Talking the Talk 10 Terms You Need to Know When You Begin the Home Buying Process
You know the basic terms: mortgage, down payment, closing costs, equity. Yet, when you dive deep into the home buying process, there are so many more complex phrases you need to be aware of so you can speak effectively with all of the professionals involved. Here, KNOWAtlanta identifies the top 10 terms you’ll need to have a good handle on before you sit down to sign on the dotted line and purchase the home of your dreams.
Backed by the United States Federal Housing Administration (FHA), this type of loan is popular because the guidelines are more flexible, and it allows you to purchase a home with a relatively low down payment (as little as 3.5 percent with a credit score of 580 or higher). You do have to go through an FHA-approved lender (such as Fidelity Bank Mortgage) to secure an FHA loan, but it is a great option for families with limited income.
When you apply for a mortgage, there are upfront fees you’ll need to consider. An origination fee often includes an application fee, appraisal fees and any additional costs associated with the follow up or processing of the loan. A one percent origination fee is common.
A lender needs to determine if you can qualify for a loan and will look at your qualifying ratios. These numbers are based on two things: 1) the expense of the home you chose as a percent of your income ratio and 2) your total debt obligations as a percent of your income ratio. The lender will takes these numbers into account to help arrive at a decision.
If you want to know exactly what you’ll be paying every month for the duration of your loan, then you’ll want to secure a fixed-rate mortgage. In this scenario, the interest rate for your loan is negotiated and set at the very beginning of the process. It will not change for the life of the loan, which can range from 10 to 40 years.
If you know you’ll need a lower interest rate for the first few years of your loan, then an adjustable-rate mortgage, or ARM, may be for you. Often lasting one, three or five years, the lower rate then adjusts to a higher one based on an index (and your monthly payments will change accordingly). After that initial period ends, the rate will adjust at set intervals for the life of the loan.
Private Mortgage Insurance (PMI)
When you want to purchase a home but cannot provide a 20 percent down payment, a lender will request that you buy Private Mortgage Insurance (PMI). This insurance covers the remaining real estate value and protects the lender against a loss if you default on your loan. In most cases, once you have paid back enough of the loan to fall below the 80 percent (or higher) that you borrowed, you no longer need PMI.
It sounds complicated, but this is simply the schedule upon which you will repay the loan for your home. Your loan payment will be calculated based on the amount borrowed (the principal) and the interest rate. It will then be evenly divided (usually into monthly payments) and set for a fixed period; at the end of that period, the debt will be paid off completely.
The main loan itself is not the only cost associated with purchasing a home. You also need to consider annual property taxes and insurance costs. Once you sign on a loan, your lender typically will create an escrow account for you. Part of your monthly payment will be held in this account, which is managed by the lender; the company will then send in (or pay) the tax bills regularly on your behalf.
Good Faith Estimate
Closing costs are an important part of the home buying transaction and something you need to know about up front. Based on the mortgage loan, your lender will estimate the closing costs you will need to bring to the table. It isn’t an exact amount, but it will give you a ballpark figure so you can plan accordingly.
Are you building your dream home? Then you need to think about a construction mortgage, which will allow you to borrow money from a lender to cover the costs of building the home. During construction, the funds are advanced in increments, and you will only pay the interest on the loan. Once the house is completed, the loan transitions into a normal loan that covers both the principal and the interest rate. n
Consider Your Options
There are often special loans that you can secure based on your specific needs or background. Check out the following options as you begin the home buying process.
Buying a home as you relocate to Atlanta…but haven’t sold your old home yet? A bridge loan, also known as a swing loan, provides necessary funds in the interval between two transactions—namely the selling of one home and the purchase of another. The loan is secured to your current home (the one for sale), and funds can be used as a down payment on your new home. There are risks involved (such as carrying two loans), so proceed cautiously.
Often referred to as a physician mortgage loan, a doctor loan is designed specifically for medical doctors, residents, dentists and other medical professionals. They often are more flexible for those who have a high debt-to-income ratio (thanks to medical school bills) as well as a high earning potential. Fidelity Bank Mortgage offers a doctor loan program with up to 100 percent financing for eligible medical doctors and residents.
Guaranteed by the U.S. Department of Veterans Affairs, the VA loan allows service members, veterans and eligible surviving spouses the opportunity to purchase a home without a down payment—or even excellent credit. You will need to go through an approved lender and meet eligibility requirements, so be sure to do your research before starting the application process.