When you are building or buying a new home, there will be plenty of words used that might not mean anything to you right away. However, it’s important to know these terms, as they play a large role in the process you will go through to apply for a mortgage. Here are few that are often used in the homebuying journey.
Annual Percentage Rate (APR): The APR is the yearly interest rate. It is reflected in the cost of the mortgage on an annual basis. Lenders will post advertised rates for different types of mortgages and APRs, such as for 30-year or 15-year. This way you can compare them and what each lender offers. Be prepared that the actual rate you might pay will likely be higher because it includes credit costs and points.
Appraisal: This is an estimate of the house’s value. A professional known as an “appraiser” will come to the house before you finalize the sale. This person will look at the house and tell you how much it is worth.
Certificate of Occupancy: Before you can move into your new how home, you need proof that the house is properly built and safe to live in. This certificate is that proof. It is provided to your builder by the local government.
Closing: When it’s time for you to move into your new home, you will attend a meeting called “the closing.” You, the lender, and others will be present. At this time, you will sign the official documents that make you the owner of your home. In some places, this meeting is called a settlement.
Closing Costs: There are many fees involved in finalizing a home sale. These might include an origination fee, discount points, appraisal fee, insurance costs, taxes, deed recording fees, survey fees, and possibly a title search fee for the land. Figure these costs to be between 3 to 6 percent of your total mortgage amount.
Discount Points: This is interest you might pre-pay at closing. For example, since each discount point equals 1 percent of the loan amount, if you had 3 points on a $100,000 mortgage, the total cost for discount points would be $3,000.
Down Payment: This is the amount of money you are generally required to put into your home up front to qualify for a mortgage. For example, if you bought your home for $100,000, and you put 10 percent down (or $10,000), your mortgage would be for $90,000. The percent of down payment required varies depending on the type of loan you get. Conventional loans generally require a 10 percent to 20 percent down payment while FHA and VA loans may require much less (up to 5 percent).
Earnest Money: This is money that you put up front as part of the purchase price to show that you are committed to buying this home. This binds the transaction between you and the seller.
Escrow: While you are in the process of buying your home, the escrow holder is a neutral third party who handles the paperwork for the closing. After you buy your home, the lender might also have an escrow account for you that holds money from which your property tax and insurance is paid.
Free and Clear: When a property is completely paid for (no liens against it for money owed), it is considered free and clear.
Hazard Insurance: This is insurance you buy from an insurance company to protect your investment in your home should your house catch fire, be damaged by a windstorm, as well as other situations. Hazard insurances do not cover damage from earthquakes, riots, or flood damage. Depending on where you live, you may be required to buy extra insurance if flooding or earthquakes are a concern.
Market Value: Your home’s market value is the highest price that someone would pay or the lowest price someone would sell the property. It is often different from how much the home would actually sell for at any given time.
Origination Fee: This is the fee your lender charges for the background work done to get your mortgage approved and your home ready for closing. This work often includes preparing loan documents, doing credit checks, property inspections, and any other work required. This fee is usually a percentage of the face value of the loan (the amount of the loan after the down payment is subtracted, and before interest).
Principal and Interest: This is also known as P&I. It refers to how much of your monthly mortgage payment goes to pay down the actual loan value (principal) and how much is for the interest payment (interest).
Principal, Interest, Taxes, and Insurance: This is also known as P.I.T.I. This refers to the breakdown of your monthly mortgage payment based on the principal and interest, plus money that is collected and held in escrow to pay for your taxes and insurance bills when they come due.
Points: Each point equals 1 percent of the principal amount of your mortgage.
Pre-Approval: When you are ready to buy your home, as part of the application process, an underwriter will go through your income, credit, available funds, etc. to ensure you are a good credit risk. If the underwriter feels everything is in order, he or she will approve it, which means you can go through with your mortgage. Some pre-approvals come with conditions, so do know what they are and keep them in mind.
Pre-Qualified: Before you start to build your home, you should sit down with a loan expert and discuss your financial situation. He or she can then pre-qualify you for an amount for which you should be able to get a loan approved. However, a pre-qualification is not a guarantee that you will get approved, since no one has formally gone through your information and confirmed it.
Purchase Agreement: When you are ready to buy the home, you and the seller (or builder) will complete an agreement that lists the purchase price and any other conditions either of you place on the sale.
Title: This is a document that proves that you own the property.
Title Insurance: When you buy a home, before you go through with the sale, a title search is done to see if anyone else can claim ownership of the property you wish to buy. It will also involve a search to see if there are any outstanding liens against the property that need to be paid (such as taxes, utilities, mortgages). Title insurance is a policy in which the title company assures you that they did their job to uncover any possible claims to the property before issuing a report. If some other claim comes up that wasn’t disclosed in the report, the title insurance company pays it.
Title Search: Before you buy, a title company will search the city or town records to see who has owned the property and to make sure that doesn’t have any liens (money stilled owed to banks) or other claims to ownership.
Underwriting: The job of the underwriters is to verify your information for the lender and decide if you are a good credit risk to receive a loan in this amount or a particular interest rate. They will check your credit, employment, assets, and any other information, like bank statements. They will look at your history as well.
If you know these terms, you will have a much easier time understanding and going through your home-buying process. There are many other terms, of course, but this will get you started on the road to being a knowledgeable and informed homeowner.
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