Without further ado, here are some basic mortgage terms that every potential home buyer should understand:
This is the combined annual income for you and your co-borrower. Include all income before taxes, including base salary, commissions, bonuses, overtime, tips, rental income, investment income, alimony, child support, etc.
This is the amount of money you will put towards a down payment on the house. Make sure you still have cash left over after the down payment to cover unexpected repairs, financial emergencies, closing costs, and any other unexpected costs associated with buying a house.
Include all of you and your co-borrower's monthly debts, including: minimum monthly required credit card payments, car payments, student loans, alimony/child support payments, any house payments (rent or mortgage) other than the new mortgage you are seeking, rental property maintenance, and other personal loans with periodic payments.
Do NOT include: credit card balances you pay off in full each month, existing house payments (rent or mortgage) that will become obsolete as a result of the new mortgage you are seeking, or the new mortgage you are seeking.
Interest rate is the percentage of the loan that you will pay in monthly payments.
Annual Percentage Rate (APR)
A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes such items as interest, mortgage insurance and certain points or credit costs. Because it includes these other items, it is higher than the interest rate a lender will quote.
Your DTI is expressed as a percentage and is your total "minimum" monthly debt divided by your gross monthly income. The conventional limit for DTI is 45% of your monthly income. A DTI of 20% or below is considered excellent.
This is an annual tax that governments place on individuals' income. It includes federal tax, most states and some local entities. The national average is around 30% but can vary based on income, location, etc.
Property taxes are an annual tax on homeowners' property and the tax amount is based on the home's value. Property taxes are typically impounded, and paid with your monthly mortgage payment.
Commonly known as hazard insurance, most lenders require insurance to provide damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, and more. All homeowner's insurance policies contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off your property.
Mortgage Insurance (PMI)
Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. It protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. This is also known as PMI (Private Mortgage Insurance).
Typically, owners of condos or townhomes are required to pay homeowners association dues (known as HOA fees), to cover common amenities or services within the property such as garbage collection, landscaping, snow removal, pool maintenance, and hazard insurance.
This is the length of time you choose to pay off your loan (e.g., 30 years, 20 years, 15 years, etc.)
An analysis of the subject property conducted by a professional appraiser who will look at a property and give an estimated value based on physical inspection and comparable houses that have been sold in recent times.
Factored into the loan's APR, a point equals 1 percent of a mortgage loan. Some lenders charge "origination points" to cover expenses of making a loan. Some borrowers pay "discount points" to reduce the loan's interest rate. Often in order to get a lower interest rate, lenders will allow borrowers to "buy down" the rate by paying points.
An account in which a neutral third party holds the documents and money in a real estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.
Title insurance is a policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer or both.
The most widely used credit scores are FICO Scores, the credit scores created by Fair Isaac Corporation using three credit bureaus to determine scores: Equifax, TransUnion and Experian. Each FICO Score is based on the information the credit bureau keeps on file about you. These scores typically differ, and most lenders will use the middle score to determine your credit score used for your loan. If there are two or more borrowers on the loan, the lowest FICO score will be used on the loan profile.
To minimize any confusion throughout the loan process, I often ask my borrowers what their level of expertise is with buying and selling real estate. Depending on their answer, I will or will not use real estate code. If they are experienced borrowers, it is perfectly okay and more efficient to talk in real estate code. If they are first-time home buyers, then one should always avoid using real estate code and instead use baby steps through the lending process.
If you have any questions or comments, feel free to contact me at (360) 937-0983 or send an email to email@example.com. Thanks for reading!