Today, I want to share a list of the top 10 terms that all first-time homebuyers should understand.
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If you are buying a home for the first time, there are 10 important terms that you need to know:
1. Fixed-rate mortgage: This is a mortgage with a fixed-rate term. If you have an interest rate of 4.5%, you typically have a five-, 10-, 15-, or 30-year time period on your mortgage, and your interest rate won’t change unless you refinance.
2. Adjustable rate mortgage: This is the opposite of a fixed-rate mortgage. With the adjustable-rate mortgage, you’ll have a shorter term for your loan, maybe five to 10 years. Once that term concludes, your interest rate will adjust according to other interest rates charged by the bank. This can get confusing, so I always recommend that you talk to a lender if you want more clarification.
3. Pre-approval: This is different from a pre-qualification. When you’re pre-approved, that means you’ve talked to a lender and given them all of your paperwork, including tax documents, bank statements, your W-2, and other documents the lender may require so they can verify whether or not you are qualified to buy. If you make $10 an hour, you’re probably not qualified to buy a $1 million home. If you earn $1,000 an hour, then you probably are.
4. Conventional loans: These loans typically carry a 15- or 30-year time period. You generally need a 650 FICO score to qualify for a conventional loan and a 20% down payment. The average down payment for a first-time buyer is only about 5%, so if you don’t have 20% down or a high credit score, there are a lot of other loan programs out there.
5. FHA loan: This is a great loan for anyone who has gone through some credit dings. FHA stands for Federal Housing Administration, and with this loan, you can put down a minimum of 3.5%. You will have to carry mortgage insurance, but you can take that off later down the road.
Closing costs are usually 2% to 5% of the purchase price.
6. Appraisal: An appraisal is when a third-party company, working on behalf of the bank, analyzes your property and compares it to comparable properties within a certain radius. The home’s condition, style of the property, and lot size are just a few of the factors taken into consideration. If you offer $500,000 for the home and the appraisal comes in at $475,000, either the purchase price has to come down or you have to bring another $25,000 in cash to make the deal work.
7. Mortgage insurance: This type of insurance exists to protect the bank. If you don’t want mortgage insurance, you have to put at least 20% down. If you don’t put 20% down, you will get anywhere from 0.03% to 1.15% mortgage insurance tacked onto your rate. There are always ways around it and plenty of programs out there that don’t require mortgage insurance, so again, make sure you talk to your lender.
8. Closing costs: What you pay in closing costs depends on you and what third-party vendors you may have brought in for expenses such as escrow, title, lender fees, and inspections. Whatever it may be, you can expect closing costs to be between 2% to 5% of the purchase price.
9. Buying down the rate: If your credit score isn’t great or it’s not where you want it to be and you have a lot of cash on hand, then you have the opportunity to take a high interest rate and reduce it. You are literally paying to buy a better interest rate.
10. Escrow: This means that you are at the table and signing away. An escrow account is a locked account that holds the buyer’s deposit so the seller can’t pull it out and the buyer can’t spend it. It’s kept safe through non-conflicting instructions regarding the buyer and seller releasing that cash, and that’s usually when the deal ends.
I hope you found this top 10 list helpful. If you have any questions about buying a house or real estate in general, just give me a call or send me an email. I would be happy to help you!
