Definitions That Every First-time Homebuyer Needs to Know

 

Home-buying jargon can be confusing at first. However, clarity on these definitions is important so you feel confident discussing your loan to make informed decisions. 

I’ve collected a list of definitions I learned at the start of my transition into the mortgage business. I know they will be useful for first-time homebuyers, too. 

I organized the definitions in the order you will likely encounter them in the home-buying journey. 

Useful First-time Homebuyer Definitions

Debt-to-Income Ratio

A debt-to-income (DTI) ratio is a percentage that compares your monthly income to how much you owe.

Why it matters

Lenders use your DTI ratio to determine your borrowing risk and decide whether or not to approve your loan. To calculate your DTI, add your minimum monthly debt payments and divide by your gross monthly income. 

Generally, a DTI of 36 percent or below is considered favorable.  However, some lenders may allow a higher DTI ratio if you have good credit. A lower DTI ratio also improves your chances of securing a mortgage and qualifying for a better interest rate.

Prequalified vs. Preapproved

People often assume prequalified and preapproved mean the same thing, but there are distinct differences. 

Prequalified means how much your loan will likely be. 

Preapproved means you will be approved for the loan.

Why it matters

Prequalification lets you know what houses you can afford so you can shop for what’s in your price range. (You can get an instant quote on our website).

Preapproved means you will receive the loan, but it requires more work on your end to get to this point. You have to submit much more documentation, such as pay stubs, bank statements, and tax returns. 

Points

Points are prepaid interest. One point is a charge equal to 1 percent of the loan amount.

Why it matters

Points help you buy down your loan. Lenders typically allow homebuyers to purchase up to three points, or 3 percent, of their loan.  It makes financial sense to pay as many points as possible to get a lower interest rate, which saves you money over time. 

Mortgage Insurance

People often do not have 20 percent of their home price as a down payment. That can be a lot of cash. If that’s the case, homebuyers can get mortgage insurance. This protects the lender from giving a loan to someone who might not be able to afford the loan. 

Why it matters

For first-time homebuyers who do not have the full 20 percent down payment can still purchase a home. This means your mortgage payments are a little more expensive at first but go back down after your payments have reached 20 percent of your home price. 

Down Payment

A down payment is a percentage of your home’s purchase price that you pay up front when you close your home loan.

Why it matters

The down payment affects how much you have to borrow; the more cash you have, the bigger the loan. 

It also lets you know how much cash you need to save and if you need private mortgage insurance.

Down payments also influence your interest rate. Your lender will often offer you a lower rate if you can make a higher down payment.

Under Contract

These are two good words to hear when buying a home. It means that you and the seller have agreed on the sale, though it is not final. There are still stipulations to meet before officially closing. 

Why it matters

At this point, you are very likely to close on your home. You have completed nearly all the necessary steps, but some requirements have yet to be fulfilled, such as a home inspection. 

Closing costs

Closing costs refer to the fees homebuyers must pay, such as home inspection, realtor, and lender fees, when closing a house. The good news is with Speak Straight Mortgage, there are $0 in lender fees in 95 percent of our loan programs. 

Why it matters

Buying a home is more expensive than you might initially have thought. Expect your closing costs to be 2 to 5 percent of the purchase price of your home. That may sound like a lot, but many costs are involved in closing a deal. 

Escrow

A portion of a mortgage payment goes into an escrow account, a neutral third party that saves and pays your property taxes and insurance. 

Why it matters

Money from each monthly mortgage payment goes into an escrow account. This means your mortgage payment is a little more each month. The good news is when it comes time to pay your property taxes each year, you don’t have to worry about it. Your money is in the escrow account and will be paid for you. 

Be confident in your home loan journey. Find out how much home you can afford now. Get an instant quote.  

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