People buy homes only a few times in their lifetimes. Some only once. It makes sense that the industry jargon thrown around by lenders and those in the “biz” make it sound so confusing. You need to learn the lingo in order to understand what they’re saying. This homebuyer’s dictionary will help you understand 10 of the terms to know when buying a home.
1) Pre-Approval
This describes a process by which you are essentially pre-approved by your lender for a loan up to a specific dollar amount. For this process, lenders will verify financial information including information about your income, debts, and assets. If you have a pre-approval before beginning your home search, you know how much money you have to work with and sellers will give your offers more weight than those who do not have pre-approved loans.
2) Debt-to-Income (DTI) Ratio
This ratio is used to determine your likely ability to repay your mortgage loan. Generally, banks prefer your total debt, including monthly mortgage payment, to be no greater than 36 percent of your total income.
3) Loan-to-Value (LTV) Ratio
This value is about the appraised value of the home compared to the amount borrowed to purchase the home. People who borrow more than 80 percent of the home’s value will often pay higher interest rates as well as private mortgage insurance.
4) Down Payment
Depending on the type of loan you get for your home, a down payment may be a key element in your ability to secure financing. The term refers to the amount of money you’re prepared to put toward the purchase of your home upfront and in cash. Some lenders require as little as three percent down while others will require 20 percent as a down payment.
5) Private Mortgage Insurance (PMI)
If your down payment total is less than 20 percent of the home’s value, lenders will likely require you to purchase private mortgage insurance to protect them against losses if you’re unable to repay your debt.
6) Contingencies
When you make an offer on a home, you’ll want to make that offer contingent upon certain conditions being met, such as the appraisal meeting or exceeding the offered amount, the home passing inspection, or other types of requirements.
7) Appraisal
This is an impartial valuation of the home conducted by a disinterested third-party. The objective is to determine a value for the home to satisfy lenders. It is done at the expense of the purchaser.
8) Closing Costs
For some people, closing costs are complete and total surprises. Don’t let this happen to you. When you get to the closing table, there are various fees involved in the purchase of a home. These fees include things like attorney fees, title insurance, points, title search fees, and other expenses. The total value of these fees is usually between two and five percent of the mortgage loan amount.
9) Escrow
Most mortgage companies seek to protect their investments in your home. For this reason, they require certain payments, such as property taxes, private mortgage insurance, and homeowners insurance to be paid into an escrow account. The same holds true for the deposit you made when placing an offer on the home. It will be placed in an escrow account and then applied to the purchase of the home at closing.
10) Closing
This is the final step in the home buying process. During the closing, you will sign all the documents to complete the sale and accept responsibility for repaying the loan.
Mid America Mortgage understands the challenges you face when getting a mortgage and buying a home. Whether this is your first or one of many, we can help you sort out the fine print and get the financing you need for your home purchase. Contact Mid America Mortgage today to get the ball rolling.
