A lot goes into buying a house. Getting a mortgage secured takes a lot of work and there’s a lot you need to know! It’s important to be informed about the basic mortgage terms that you will run into. Here are mortgage terms every prospective home buyer should know.
#1 Debt to Income Ratio
Your debt to income ratio is your monthly gross income divided by your monthly debt payments. To put it more simply, how much of your monthly income is eaten up by debt. This lets a lender know how much of your income is left over after your debts are paid and whether you would be able to afford the loan.
The appraisal tells the lender what the home is worth. An appraisal must be done by a licensed appraiser. Your offer needs to be close to the appraisal amount determined in order to qualify for a loan.
#3 FICO Score
This is the credit score used to determine what type of mortgage loan you qualify for. This will significantly impact your interest rate on your loan. You should work on increasing your credit score before buying a house.
#4 Principal Payment
The amount of your monthly mortgage that goes toward the principal of your mortgage. Paying extra to pay down the principal faster will reduce the amount of interest that you pay over the course of your loan.
#5 Loan Estimate
This is one of the more essential mortgage terms to know. A loan estimate is a document that covers all the details of your loan. It includes closing costs, interest rate and loan amount. This document will allow you to compare costs between different lenders.
Equity is how much of your home you own versus how much is held by the lender. The shorter your loan is the more you increase your equity.
#7 Closing Costs
These are all of the additional costs that you have to pay when closing on your house, not including your down payment. This includes mortgage fees, appraisal, recording fees, escrow, inspections, etc.
#8 Title Insurance
There are things that can happen that would hurt the title of your property, such as liens, title insurance is there to protect you against something like that.
This is a key mortgage term. Essentially, a third party holds the money while you and the seller complete the sale of the house. It’s like putting your money in a temporary account while you finalize the sale, and it’s a guarantee to the seller that you will buy.
#10 FHA Mortgage
For a first time home owner, this is the type of mortgage you want. FHA means Federal Housing Association. They offer reasonable rates and allow you to pay a lower down payment of 3.5%.
It is one percent of the total amount of the loan. If you know that you will be staying in your new home for an extended period of time, you may want to consider paying points as it will bring down your monthly interest rate.
A mortgage that has a fixed-rate means that the interest rate will not change over the course of the loan.
#13 Fannie Mae and Freddie Mac
#14 Pre-Approved vs. Pre-Qualified
Generally speaking you want to be pre-approved, this means the lender is verifying your income, employment and credit score. Pre-qualified does not necessarily mean that it’s been verified, though it can. Be sure to check with the lender.
#15 Clear to Close
This is a very important mortgage term to know. It means that your application and documentation have been reviewed and approved. You can go buy your house!
Contact the Sarah Bernard Realty Team to Help you with all your Home Buying Needs!
We know it can be an overwhelming experience if you don’t know all the mortgage terms, that’s where we come in! Here at Sarah Bernard Realty we are dedicated to helping you through every step of the buying process. Contact us now for a complimentary consultation! Call 314-780-9070.