Before you take out an FHA loan, you’ll want to ask questions of your FHA lender. You have the option to shop around. You can apply with as many lenders as you want. Of course, time is of the essence, so you’ll have to pick your lender in a reasonable amount of time.
As you start shopping, consider the following questions. Take the answers from each lender and look at the big picture. Then you can decide which lender is right for you.
What is the Interest Rate?
This is the answer everyone wants to know. However, you may want to take it one step further. Don’t just ask about the interest rate. Ask about the APR as well. This is an indication of the full cost of the loan. It includes the fees you pay and how it affects the true cost of the loan over its entirety.
When you compare rates, you’ll want to compare the APR. This gives you a better idea of how the fees compare from loan-to-loan. Sometimes the lower interest rate isn’t all it’s cracked up to be. You might be better off taking the slightly higher interest rate and lower fees.
What Origination Fee Does the FHA Lender Charge?
The FHA lender doesn’t have to charge you an origination fee. This doesn’t mean they won’t, though. It varies by lender. It also depends on your loan file. Are you a risky borrower? If so, a lender might throw a point or two on the front of your loan. This helps them make some money right away. If you default down the road, it won’t hurt the lender as much.
Even though the FHA guarantees FHA loans, lenders still want to protect themselves. They won’t receive the full amount of the loan from the FHA. Plus, they still have the expense of trying to sell the home. Charging an origination fee will help them offset these costs if they should come up.
How Much are the Closing Costs?
Closing costs vary by lender. The FHA doesn’t set them. If you shop around, ask a lender for a Loan Estimate. By law, they must provide you with one within 3 business days of applying for the loan. This way you can see for yourself how much the closing costs run.
The only fee that will be standard for any FHA loan is the upfront mortgage insurance fee. It’s a flat percentage of your loan amount. Right now, it equals 1.75% of your loan amount. If you have a $200,000 loan, that means a fee of $3,500.
This fee is separate from any other closing costs. You’ll likely find fees like:
- Document prep
- Credit reporting
You pay these fees to the lender. There are also 3rd party fees. While the lender doesn’t have a say in these fees, they should know what each vendor will charge you. You can also ask the lender if you can shop for certain services, such as a title company or an appraiser to help lower the costs.
How Much Are the Monthly Payments?
Your FHA loan payment consists of several components. It’s not just principal and interest. You’ll also pay annual mortgage insurance. This is an annual fee that the lender divides equally among your 12 monthly payments. Most borrowers will pay 0.85% of their loan amount on an annual basis. Using the $200,000 loan example, you’d pay $141.67 per month. That amount would decrease slightly each year as you pay the principal down on your loan.
How Much Will My Adjustable Rate Mortgage Adjust?
FHA loans are usually a 30-year fixed rate loan, but there are other options including the ARM. Before you close on an adjustable rate mortgage, you should know the worst-case scenario. Ask the FHA lender how much the rate could possibly adjust at one time. Then ask them to calculate the payment for you so you know what to expect.
Hopefully, it never reaches that worst-case scenario, but it allows you to make the right decision. If there is no way you’d be comfortable with the higher rate, you might want to consider a different type of loan.
How do I Lock In My Interest Rate?
Once you get closer to closing, you’ll want to lock in an interest rate. Your FHA lender can let you know when the time is right. Before you lock it in, though, you’ll want to ask the lender a few more questions:
- What’s the fee to lock the rate?
- How long is the lock period?
- What happens if the lock expires before closing?
This way you’ll be able to figure out the best time to lock the rate and how much it might cost.
What is the FHA Lender’s Turnaround Time?
If you are on a tight schedule, especially while purchasing a home, you’ll need to know the turnaround time. A lender that is backed up might not be the ideal choice. FHA loans don’t have to go to the FHA for approval, which can save time. But, it all depends on the lender’s workload.
If you find one lender that has a long turnaround time, shop other lenders and see what they offer. You might find the turnaround time is the norm for the area or that one lender is just backed up.
Who Will Service my Loan?
Don’t assume the lender that underwrites your loan will service it. Oftentimes, lenders sell their loans to servicers. If this is the case, inquire about the servicer. Find out what their customer service is like. See if you can talk to them directly. The servicing of your loan is one of the most important aspects so you’ll want to make sure it’s a company you can handle.
The Bottom Line
You aren’t required to use one particular FHA lender for your FHA loan. You are free to use the one that you feel suits you best. As you shop around, don’t focus only on the numbers. Also, look at the big picture. What is the customer service like? How well does the lender answer your questions? These are things that will matter years down the road, not just today. Remember, this is an investment for the next 15-30 years.