For most of us, buying a new home is the largest transaction we’ll make in the course of our lifetimes. If you’re a first-time home buyer, or it’s been a while since you’ve gone through the process, there are several common terms you should know as you navigate the ins and outs of buying your new home. According to Geoff Williams for U.S. News & World Reports, these are the basics:
If a lender pre-qualifies you for a loan, it reduces the amount of documentation required and arms you with a general dollar amount you’ll be eligible to borrow. Pre-qualification is a useful tool that gives you an idea of what you can afford as you begin your home-buying journey.
To be pre-approved, you’ll have to submit a substantial amount of documentation to the lender such as pay stubs, tax returns, and bank statements. Getting pre-approved requires work, and is really for committed home-buyers.
With a fixed-rate mortgage, the amount of interest charged over the life of your loan won’t change. That doesn’t mean that your payment will necessarily stay the same for the term of your loan, however. Rising taxes and homeowners’ insurance rates will change from time to time, affecting the amount of your monthly mortgage payment.
Also known as an ARM, an adjustable-rate mortgage is basically the opposite of a fixed-rate mortgage. Your interest rate will stay the same for a period — perhaps five or ten years, and then will rise with the prime. That means you’ll start with a lower interest rate and payment, but both will likely rise after the initial 5 or 10-year period.
This is the type of loan most people apply for when they’re looking for mortgage. Those with sub-par credit scores (below 650), usually won’t qualify for a conventional loan. At one time, buyers had to plunk down a 5% deposit on the loan, but due to fairly recent changes, the amount is more like 3% of the amount of the loan.
People with lower credit scores can usually qualify for a FHA (Federal Housing Administration) loan. They’re a great option for first time homeowners with low credit or those who haven’t had time to establish a credit score. There’s less emphasis on having above-average credit, and lower up-front costs, too.
Because they don’t want to lend you more than the house is worth, most banks require an official appraisal of a property before they’ll agree to lend any money. An appraiser working on behalf of the bank performs an inspection and then tells the bank what he believes the house is worth. That figure is the amount the bank or lender is willing to lend you for that house.
According to Zillow, expect closing costs (fees charged by your lender for things like administrative services, appraisal, etc., to be anywhere from 3 to 5% of the amount of the loan.
One point is equal to 1% of the loan amount. So if the house is 250,000, and your lender is charging you 2 points, that would amount to $5,000. Paying points up front is the same as prepaying interest, which means that the more points you pay, the lower your interest rate will be.
An escrow is a third-party account that holds money aside for expenses. For example, if you put a deposit on a home you’re buying, the deposit would go into “escrow”. During the life of the loan, money for real estate taxes, homeowners’ insurance, and other basic expenses go into your escrow account.
There’s a lot to digest when you’re starting on the path to new home ownership! If you’d like to learn another new home option in the Miami Valley — building rather than buying an existing home, please contact us!