Buying a home is exciting, but the process can seem overwhelming. Taking on a major financial responsibility is simplified with our team of professionals at Call Federal. We understand the need to know your budget and get educated on mortgage fundamentals.
The first part is knowing the language of mortgages. Read on for some essential mortgage loan terms to get you started!
The Mortgage Process
Let’s start this review of essential terms by defining the five key steps of the mortgage process itself.
- Preapproval – The lender will collect information about your income and perform a credit check. If you meet the minimum requirements, you can move on to the application.
- Application – You’ll be asked to complete a loan application that requests additional personal and financial details. Supporting documentation must be submitted with your application.
- Loan Processing – The lender ensures all required loan documents are on file before sending your information to underwriting.
- Underwriting – Your information is reviewed by the lender’s underwriting department to determine the likelihood of loan repayment.
- Closing – All parties involved come together to finalize the transaction by signing legal and financial documents.
Credit
Along with your ratio of debt to income, your employment, and the amount of your down payment, your personal credit is a major factor in qualifying for a mortgage. It also can affect the rate you’ll pay and how much financing is offered.
Debt Ratio
Your debt-to-income ratio is all of your monthly debt payments divided by your gross monthly income. This figure is one way lenders determine your ability to take on a mortgage payment. A lower debt ratio is preferred, especially when applying for a mortgage.
Down Payment
The down payment on your house is the amount you pay upfront in order to secure your home loan. Making a down payment shows you’re committed to the process and will be a responsible borrower. Down payment amounts can differ depending on your loan.
Government programs such as those of the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) allow a lower down payment if you qualify. But, if your budget allows, making a larger down payment could help you get a better rate and save you money in the long run.
Annual Percentage Rate (APR)
When it comes to loans, the first variable that comes to mind for many of us is rate. As you compare your mortgage options, considering your annual percentage rate can go beyond just the percentage of interest over the life of your loan. Factors such as the current state of our economy and whether your rate is fixed or variable can play a role in the overall cost of your mortgage repayment. We covered the “ABCs of APR” in a previous entry on our Financial Insights blog.
Loan Term
Traditionally, mortgages have been a more long-term financial investment with loan terms lasting a minimum of 30 years; in more recent times, mortgage terms lasting as few as 15 years have provided homebuyers with options in how long they plan to finance their home. While shorter terms can provide flexibility, it’s always best to speak with your trusted loan advisor to determine what mortgage terms are best for you and your goals.
P.I.T.I.
PITI stands for principal, interest, taxes, and insurance. Together, these four components of your mortgage make up your total payment. This payment will be compared to your current gross monthly income to ensure affordability. As a rule of thumb, housing costs should be less than 30% of your monthly income.
Private Mortgage Insurance (PMI)
Not to be confused with homeowners insurance that you pay to your insurance company, mortgage insurance (or PMI) is often required by your lender to protect them in event of a loan default and is another cost for you to consider when comparing mortgage options. PMI is typically added when a down payment of less than 20% is required and added to your monthly mortgage payment. Check out this entry on our Financial Insights blog to learn more about mortgage insurance.
Title
When you buy your home, the property’s legal ownership (or title) will transfer from the seller to you.
Before the sale, a title company performs a title search to confirm the property’s legal ownership, and you will need to buy title insurance to protect you and the lender in case of a dispute over the property. The property’s title is recorded by your local government and recording fees will be included in your closing costs.
Fees and Penalties
As you navigate through your home purchase, you may discover a number of listed fees and penalties in your mortgage loan estimate. Fees applicable to your purchase may include property-related fees, legal fees or escrow that are disclosed prior to closing and often included in the total out-of-pocket costs due at the close of your mortgage process. While these fees can vary depending on your purchase price, lender, and location of your home, it’s important to factor in these variables when considering the total cost of your purchase.
Closing Costs
These are the fees you’ll need to pay upfront in addition to your down payment. Your closing costs will include a loan origination fee, prepaid interest, title insurance, and your initial deposit. Be sure to ask about any specific fees that may apply. Closing costs are typically about 2% to 5% of the total cost of your loan.
Be In The Know With Mortgage Loan Terminology to Stay on Track!
Now that you know some essential mortgage loan terms, get to know our Mortgage Checklist! This is a free tool to use that ensures you don’t miss a step in the process.
Use your knowledge of the above terms and the checklist to be confident in your search for your new home!