15 Key Home Loan Terms for First Time Buyers
Knowledge is power and new house buyers alike should get up to speed on critical terms prior to shopping for a first time home mortgage online. Buying that first home is an amazing experience – you'll be making your dream a reality and become a true American homeowner. One of the biggest challenges is simply understanding the wide range of terms that are used in the process of buying a home. It's important to understand many of these commonly used terms as a first time homebuyer. Here are some of the main terms to become familiar with.
- Credit Score – This is the primary factor that dictates whether or not you can secure a loan and what the terms of that loan will be. In most cases, the minimum credit score for securing a first time house loan is around 620, and that is for a government backed loan. Private lenders will require much higher scores.
- Fixed Interest Rate – A fixed interest rate is one that is set in stone and that won't change over time. It's the best choice for those buying a home they plan to own and live in for years.
- Variable Interest Rate – A variable interest rate, or Adjustable Rate Mortgage (ARM) is one that has an initial interest rate but that can change annually. It's a better choice for those planning on selling their home within a few years since it initially offers low rates.
- Pre-Qualified – This means that you've submitted information and that you're approved for a loan. It's something those who are ready to buy a home will need to do. Getting a Pre-qualification letter is an important component in making an offer to the seller. Most real estate agents and sellers consider offers more seriously when the prospect is pre-qualified for a loan as a first time home buyer especially if it is with a credible lender.
- Pre-Approved – In some cases this could be a simple marketing offer. It can give you an idea of what kind of home price range you can look for, but it's not a guarantee of receiving a loan.
- Closing Costs – This includes a variety of additional costs including things like lawyer fees, inspector fees, and more. They're generally about 2 to 4 percent of the total price of a home.
- Mortgage Insurance – This is insurance that is required if you make a down payment of less than 20% of the total price of the home, and is usually only a temporary fee you'll have to pay. FHA charges mortgage insurance and lenders that offer first time loan with low down-payments less than 20%.
- Good Faith Estimate – This is just what it sounds like: An estimate as to the total value of a home, made by an appraiser prior to securing your home loan.
- Down Payment – The total amount you initially pay down on the total price of the home. To get a loan, this figure is usually required to be anywhere from 3 to 10 percent of the total price of the home. FHA, Fannie Mae and Freddie Mac all offer loan programs for first time house buyers ranging from 3.5 to 5%.
- Debt to Income Ratio – This is the difference between how much money you earn and how much debt you have. The better your ratio, the better your odds of securing a loan will be.
- Mortgage Length – Most loans are available for 15 or 30 years. Longer mortgages offer lower monthly payments, but you'll pay more in total for the home.
- Annual Percentage Rate – This is nothing more than the interest rate you pay each year. Rates could be fixed or may be adjustable per year.
- Prepayment Penalty – Some loans charge a penalty for your paying them off in full before the loan's duration. Others don't. It's important to pay attention to this sum if you're planning on prepaying. Please note that here is no pre-payment penalty allowed on federal programs like VA or FHA.
- FHA Mortgage – FHA loans are backed by the government and are designed to help make it easier for first time home buyers to purchase their dream home.
- Escrow – Escrow is a kind of fund that is neutral, and is where things like deposits on a home you want to buy are placed, or where property taxes and insurance fees are placed until they're paid.
This article was written by June Bloom