So you’re starting your home buying journey. Chances are you’ve stumbled on a few acronyms or terms that your lender and agent expect you’ve already heard of. Fear not–here’s the top lingo you should know.
Your FICO determines not only which loan programs you qualify for, but what rate you’ll get. FICO Scores generally range from 300 to 850. Higher scores demonstrate lower credit risk, and lower scores demonstrate higher credit risk. Learn more about how your FICO score affects your mortgage here.
Loan-to-Value ratio, or LTV is another factor determining your mortgage rate. In most cases, the lower the LTV, the lower the rate. You can calculate your LTV by dividing the loan amount by the value of the property.
Debt-to-income ratio. This is calculated by dividing your monthly liabilities by your monthly gross income. Generally, you want this below 43% to qualify for a mortgage.
Federal Housing Administration–the largest mortgage insurer in the world. They insure the many FHA loans borrowers take out to finance their home purchases and their signature offering is the 3.5% down payment mortgage.
Private Mortgage Insurance. It applies to most home loans with an LTV above 80%. It protects the lender, not you, from default, and is paid as a monthly premium.
The mortgage insurance equivalent for FHA loans is known as MIP, and includes both an upfront premium (typically financed into the loan amount) and an annual premium, paid monthly.
Principal, interest, taxes, and insurance. It represents your total housing payment, which is often advertised as just principal and interest (making it look at lot cheaper).
Adjustable rate mortgage. Offers a lower interest rate to homeowners versus a fixed rate mortgage, but it can adjust much higher once any initial fixed period comes to an end.
Annual Percentage Rate. APR is the cost of your loan, factoring in closing costs. Because closing costs can vary by thousands of dollars, they must be considered to determine which loan offer is the best deal. Comparing APR is the best way to determine which loan is best. Read more about APR here.
A mortgage point is just another way of saying 1% of the loan amount. They may take the form of discount points (to lower your interest rate) or represent the lender’s commission, known as a loan origination fee.
Property taxes and homeowner’s insurance are collected on your behalf and paid monthly via anescrow account. The lender collects a portion of these payments monthly, then releases the necessary funds once or twice a year on your behalf. Read more about escrow accounts here.
Once you’ve already got a mortgage, you can tap into your home equity via a home equity line of credit, known as a HELOC. It differs from a traditional second mortgage in that you get a line of credit that you can borrow from multiple times, like a credit card. You can borrow as little or as much of that line as you want, pay it back, then borrow again, or leave it open.
#13 Pre Approval
If you’re shopping for a home to purchase, it’s pretty much required to have a mortgage pre-approval in hand in order to make an offer on a home. They’re also helpful to determine how much home you can afford and tackle any potential issues early on.
Ready to get pre approved? Fill out the form below to start your home buying journey.