It’s a brand new year and people are dreaming about Spring and buying a new home. If this is your first time buying you are most likely going to hear a lot of “terms” you never heard before. Buying your first home is a wonderful and exciting experience BUT a really important decision. Below is an explanation of 9 common terms to help you better understand the home buying process.
1. RATES- Adjustable/Fixed Rates-
These terms describe the type of interest rate you will be getting with your new loan. An adjustable rate means exactly what is says. It can adjust over a certain period of time. So for instance, you start out with a lower percentage interest rate and after 5 years it adjusts based on the prime rate at that time. It can go up or down. This is not something I would suggest you do unless you are well versed and have an ultimate plan in mind that would make this a good fit. A detailed discussion with your lender on the adjustable rate would be highly suggested.
A fixed rate is the opposite of an adjustable rate and is determined at the time you apply for the loan. If you purchase within the time frame given by the lender for your interest rate, it will not change over the life of the loan. This seems to be the safest interest rate for a first time buyer since the payment amount for the loan will not change. Taxes and insurance can and will affect the mortgage payment over time, however.
2. PRE-QUALIFICATION- This is really just a preliminary look at your credit and income and can be done over the phone with a loan officer. This, however does not constitute a commitment by the bank to give you a loan.
3. PRE-APPROVAL- A much better way to go, giving you confidence that as long as you do not fudge things up by buying a house full of furniture or a new car during the loan process, since this will impact your credit score, the bank will provide the loan for you. The pre-approval process requires extensive documentation that you will need to provide, such as work history, income history and credit history, tax returns, etc.
4.CONVENTIONAL LOAN- You will need good credit and most times more money down. Conventional loans do not have stringent appraisal requirements like an FHA loan. Talk to your lender as to what is your best fit.
5. FHA LOANS- This loan type is great for persons with a little higher risk to borrow and and lower credit scores. Your Realtor will need the information on which loan type when writing the offer to purchase contract.
6. APPRAISAL- In order for the bank to give you a loan they must be assured that the home is worth what you are paying for it. The appraisal is done to determine the value. If the appraiser cannot find the agreed upon purchase price through his research of the current homes sold in the area, in most cases, a re-negotiation will need to take place between you and the seller to come to an agreement. This can be a sticky situation but a good realtor will help you through this process.
7. PMI- Premium Mortgage Insurance- This is Insurance required by your lender if you do not have 20% to put as a down payment for the purchase of your home. It can be paid upfront as part of the closing costs, or can be paid as monthly installments as part of your mortgage payment.
8. CLOSING COSTS- These are the costs associated with obtaining a mortgage. The lender or bank charges fees to process the paperwork and initiate the loan. The title company charges to research the title to make sure it is free of liens and do the actual closing. There is the appraisal fee and miscellaneous recording and other fees as well. Many times a first time buyer will negotiate with the seller to pay closing costs in their offer. The sellers are not required to pay your closing costs but if it can be negotiated into the price, it can be a win/win for both buyer and seller.
9. ESCROW- I have noticed that in other states, Realtors use this word in different contexts. Locally, the escrow pertains to an escrow account where the earnest money or any monies that needed to be held until closing is held. Either the real estate company or a title company have accounts set up to hold theses funds until such time as you close. At closing, the money is released as part of the down payment made by the buyer.
BONUS TERM- COMPETENT REAL ESTATE AGENT- Education of this process is important to your understanding, but lets face it, you cannot learn everything about how to buy a home on the internet in 3 hours. There are just too many details and processes that have to occur to make it happen! So hire a professional Realtor that cares about your experience and knows the ins and outs of what it takes to expedite a smooth and easy transaction for you. A competent Realtor will communicate with you, fully explain the contract and guide you in each phase of the transaction so your are well informed but not overwhelmed and most important get you the home of your Dreams!!!!