Lost in the world of home loans? For a new homebuyer, there may be a lot of industry jargon going right over your head.
Take a look through this glossary of home loan terms to help you get one step closer to approval and that much closer to your dream home:
Adjustable-Rate Mortgage (ARM)
Most ARMs today are hybrid loans with a period of one, five, seven or 10 years at a fixed-rate followed by a period of adjusting interest rates. You can save money on your interest payments in the initial period, since these loans generally have a lower interest rate than fixed-rate loans.
An estimate of the home’s value — this shows the lender whether or not the home you want to purchase is worth the asking price. Values for new homes are usually based on costs for land and other factors.
Short-term financing designed to get you past a timing squeeze, such as when you’re buying a new home but haven’t yet sold your current house and don’t have all the cash you need. The lender agrees to advance you money using the equity you’ve got in your current home as collateral.
Most large- and medium-sized builders either has wholly owned mortgage subsidiaries or affiliate relationships with outside mortgage companies. This allows builders to offer a menu of financing options to qualified buyers.
Likely to be more useful to you if you are building a home yourself as a general contractor or working with a custom builder. Most provide short-term funds designed to get you through the building stage of your project, followed by a conversion into a permanent long-term loan.
If you have more than 10 or 20 percent to put down, these may be your best bet. Conventional loans are designed to be sold to Fannie Mae and Freddie Mac (the government-chartered mega-investors). The downside is conventional underwriting rules are more strict and banks may impose add-on fees to loans, increasing your cost. Down payments below 10 percent may be possible, but they require high private mortgage insurance premiums.
Credit Restoration Program
Programs designed to help improve your credit score so you can land your desired loan or mortgage.
Score that largely determine what type and how much credit you can obtain, what interest rates you’ll pay and sometimes what job you are qualified for. Most credit scores are between the range of 300 to 850, with 650 to 699 being considered fair by most lenders.
Compares the minimum payment on all recurring debt with your monthly gross income.
If you want to lower the payments on your home loan and reduce the interest rate, you can pay points when you close on the purchase of your home. A discount point is equal to 1 percent of the loan amount, or $2,000 on a $200,000 loan.
The money you put down to secure the purchase of a home. The size of your down payment typically depends on your loan terms and how much cash you have available to invest in your home.
If you’ve got only minimal cash to make a down payment and your credit history has a few blemishes, a federal government-backed loan is most likely your best choice. FHA (Federal Housing Administration) loans allow down payments as low as 3.5 percent, along with generous credit underwriting.
The most commonly used credit score, which ranges from 300 to 850. Based on your payment history, amount of debt you owe, length of your credit history, amount of new credit you request and types of credit you use.
A description of your finances including employment, credit and debt information. Some lenders may not approve a mortgage if your profile shows that you have changed jobs or applied for new credit cards during the “quiet period.”
A fixed-rate mortgage will have the same interest rate and the same principal and interest payment for the life of your loan. However, your payment may change if your property taxes and insurance premiums adjust over time.
The money you will be paying pack to your lender in addition to your loan. Often paid back regularly and at a particular rate depending on your credit, employment and other factors decided upon by the lender.
Lenders like to see a solid job history and steady employment. If you have repeatedly jumped from job to job, it could hurt your chances for approval.
If you’re borrowing an amount above the limit for conventional financing, you’ll need a jumbo loan. These loans typically require a larger down payment of at least 20 percent to 25 percent and have stricter credit standards because of the higher level of risk associated with a larger loan.
The amount of time that your loan will exist; you can choose the term for your loan. While first-time buyers typically prefer a 30-year loan to keep their mortgage payments as low as possible, you can pay less interest over the life of the loan with a shorter loan term such as 20, 15 or 10 years.
An agreement by law that conveys the conditional right of ownership to a home by the owner to a lender as security for a loan. A lender’s security interest is recorded in the register of title documents, made public information and can be voided when the loan is fully repaid.
Absent an appraisal, it is the lender’s promise that you are going to get the loan you need to buy the home. Helps you define your search for a home by laying out what you can and cannot afford. Carries more weight when you finally decide on a home and is usually good for 90 days.
A lender’s statement that, based on everything you’ve said and turned in but has yet to be confirmed, you are eligible to apply for a loan.
The amount borrowed or the subset of the amount borrowed which has yet to be repaid.
Private Mortgage Insurance (PMI)
If you opt to make a down payment of less than 20 percent, you’ll have to pay PMI. Lenders offer several ways of paying PMI, including a monthly premium, an upfront premium at the closing or paying a slightly higher interest rate while your lender pays the monthly premiums.
A critical time period where many buyers do something silly that changes their all-important debt-to-income ratios (DTI). If you do that, you might be pushed into accepting a higher interest rate on your loan than you planned. Or worse, you could lose the financing altogether.
An FHA-insured reverse mortgage can be used to purchase a home if you’re over age 62. You can make a down payment of 40 percent or 50 percent and take out a reverse mortgage for the rest of the home value. You won’t make any payments on the reverse mortgage because the loan will be repaid with your home equity after you leave the property. You own the home as long as you pay the property taxes, homeowners insurance and HOA fees.
Once a new house is completed, this type of loan automatically switches to permanent financing; also known as a construction-to-permanent loan (C2P). Largely regarded as a safe financing type, numerous custom builders are known for using this type of financing.
A guideline put together prior to your loan request in order to outline what kind of home, principal, interest, property tax and more that you can afford.
USDA Rural Loans
Allow zero down, but they’re limited to areas with relatively small populations and may have income restrictions.
VA loans require no down payment, but you must be a veteran to qualify. The VA loan is open to most active-duty military personnel and U.S. military veterans.
Drew Knight is a freelance writer for Builders Digital Experience (BDX). He graduated from Texas A&M University in December 2014 with a degree in agricultural communications and journalism.