As someone who has been in the real estate industry for over 30 years, I admit, the acronyms and terminology can be a bit much. When a new home buyer starts looking for a property to purchase, there are so many new words and phrases thrown their way that it can easily become overwhelming.
At Tru Realty, our real estate agents are your trusted partners throughout the entire buying or selling process. We don’t talk over your head to prove that we’re the experts. We’d rather show you our value through our actions, which include being a resource to our clients in more ways than one!
Understanding Mortgage Loan Terminology
I know, not the most exciting part of the process but we’ve chosen a few of the most commonly used and often misunderstood mortgage loan terms to highlight. Our goal is to help boost your confidence as you enter the mortgage process and ultimately help you land your next home!
Debt-To-Income (DTI) Ratio
Your DTI is equal to your total fixed, recurring monthly debts divided by your total monthly gross household income.
Mortgage lenders look at your DTI when they consider you for a loan to make sure that you have enough money coming in to make your payments. You may have trouble obtaining a loan if your DTI is too high. Most lenders cater to applicants who have a DTI of 50% or lower.
Earnest Money Deposit
An earnest money deposit is a check that you write to be held in escrow when you make an offer on a home.
Most earnest money deposits are equal to 1–3% of the purchase price. An earnest money deposit tells the seller that you’re serious about buying their home. Upon close of escrow, your earnest money deposit goes as a credit toward your down payment at closing.
A down payment is often listed as a percentage of your loan value. For example, if you have a 20% down payment on a $500,000 loan, you’ll bring $100,000 to closing.
Most loan types require some kind of down payment. Though many people believe that you need a 20% down payment to buy a home, this actually isn’t true. You can buy a home with a much lower down payment. Some types of government-backed loans, like a VA loan, may even allow you to buy a home with no down payment at all.
A Closing Disclosure is a document that tells you the terms of your loan.
This document includes your interest rate, loan principal, and the closing costs you must pay. Your lender is legally required to give you at least 3 days to review your Closing Disclosure before you sign on your loan.
Settlement costs and fees you pay to your lender in exchange for finalizing your loan.
Some common closing costs include appraisal fees, loan origination fees, and pest inspection fees. The specific costs you’ll need to cover depend on your location and property type. Closing costs usually equal around 3-6% (including rate buy down) of the total value of your loan.
Mortgage Insurance (PMI)(MIP)
Mortgage insurance is a type of insurance that protects your lender in the event that you default on your loan.
Your lender will usually require you to pay mortgage insurance if you have less than a 20% down payment. You may have the option to remove PMI from your loan when you reach 20% equity in your property. Mortgage insurance premiums or MIP is used by FHA-backed lenders. Read more about MIP here.
The Importance of a Great Relationship With Your Lender and Realtor
Don’t be afraid to lean on your agent to inquire about anything within the buying and mortgage process that you find unclear. It’s your agent’s job to make you feel comfortable to do so.
If you don’t have that level of comfort with your vendors, let’s match you with an agent. We’d love to help support you on your journey to becoming a homeowner!
Barry Nicholas is the Designated Broker at Tru Realty. He currently has active broker’s licenses in Arizona, Kansas, Missouri, and Oklahoma and is a graduate of the Realtor Institute. He also holds the Certified Residential Specialist Designation. Barry provides his clients with the expertise and acumen that addresses the ever-changing trends in home sales, property marketing, and real estate technology. As your Broker, he views customer service as his utmost priority.