Are you thinking about buying a home? The lingo can be confusing if you aren’t familiar with it. Find out what common mortgage terms mean, and you’ll be able to understand what’s going on at each step of the home loan process.
Your amortization schedule shows you a list of payments and dates from the time you buy your home to your payoff date.
A third party will need to evaluate the value of any home you plan to buy. Once you tell your lender what home you want to make an offer on, they will order the appraisal to ensure it meets Appraiser Independence Requirements. You can’t use an appraisal you yourself ordered as part of a mortgage transaction.
Asset reserves are funds you need to show that you have set aside for future obligations, such as homeowners insurance, mortgage payments, PMI, and property takes. For a primary residence, you may be asked to show two months’ worth of asset reserves.
Your lender might offer you discount points so you can “buy” a lower interest rate at closing. Although rates can change, and you should discuss this move with your loan officer first, on average a 1 point buy down will lower your rate by .25%. If you don’t plan to keep the home for more than a few years, this may not make good financial sense for you.
There’s a common assumption that a down payment is pegged at 20% of the total home purchase. This simply isn’t true. It can be anywhere from 0% up to 30% or more, depending on your type of loan, finances, and loan term.
DTI stands for debt to income ratio, which compares your monthly income to your monthly debt. You want this number to be as low as possible to get favorable interest rates.
Escrows / impounds
You’ll be asked to put certain funds in an escrow or impound account during the homme purchase process. This ensures funds are available for certain costs along the way, and protects the home buyer and home seller. If either side backs out, unless the reason for terminating the sale is covered in the contract, the other party gets the escrowed funds.
The escrow is managed by a third party who opens, monitors, and disburses funds from escrow accounts. They can also help make sure conditions are met, signatures obtained, and legal steps are completed for property transfer into your name.
Your lender won’t require one, but you’re strongly advised to get a home inspection to make sure nothing is seriously wrong with the house you are buying. Do this early; if there are things to be repaired, they need to be finished well before your closing date.
You can fill out your application for a home mortgage loan online, or on the phone with a loan officer (LO). You’ll be asked to provide a fair amount of information to complete your application, when will then be processed, and if everything looks good, it will go to underwriting for approval.
Your loan officer (LO) is your go-to person early in the home purchase process. They are responsible for reviewing your loan options, and can give you advice about how your loan should be structured, as well as what types of loans you could qualify for and what the rates and costs would be.
Your loan processor has to verify all of the information you submitted on your loan application. They get your file set up and ready for underwriting, and if there are any conditions set by underwriting, they will go back and help them get cleared. After your loan is locked, you’ll be working primarily with the loan processor although your LO may still be overseeing things.
The loan to value ratio compares the value of your home, and how much of a loan you will be taking out. A higher LTV is more risk for the mortgage company, so if your down payment is less than 20% (making your LTV over 80%) you’ll need to purchase PMI to protect the lender.
PMI and LPMI
Private mortgage insurance (PMI)is required if you have a high LTV, meaning you have low equity in your home and the mortgage loan company is carrying most of the risk. Your PMI premium may be paid monthly, and can usually be removed once your equity passes 20%. Lender-paid PMI (LPMI) means the lender pays for this in a one time payment, but they pass on the cost at closing or in the form of a higher interest rate.
If your loan application is preapproved by verifying your submitted information, you get a preapproval letter. This usually means that unless the loan application trunks into trouble at underwriting or there is a problem with your home appraisal, the loan is a pretty sure thing. Preapprovals are better than prequalifications, which are based on unverified information.
When you close on your home, you sign the final documents and pay any remaining fees and costs. These can be paid with previously escrowed funds, and include things like outstanding property taxes,insurance premium pre-payments, lender origination fees, and so on.
The principal is the actual amount of your loan. Over the term of your loan, part of your monthly payment will go to your p[rincipal every month, and the rest will go towards interest. At the beginning, the majority of your payment is interest. Near the end, the majority of your payment is principal. You may be able to make extra payments to the principal to pay off your loan faster.
A seller may make concessions like credits to help cover closing costs. At entry level price points, first time homebuyers may not have extra money saved to easily manage closing costs. A seller concession can cover prepaid items and other fees, but cannot be applied to the down payment.
The mortgage term is how many years it will take to pay off your loan (principal plus interest.) Shorter terms mean you will have a bigger monthly payment, but you’ll pay less interest (possibly a lower interest rate as well) and be done sooner. Longer terms mean lower payments, but more years and more interest.
A title company will check for any liens or claims against the property, but it’s not an infallible process. This means your lender will mandate that you buy title insurance, although in some states the seller may be able to pay for it. You can buy a separate policy to protect yourself against potential future claims.
Your transaction coordinator will typically be the person gathering information for verification purposes, and adding it to the file. This includes both information on you, as the buyer, and on the home you instead to purchase.
The underwriter performs risk management by comparing the value of the home to your financial history, including your credit, and DTI. They determine whether or not the loan meets the lending requirements for the loan program you’re applying for. They might ask for more documentation before making the final credit decision on your file and approving or denying your loan.
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