Understanding Mortgage Terms, Part 1 – 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. This is the first article in a two-part series that provides basic information about commonly used and sometimes misunderstood terms.
Terms Used in the Application Process
Good faith 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 good faith 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.