Is owning a home your American dream? If your answer is yes, then you will most likely need a mortgage. Unfortunately, many first-time homebuyers enter the market without knowing the most frequently used mortgage terms, so we will explain the basics. An understanding of the basic terms will help you prepare for this exciting journey.
What is a mortgage?
A mortgage is a type of secured loan used to purchase or refinance a home. A financial institution or a mortgage lender lends you money to buy a home. Most homes in the US are purchased by taking out a mortgage. You’ll then pay the company back with interest over a specified period.
How do I qualify for a mortgage?
To qualify for a mortgage, you must meet some eligibility requirements. First, you’re more likely to be approved for a mortgage if you have a stable and reliable income, a debt-to-income ratio of no more than 43%, and a credit score of at least 620 for a conventional loan and 580 for an FHA loan. Mortgages require collateral, and in the case of a mortgage, the collateral is the home itself. The lender will get an appraisal on the property. Whenever a mortgage is required to purchase a home, an appraisal must establish the validity of the asking price. The lender can repossess your home using a foreclosure process if you don’t pay your mortgage back on time and following the established terms.
What are the different types of mortgages?
Conventional loans – The lender assumes the risk for lending a borrower the money. A conventional loan requires higher down payments and more strict credit requirements but generally offers lower interest rates.
Government sponsored loans – The government will assume the risk of lending someone money. Government loans have lower credit and down payment requirements to make it easier for someone to get a home loan.
FHA – An FHA loan is a government-sponsored loan used to purchase a home with as little as 3.5% of the sales price as a down payment.
VA – A VA loan is a government-sponsored loan that provides 100% financing to eligible veterans, National Guard members, active-duty members, reservists, and surviving spouses.
USDA – A USDA loan is a government-sponsored loan requiring no money down for eligible homes in rural and suburban areas.
Fixed-rate – The most common loan type is a fixed-rate mortgage. A fixed-rate loan is a better choice for someone who wants stable payments and plans to live in their home for the long term. A fixed-rate mortgage has an established interest rate over a set term of usually 15, 20, or 30 years. Some lenders offer customized loans terms that can be agreed upon by the borrower and lender. In the case of a fixed-rate mortgage, the main advantage is that the borrower can feel confident that the monthly payment will stay the same over the life of the loan. The 30-year mortgage term is the most popular because the longer-term generally makes the payment lower. The trade-off is that you will pay more interest in the long run.
Adjustable-rate (ARM) – ARMs are a good option if someone only plans to live in a home for a few years. The interest rate with an adjustable-rate mortgage fluctuates over time, which directly affects the borrower’s monthly payment. ARMs generally have a lower introductory interest rate, which will adjust to a higher rate after the initial period has ended.
Terms you need to know
Purchase – A loan is used for purchase when ownership of the home goes from one person to another.
Refinance – A refinance describes the process of getting a new loan on a home you already own. Most people refinance to get better interest rates or take advantage of equity built up since the original purchase.
Credit score – A credit score is a number between 300 and 850 that shows a borrower’s creditworthiness. The higher the credit score, the higher the chances of getting approved for a loan with a lower interest rate.
Debt to income ratio – The debt to income ratio is the total monthly debt payments divided by the gross monthly income. This number helps lenders assess a borrower’s ability to manage monthly payments and the likelihood of the loan repayment.
Interest rate – The interest rate is a percentage of the total amount you wish to borrow. It is the percentage of the total loan amount charged by lenders.
Loan terms – refer to the period when you must repay a loan or the loan’s particular features, such as required repayments, interest rates, penalty fees, and more.
If owning your own home is your dream, you should start doing your research in advance. You should contact a loan officer and a realtor. These professionals will help you create a strategy to get the home you want and can afford. If you understand mortgage terminology and know what you can afford you will have an advantage.
