No matter if someone has bought a home before or they’re looking for their first home, the terminology used can be confusing. There is a lot of lingo that’s specific to real estate, so it can seem like a real estate agent, or mortgage broker is almost speaking another language when they use these terms. Though the real estate agent can explain any terms, read below to learn some of the most common ones before starting the search for a new home.
Pre-approval Versus Pre-qualification
Finding out the amount that can be borrowed and spent to purchase a home is crucial. There are a few terms to understand when initially looking into home mortgages.
- Pre-approval – A pre-approval means the lender has agreed to loan a specific amount of money. This shows sellers that you can afford to purchase the home, and obtaining a pre-approval can make it easier to go through the remaining process. There may be terms to the agreement, such as no major changes to the finances before the mortgage is obtained.
- Pre-qualification – A pre-qualification simply states that a lender is estimating how much they will offer for a mortgage. They will require additional information before offering a pre-approval, but this can give you a better idea of how much you can spend.
- Debt to Income Ratio – One of the things a lender will look at is the DTI, or debt to income ratio. This compares how much you make with how much you spend before taxes, and most lenders will require the DTI, including the mortgage, to be less than a certain percentage of your income.
The Monthly Payment on a Mortgage
The monthly payment for a mortgage is known as the PITI, which stands for principal, interest, taxes, and insurance. This is how much will be paid each month for the mortgage, so it’s important to understand how much it will be and what percent of the PITI payment goes to each component each month.
- Loan to Value Ratio – The LTV compares the amount of the mortgage and the appraised value of the home to determine the interest rate. The higher the down payment is, the bigger the difference is between the mortgage and appraised value. The bigger the LTV is, the smaller the interest rate may be.
- Annual Percentage Rate – The APR for a loan is the interest rate paid on the loan. It’s important for this to be as low as possible to help you save money in the long run on the cost of having a mortgage.
- Adjustable-Rate Mortgage – The interest rate is usually static, but there are adjustable-rate mortgages available as well. Depending on the terms of the ARM, the interest rate could go up or down during the time you have the mortgage.
- Escrow – Escrow is an additional amount that is added to the monthly payment. This is done to cover property taxes, insurance, and other essentials to ensure they are paid.
Looking for a Home to Buy
When you’ve got a pre-approval, and you’re looking for a home, some of the terms you may hear include the following.
- Comps – Comps are the prices of recently sold homes that are similar to the one you’re looking at. They help determine the fair market value of the home to see if you’re getting a good deal or if the seller is asking for too much.
- Contingencies – When placing a bid on a home, there will likely be some contingencies, which are conditions that must be met for the sale to go through. These can vary but typically include things like the house passing the inspection.
- Appraisal – An appraisal is done to determine the home’s value and is often required by the mortgage lender.
Closing on the Home
Closing on the home is the process of paying for the home, with the mortgage, and getting the deed to the home. There are many terms to understand before the closing, so you’re prepared for it.
- Closing Disclosure – The closing disclosure is a form provided by the lender before the closing. It reviews the terms and costs of the mortgage, so you know what to expect.
- Closing Costs – Various costs will need to be paid at the closing. This can include fees for an appraisal, title fees, and more.
While these aren’t all the terms you’ll likely come across while buying a home, they are some of the most common and can give you a good starting point while you’re shopping for your new home. You can also ask your real estate agent or lender if there are other terms you are not familiar with, so you understand every part of the home buying process.