Whether you have started your homebuying process or are still considering taking the first step, you may hear a lot of different terms passed around from friends, family, real estate agents, and lenders.
Whether you are looking for your first house or your fifth house, homebuying terms and phrases can still be confusing! Our quick and easy guide can help you out during the process. Below is a list of terms you will want to know:
Appraisal: a required property assessment completed by an independent appraiser to measure the property’s value and condition.
Amortization: the repayment schedule on a loan, or the gradual paydown on a loan.
Closing costs: fees associated with finalizing your loan. Each of these fees may not apply to your unique situation, and closing costs vary and may include the appraisal fee, lender fees, credit fees, attorney fees, and more.
Debt-to-Income Ratio (DTI): a calculation used to identify the amount of debt you have in comparison to your monthly income. This includes all debt, not just a home loan. The lower your DTI, the easier it can be to obtain a home loan. You can calculate your DTI using the equation: total recurring monthly debt / gross monthly income = DTI.
Deed: a document that legally transfers ownership of real estate.
Disclosure or Closing Disclosure: a document outlining the terms and costs related to your mortgage. You will receive a disclosure at the time of closing, as well as an updated disclosure when any significant changes are made to your rate or terms.
Down payment: a portion of your mortgage paid upfront. While some types of loans do not require any money down, you can often expect to pay a down payment on your mortgage. This can be any percentage of the mortgage and helps reduce your monthly payment amount. Down payments can show that you have money prepared to dedicate to your home loan.
Earnest money: a deposit that ensures your sincerity about the home transaction. The amount often varies, but it can be anything decided upon by the buyer and seller. It may be a percentage of the home price, or it may be a concrete dollar amount. This deposit is held in an escrow account until closing, at which point it will be applied to the down payment amount.
Escrow: a third-party account that holds money for taxes and insurance paid through your monthly mortgage payments.
Equity: the amount of the home’s value owned by the homeowner.
Inspection: an optional examination of a property that is often performed to spot any issues that did not come up during the appraisal.
Interest rate: the price of borrowing money from a lender. The base rate is set by the Federal Reserve and then customized per borrower based on credit score, down payment, property type, and points the buyer pays to lower the rate.
Private Mortgage Insurance (PMI): insurance designed to protect the lender if the homeowner defaults on the loan. Private Mortgage Insurance protects lenders from losses if a homebuyer defaults on a loan. PMI is often paid on conventional loans where less than 20% is put down.
PITI (Principal, Interest, Taxes, and Insurance): the four main components that make up your monthly mortgage payment. Your escrow account is often used to pay your taxes and insurance.
Pre-approval: a step that leads into the mortgage process where documentation is officially reviewed, though full approval comes later.
Pre-qualification: helps buyers get a sense of how much home they can afford before starting the loan process. It is a snapshot of finances to show a preliminary budget.
Underwriting: all your documentation is reviewed and approved or denied by the lending company.
