Step-by-Step Series #1: Financing Your New Home Purchase – Mortgage-Speak: 10 Terms Every First-Time Home Buyer Should Know
Let’s face it. Every industry has its own vocabulary, and real estate is no different. Sometimes real estate pros use language that isn’t quickly familiar to those of us new to the process. So we’ve compiled a vocabulary “cheat sheet” for you so you will be “in the know” when these terms come up during your new home purchase.
First-time homebuyer: Usually, but not always, someone looking to purchase a first home. A first-time homebuyer also means a person who has not owned a home during the last three years.
Credit: The ability of a person to borrow money or buy goods by paying over time. A lender extends credit based on an evaluation of the potential borrower’s financial situation. Your credit score, which provides information on money you’ve borrowed and your payment history, is a key factor in obtaining credit for a mortgage loan.
Pre-Approval: The process by which a lender provides a prospective borrower with an indication of how much money he or she will be eligible to borrow when applying for a mortgage loan. This process typically includes a credit application followed by a review of the applicant’s credit history, income, and assets. Once the process is completed, your lender will give you a Pre-Approval Letter indicating that you qualify for a mortgage of a specific amount. Your Pre-Approval Letter helps your Realtor know how much house you can afford and shows a home seller that you are a serious buyer. You can be pre-approved before you identify a house to purchase.
Commitment Letter: A binding offer from your lender that includes the amount of the mortgage, the interest rate, and repayment terms for the home you intend to purchase. A commitment letter is issued when the homebuyer is ready to purchase a specific home.
Lock-In Rate: A written agreement guaranteeing a specific mortgage interest rate for a certain amount of time.
Loan Origination Fee: These are fees paid to your mortgage lender or broker for processing the mortgage application. This fee is usually in the form of points. One point equals one percent of the mortgage amount. For example, if a loan is made for $100,000, one point equals $1,000.
Discount point: A fee paid by the borrower at closing to reduce the interest rate. A point equals one percent of the loan amount. Qualifying buyers may be able to pay one or more points to lower the mortgage interest rate, which means a lower monthly payment.
Appraisal: A professional analysis of a property’s value. An appraisal is based on a number of factors, including the size, location, and features of the home and sales of similar properties. Your lender will require an appraisal to ensure that the amount of the loan does not exceed the property’s true value.
Closing Costs: The upfront fees charged in connection with a mortgage loan transaction. Closing costs may be negotiated between the buyer and seller. These costs generally include, but are not limited to, a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.
Settlement (also known as Closing): The process of completing a loan transaction. At settlement or closing, the mortgage documents are signed and then recorded, funds are disbursed, and the property is transferred to the buyer (if applicable).