As you are going through the home loan process, you will run across a few terms that you will not understand. You should ask your lender to explain these terms so that you will fully understand the type of loan you are applying for, the lenders policies, and other information that will be important throughout the life of the loan. Here are some common terms you may encounter:
While this term can mean different things in different situations, you will see it often when closing on a home. If you place a down payment on a home, it will be in escrow until all the paperwork has been signed. The money is held by a neutral third party, such as another bank or escrow service, and will be distributed once the deal is over. You can ask your real estate agent about escrow services in your area.
Even though you have heard of a mortgage before, you probably thought of it as the home loan you will be paying once you move into your new home. Technically, a mortgage is a lien on your home created by your lender. If you cannot make payments on your home, the lender will have the right to sell the property in order to gain the money that they have lost.
This is a term that refers to homes whose owners could not make payments each month. Once a lender has decided to sell the home, it will be in foreclosure. You should find out ways to work with your lender in case you miss a mortgage payment at any time. Having this knowledge in advance will make financial emergencies easier to deal with.
A mortgage broker is a person who does not work for a bank, but rather works on commission to match homebuyers with many lenders that may not be in your area. If you have poor credit, you may want to secure a home loan through a mortgage broker because you will have a better chance than going through a bank that only has one lender to choose from – themselves.
This refers to the interest rate on your loan. If you choose an adjustable rate loan, for example, your points may be capped each year so that they cannot exceed a certain number.
A down payment is helpful in several ways. It will lower the amount of money you will need for a home loan, it will allow lenders to see that you are responsible for paying off a mortgage, and it will move the home buying process faster. Most first time homeowners will put down no more than 20% for a down payment.
You do not want to overextend yourself by putting a huge down payment on a home because you may not have enough money to pay your mortgage, afford new furniture, or make home repairs.
This is one way that lenders will sue to determine if you can afford your monthly mortgage payments on your current income. The lender will subtract all your reoccurring debt to determine how much is left for a mortgage payment.
This is why not buying a car or spending money on your credit cards is so important when buying a home. The less debt you have will mean more available money for your mortgage payment.
If you cannot afford to put down more than 5% on a home, you may not be approved for a loan. But if you purchase private mortgage insurance, your lender may agree to give you the loan. This extra insurance will protect the lender in case you default on the loan by paying them at least 15% of the total loan value. This will cost you a little extra each month, but it may be worth it.
Before you apply for a home loan, you should obtain copies of your credit report so that you can check for errors; see how much money you owe on credit cards and loans, and to see what your credit score is. This is another way that lenders will determine if you will receive a loan.
There are three credit reports that you should obtain, because you will not know which one the lender will base their decisions on. While the numbers from these credit reports should not vary too much, if you see any major discrepancies, you should contact the agency and have the mistake corrected.