Understanding Mortgage Terms:– The Application Process
The home-buying process can be confusing, especially for a first-time buyer. Initially, it can be hard to understand the technical terminology used by real estate agents and lenders.
Terms Used in the Application Process
Loan Estimate: This document specifies the costs associated with a mortgage, such as the interest rate, lender’s fees, title charges and any pre-paid interest and homeowner’s insurance. The listed fees are only an estimate and are subject to change. A loan estimate should be provided to you within three days of submitting an application; if you don’t receive one, consider it a red flag for using this lender.
Down payment and gift funds: The down payment is the money paid on the purchase of the house from the buyer’s own funds. Gift funds may be used with most loans, but a paper trail must be provided by the buyer and the person gifting the funds. A seasoning period of 60 days is usually preferred for deposits that will be used as down payments. For example, if the balance in a savings account has been around the same amount for the past two months, it is generally viewed with less concern than a large deposit suddenly made in the week prior to application.
Title insurance: Title insurance protects the party against losses that occur from disputes over the ownership of the property. The lender and buyer may each purchase a policy. Many loans can have title issues, but they are generally resolved quickly and with no consequences.
Debt-to-income (DTI) ratio: This is calculated by totaling all monthly obligations and dividing by income. A less than 36% DTI is considered ideal, but you may find lenders that will approve you up to 50%.
Loan-to-value ratio: This is the percentage of the property value to the amount you borrowed to secure the property. If it is more than 80%, you will most likely need mortgage insurance. Talk to a reliable lender about the different types of insurance available.
Private mortgage insurance: Often abbreviated as PMI, this insurance helps protect the lender from borrowers defaulting on a loan when they put down less than the minimum requirement. For most loans, this is 20%. PMI can also be used as a negotiating tool because it is not always required.
It is most often used to protect against property title fraud or forgeries, but it can also provide protection against other liens or owners that have not been named as sellers. A title search is conducted on all purchases to review public records and make sure the property is eligible for sale. Your real estate agent can provide recommendations for a reliable title insurance company.
Although some of these terms can at first seem difficult to comprehend, don’t let them scare you away from buying a home. Instead, take your questions and concerns to your lender early in your home search process and make sure you receive a clear explanation.
We have created this mortgage terminology glossary that can help you make sense of terms you see here or in your loan paperwork, providing a better understanding of your options.
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