Making Sense of Home Loan Language
Deciding on the right loan is tough, but understanding the home loan language can be tougher.
The prospect of buying a home for the first time can be exciting and daunting. There’s the anticipation of the journey – visiting prospective homes looking for the one that “feels” right and holds all the potential and promise you imagine. There is also the practicality of finding the place that fits within your budget. The parameters of your home loan will have a big impact on the house you will choose. Understanding the language used in the home loan industry will help.
JSYK, It’s Like Another Language
For those of you who do not know, JSYK is text-speak for “just so you know.” That is what the world of home mortgage is like. Although the process is full of acronyms and confusing industry buzz words, with a little practice, you can get the hang of it.
Home Loans and Mortgages
Though these two are very similar, they are not the same animal. They work together, but they are different parts of the home buying process.
When you borrow money to pay for your home, you are getting a home loan. It will have fixed rates or adjustable rates and there are a variety of types of home loans available. Galaxy Lending Group will work with you to get the right home loan for your needs.
- Conforming Loan: This type conforms to either the Freddie Mac® or Fannie Mae® guidelines and will be equal to or less than the loan limit.
- Jumbo Loan or Non-Conforming loan: When purchasing very expensive real estate, this type of loan may be used. It does not conform to either Freddie Mac or Fannie Mae and is above the loan limit.
- Government Loan: Backed by the U.S. government, these loans have some of the lowest rates; however, they also have very strict guidelines.
- Conventional Loan: You can expect high rates with this type of loan. It is insured by the mortgage company and the high rate offsets the lenders’ risk.
A mortgage is a binding legal document you sign that indicates your agreement to fully pay back the lender before the property is totally yours. This document details the agreement and your obligation to pay. The home you purchase is the collateral. If you do not repay the loan, your home can go into foreclosure and be sold to another buyer.
The Acronyms of Home Loans
When you apply for your home loan, you will be inundated with a variety of acronyms. It may be difficult to remember all of them, but your agent will help you through.
- DTI – This stands for the debt-to-income ratio. It is the difference between your total income and the amount of debt you owe. This ratio is used to determine if you can afford the mortgage payment on top of all your other bills.
- LTV – Loan to value compares the value of the home against the mortgage loan. The difference between the two is the equity of the home. As the mortgage is reduced by your payments, the LTV will change accordingly.
- PMI – For people paying less than 20 percent for a down payment on a home, private mortgage insurance, or PMI, is required. This safety net for the lender lowers the risk to them if you should default on your loan. Each year the insurance is calculated and divided into monthly installments which are added to your mortgage payment.
- PITI – These are the components of the monthly mortgage payment: principal, interest, taxes, and insurance.
- APR – You have probably encountered annual percentage rates, APR, before. This is the total cost you will bear in securing your loan, including fees to close the loan and interest rates.
- Refi – Refinancing or refi is used by borrowers to get a better interest rate. It is used to replace the original mortgage with a new one.
- FICO – FICO stands for Fair Isaac Corporation. This was the first company to offer a model of credit risk with a score, and it uses information from the three major credit-reporting agencies to determine your score. Your FICO score indicates your ability to manage your debt. The higher the score, the better you are as a manager. Low FICO scores generally will prevent individuals from getting a mortgage loan. It is always a good idea for you to check with each agency annually, to ensure the information they have is correct and current.
- FRM – Monthly principal and interest payments remain the same for as long as you have the loan. Fixed-rate mortgages do not change during the life of the loan.
- ARM – An adjustable-rate mortgage can change from time to time – your monthly payment can increase or decrease.
Here are more of the terms you will want to know when you are applying for a home loan.
- Earnest Money – An amount of money paid down by the buyer in order to bind the sale of the home. If the offer is accepted, the earnest money is usually used as part of the down payment.
- Escrow Account -This account holds money for property taxes and insurance. Each time a mortgage payment is made, money is added to this account.
- Underwriting – This is the process by which the lender decides whether or not to grant a loan to a potential buyer.
There are many terms you will encounter as you seek to fulfill your dream of homeownership. Learning the language may be a steep learning curve, but Galaxy Lending Group can help you navigate the process. At the end of the day, you will celebrate the journey that leads you home.