When you start shopping for your first home to purchase, unless you’re paying all cash, you’ll also start shopping for a mortgage.
Mortgage shopping for a first-time buyer can remind you of your first foreign language lesson. You’ll be hit with all kinds of words and phrases you’ve probably never heard before and have no idea what they mean. Here are 6 of the most common ones you should know. Knowing these 6, especially the last one, will keep you out of trouble and on the right path to closing.
- Down Payment
A down payment can have a couple of different meanings.
More commonly, a down payment is a part of the mortgage process of a residential real estate purchase. It’s the up-front payment a home buyer is usually required to provide in order to secure the borrowed amount from the lender.
Most lenders require that consumers make down payments of 20% in order to be approved for a mortgage. Although there are exceptions to this amount. Putting down less than 20% for a down payment may cause lenders to require PMI, which we’ll come to later.
Some government-insured mortgage programs such as VA (Veterans Affairs) allow for zero down. And FHA (Federal Housing Authority) requires only 3% for a down payment. The amount of the down payment will be unique to the borrower and won’t always be the same in every scenario.
Other forms of down payments may be earnest money deposits. Which are basically a “good faith” deposit that a potential buyer submits to the seller along with a written purchase & sales agreement. The earnest money shows the seller that the buyer is committed to purchasing. It gives the buyer time to secure financing, conduct inspections and get an official appraisal. If the buyer backs out of the contract, the seller usually has the right to keep the earnest deposit. Earnest deposits are held in an escrow account and applied to the closing costs, the mortgage down payment or returned to the buyer.
An Annual Percentage Rate (APR) reflects the mortgage interest rate plus other costs, which are charged to borrowers and paid to lenders. Many costs are associated with taking out a mortgage. The interest rate is the cost of borrowing the principal loan amount over the whole length of the mortgage term. The APR is a broader measure of the cost of a mortgage because it also includes the interest rate plus other costs such as broker fees, discount points and some closing costs.
APR is always shown as a percentage and reflects the yearly cost of borrowing funds over the length of the loan.
Private Mortgage Insurance or PMI is a type of insurance that’s typically required if a borrower gives a down payment of less than 20% of the home’s purchase price on a conventional mortgage.
A PMI policy protects the lender, if the borrower fails to make a mortgage payment. Buyers that are required to have PMI will pay a monthly premium to the insurance company. The charge for PMI is usually included as a part of the monthly mortgage payment. The policy coverage will pay a portion of the mortgage balance to the lender if the buyer fails to pay back the home loan.
- “Clear to Close”
This is one of the final stages before your loan is funded, prior to your scheduled closing date. It means the Underwriter has reviewed and signed-off on all necessary documents and issued a final approval.
You should receive a loan approval, or ‘Clear to Close’, from the lender, along with a Closing Disclosure or CD, with details of the final loan terms which should include a breakdown of costs and fees. The Touchstone Closing team will also prepare a separate ALTA (American Land Title Association) Settlement Statement which indicates what funds go where and how much money you may need to bring to the closing.
An appraisal is an unbiased, objective estimate of the value of a home calculated by a third party licensed professional. It’s used whenever a mortgage is involved in the buying, refinancing or selling of real estate property. Lenders use the appraisal to determine your Loan To Value, (LTV) ratio.
The appraised value is determined by such aspects as an inspection, upgrades, additions and comparable properties recently sold in the same market. If the appraised value is lower than the agreed price, the transaction can be canceled or delayed until either the seller lowers the price or the buyer increases the down payment.
- Loan Estimate (LE)
A Loan Estimate (LE) is a form that borrowers receive after applying for a mortgage. It tells you key details about the loan you’ve requested. The government mandates that all borrowers receive an LE. The form provides information such as the estimated interest rate, the projected monthly mortgage payment and the total closing costs for the loan. If something looks different than what you expected, you should ask why.
If you already have one or more real estate closings under your belt, tell us what you think of our list. Were there any terms that you feel we left out? Let us know in the comments below or give us a shout on social media. If you found this list helpful, please share it with a friend you think could use it.