Buying a home can seem like a daunting task to those going through the process for the first time. The home buying process can be seamless for those that take the time to plan ahead, get educated about buying a home, and getting your financial house in order so you are ready to go when the time comes to start making offers on homes. Part of that education is learning about the mortgage process and the mortgage terms you may encounter as you get pre-qualified to buy a home. In this article we hope to teach potential home buyers about five mortgage terms every home buyer should know when purchasing a home.
The mortgage industry is filled with terms and acronyms that are used on a daily basis and seem normal to those working in the industry daily, but can seem like a foreign language to those trying to get a mortgage for the first time. With our list of five popular mortgage terms our goal is to explain some of the most used terms in the mortgage lending business and provide some detail on what each term means.
1. Pre-Qualification: process by which a lender reviews a borrower’s credit, income, and debts to determine if the borrower can qualify for a mortgage. If the borrower qualifies, the lender will determine what type of loan the client qualifies for and how much home the client can buy.
2. Debt to Income Ratio (DTI): this is a ratio of a borrower’s total amount of monthly debt payments divided by gross monthly income. The lender needs to know how much of a borrower’s monthly income is dedicated to debt payments. The type of debt payments factored in to this calculation includes revolving credit payments, installment loans including car loans, student loan debt, alimony or child support, and rent or mortgage payments. In lender terms, the debt to income ratio (DTI) is also known as the back-end ratio.
3. Down Payment: most potential home buyers know what a down payment is. What many home buyers don’t fully understand is how much of a down payment is required when purchasing a home. The most common types of loans are either a Conventional loan or an FHA loan. There is a myth that in order to qualify for a home a potential buyer needs to put 20% down, and that is certainly NOT true. A Conventional loan only requires a down payment of 5% and an FHA loan only requires a down payment of 3.5% of the Purchase price. A VA loan does not require any down payment at all.
4. Private Mortgage Insurance (PMI): is required on loans where the borrower is putting less than 20% down. PMI protects the lender in the event of a borrowers default but both parties benefit because the lender is protected from default and the borrower is able to purchase a home with less than a 20% down payment.
5. Fixed Rate Mortgage: this is a mortgage that is normally either a 15 year or a 30 year mortgage that has an interest rate that won’t change over the life of the loan. Most mortgages today are fixed rate mortgages because buyers want the stability of a rate and a payment that will not increase over time.
These are all mortgage terms that a homebuyer should know when purchasing a home and obtaining a mortgage. Being informed and educated on these terms might help you to secure a better mortgage for your home purchase.
Understanding what your debt to income (DTI) ratio is might prompt you to pay down some debt ahead of your home purchase. And paying down that debt might just work to increase your credit score, if you are lucky. Saving for a down payment and increasing your assets and money in the bank is also a positive step made towards purchasing a home.
Every financial move that seems small at the time, just might be the one thing that catches the eye of your mortgage loan officer and helps a client to be pre-qualified to buy a home.
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