Congratulations on making the legacy-building decision to purchase a home! Now that the process is underway, you should get familiar with the terms below. I will do my best to explain everything to you step-by-step but make sure you read through the list so you know what, why and when we do certain things during the home-buying process.
In early years of an amortized loan, almost all of the payment is applied toward interest, while in the last years of the loan, almost all of the payment is applied to reduce the principal.
Closing Costs & Prepaids
Costs paid in addition to the down payment on closing day. These items can include attorney fees, loan origination fee, loan discount point, application fee, appraisal fee, credit report, document preparation, escrow fee, survey and recording fees, tax escrow, hazard insurance, flood zone certification, two months of private mortgage insurance (if down payment is less than 20 percent) and sometimes the entire first year’s private mortgage insurance premium. Typically, the appraisal and credit report fees are paid at application.
This new form combines and replaces the HUD-1 and final Truth in Lending (“TIL”) disclosure. A lender is required to provide the Closing Disclosure to the borrower no later than three business days before loan closing. This form is a statement of final loan terms, projected payments and closing costs. Compare this document with your Loan Estimate.
The difference between the mortgage and the lower of the purchase price or appraisal. The minimum down payment is three and a half (3.5%) percent on most loans. Private mortgage insurance is required for a down payment less than 20 percent.
Deposit money given to the seller by the potential buyer to show that he is serious about buying the house. If the deal goes through, the earnest money is applied to the down payment. If the deal does not go through, it may be forfeited.
The difference between a home’s fair market value and the loan amount, and/or encumbrances (such as liens or claims) against it.
This new form combines and replaces the Good Faith Estimate (“GFE”) and the initial Truth in Lending (“TIL) disclosure. It must contain a good faith estimate of credit costs (loan costs and other costs) and transactions terms. Loan Costs are costs paid by the consumer to the lender and third-party providers of services the lender requires to be obtained by the borrower during the origination of the loan. Other Costs include taxes, governmental recording fees, and certain other payments included in the real estate closing transaction. A Calculating Cash to Close table shows the borrower how the amount of cash needed at closing is calculated. The lender is required to provide the Loan Estimate within three days of receipt of the borrowers loan application.
An estimate of the average interest rate being charged by lenders for conventional (Fannie Mae/Freddie Mac) or FHA/VA loans.
The origination fee is what the lender charges for establishing the loan. It is included in the closing costs and may be financed.
Points or Discount Points
a point or discount point is one percent of the loan amount and is charged by the lender to issue a loan at below market rates.
Private Mortgage Insurance
On conventional financing, lenders require that the borrower purchase Private Mortgage Insurance (PMI) to protect the lender against default on loans with less than 20 percent down payment. PMI has nothing to do with homeowners insurance or credit life insurance. PMI should cost the same at all lenders.
A buyer must qualify for a loan. Typically, the monthly payment cannot be more than 25 percent to 28 percent of the buyer’s gross monthly income, and all the buyer’s monthly debt cannot total more than 33 percent to 36 percent of his/her monthly income. Some leeway may be granted based upon prior credit history, down payment, job history, etc.
An instrument that shows the buyer has a clear ownership of the property. A loan does not usually close until the title company has assured the lender that there are no hidden problems with a title to a piece of property.
A policy required by the lender and paid for by the borrower that insures the lender clear title against future claims. Borrowers may also purchase title insurance to protect their equity.