction with a mortgage lender and confidently navigate your way to real estate investment success.

Remember, the world of real estate investing is always evolving. Stay informed, ask the right questions, and never stop learning. Thank you for investing your time with us. We trust that the insights shared here will serve you well on your investment journey.

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