When you’re getting ready to apply for a home loan, especially if you’re a first-time homebuyer, it’s important to understand some of the terminology. Otherwise, the entire process can become confusing very quickly. Keep reading to learn the most common terms.
1. (LTV) Loan-to-Value Ratio
Maybe you’ve already heard this term–“loan to value”. If not, you soon will. It’s the ratio of your loan amount compared to the value of the home.
2. (DTI) Debt-to-Income Ratio
Another ratio lenders look at closely is your DTI. Your debt (including your housing) compared to your income. Most loan programs require a ratio of 43% or lower. Here’s an example:
Debts: $2000 per month, including a $300 car payment and $200 for credit card payments, plus your mortgage payment (including taxes and insurance) of $1500.
Income: $6000 per month before taxes. If you’re self-employed, you’ll be asked to show your latest tax returns.
In the case above, with debts of $2000 and an income of $6000, the DTI is 33%. Just like LTV, the lower the ratio, the better. Every loan product has its guidelines, but if you stay below 43%, you’re pretty safe.
3. (PMI) Private Mortgage Insurance
PMI is another term you’ll hear. Private mortgage insurance isn’t the same as your homeowner’s insurance. It’s insurance to protect the lender in case of default. PMI is required on loans with less than 20% down and all FHA loans regardless of down payment. If you obtain a conventional loan and put less than 20% down, you can have it removed once you have 20% equity. But for FHA loans, you’ll have the PMI for the life of the loan.
4. (P&I) Principal and Interest
Principal refers to the amount of money you borrowed and have agreed to pay back. Interest is what the lender is charging you for loaning you the money. When you look at a monthly mortgage payment, most borrowers have their taxes and insurance included.
So, their payment would look something like this: $316 Principal
$476 Taxes, Insurance, & PMI
$1562 Total Payment
5. Pre-Qualification Letter
Once your loan officer goes over your income, credit, and assets, they will let you know how much you can qualify for and give you a pre-qual letter. You’ll want this letter to start shopping — knowing if you are approved and what you are approved for will be helpful for interaction with realtors and potential sellers.
6. Loan Estimate
When you find a home and the seller accepts your offer, you’re onto the next step. Your loan officer will give you a loan estimate within three days. This estimate lists all of the fees connected to your loan. Some of these main fees include:
— Appraisal fee
— Origination fee
— Title fees
— County transfer fees
7. Loan Processor
Besides working closely with your loan officer, you’ll also have another person helping on your home loan called the loan processor. They’ll work with you from the moment your offer is accepted until you sign all of your loan documents on the day of closing. It’s their job to get any additional paperwork from you along with any further information or explanations needed and submit them to the underwriter.
The underwriter is the highly trained professional that reviews your loan and makes sure it qualifies based on the particular loan guidelines. They will look at your income, credit, and assets very carefully, and if they have any questions (and they always do), they’ll ask the processor to get any additional data from you. One thing that helps the loan process go smoother is if you’re ready and willing to furnish anything the underwriter requests.
9. Escrow Account
An escrow account is set up by your lender. They determine how much your yearly property taxes and homeowner’s insurance will be. Then, they have you pay 1/12th each month along with your principal and interest payment. When your taxes and insurance come due, they pay the bills from your escrow account.
10. Closing Disclosure/Settlement Statement
At closing, you’ll receive two documents, the Closing Disclosure, and the Settlement Statement. These disclosures list out all of the money paid and collected during your transaction for all parties. For example, it would list the appraisal, survey, title fees, deposit money, and real estate commissions. You’ll also see information about your mortgage payment, including the rate and term.
This might seem like a lot…and it is. That’s why we work so hard at Total Lending Concepts to be experts so you don’t have to be. You find your first home or your dream home and we’ll make sure everything else is taken care of.