Metro Denver is experiencing one of the hottest Real Estate markets in the country right now, and entering the marketplace for the first time as a buyer can be intimidating under any market conditions. Sellers have the edge in this market, which means it is especially important to be an informed, educated buyer as you approach the home search process.
When you stumble upon a word or phrase you don’t understand, don’t be afraid to ask clarifying questions. Even the savviest Realtor started off as a newbie with lots of questions. Your agent and your mortgage rep both want you to be comfortable and confident with the process, and asking questions (and doing a bit of research when necessary) is the way to get there.
Here is a list of common Home Lending terms you should familiarize yourself with:
Mortgage… the home loan – it’s as simple as that. There are a variety of mortgage types.
Prequalification… the process of qualifying for an approximate loan amount. Serious buyers should prequalify for a mortgage before the search begins.
FICO score… FICO stands for Fair Isaac Corporation, the largest and best known software provider for calculating credit scores. Your lender will check your credit score – probably from multiple sources, in order to qualify you for a loan and set your interest rate. Some lenders take an average of 3 scores, some take your mid score (the middle out of 3).
Debt to Income Ratio… in order to qualify for a home loan, your monthly debt payments cannot exceed 43% of your monthly income. For lending purposes, the debt-to-income calculation is always based on gross income. To determine your Debt to Income Ratio (DIR), take your gross income (all incoming paychecks in a month, before taxes come out) and take them times .43. If your outgoing debt payments are at or under this amount, you’re in the clear. If not, you’ll need to increase income or eliminate debt before you can secure a mortgage. Household expenses like food, gas, entertainment don’t count in this ratio, but all recurring debt payments (credit cards, child support, car loans) do.
Loan to Value Ratio… the Loan to Value ratio, sometimes referred to as LTV, is the amount of loan you are requesting compared to the appraised value of the home. This figure helps a lender determine the loan’s risk. For example, if you are buying a $300,000 house and requesting a $295,000 loan and your credit score is low, the perceived risk is high for the lender. If you are buying the same home with a $30k down payment and a mid to high credit score, the perceived risk to the lender is lower.
Good Faith Estimate… sometimes referred to as the GFE, the Good Faith Estimate is a document provided to you by the lender outlining all fees associated with your home loan transaction.
PITI… this term is the abbreviation for Principle, Interest, Taxes, Insurance – or the various payments that role into your monthly mortgage payment. It is important to understand each factor that will affect your monthly payment, and also how much money each month is chipping away at the principle amount of your loan and building your home equity.
PMI… on a conventional home loan with less than 20% down, the buyer will generally pay Private Mortgage Insurance as a premium to offset the risk the lender takes in providing the loan. The purpose is to protect the lender in the case of a buyer defaulting on the loan.
Escrow… the Escrow account or fund is where the lender will hold closing costs until the transaction closes. This ensures the security of the funds while the lender processes your deal.
Appraisal… A property Appraisal is an estimate of a property’s value based on factors including location, amenities, structural condition and recent sales of similar local properties. A licensed home appraiser conducts the process upon the request of the lender, and the buyer pays for the Appraisal in most cases. The cost is typically a few hundred dollars and can be paid up front or rolled into closing costs.
Are you seeking an expert guide to help you navigate the Metro Denver Real Estate market? Give me a call or drop a line for experienced, reliable service.
The Meyers Group