If you are thinking of buying your first home, during the process you will come across several terms that you may not be aware of. In this post, we will introduce you to some mortgage lingo that will help you sail through the process.
Before You Make an Offer
Appraisal Contingency: This is the period by which your lender needs to get the property appraised. If the property doesn’t appraise for the contract price, you have the option to renegotiate or cancel the contract.
Loan Contingency: Loan contingency is the period of time the seller is giving you to obtain full, formal loan approval. It is important to include a financing contingency in your offer, as it makes the transaction dependent on you receiving the mortgage you’ve applied for. It specifies your cancellation rights if you are unable to obtain financing.
Contract Period: The contract period is the time-frame in which all due diligence must be completed, including obtaining loan approval, property appraisal, home inspection reports, termite inspection, etc. Give yourself enough time for all due diligence to be completed for this very important purchase you are about to make. Typically, purchase contracts are drawn up for a period of 30, 45 or 60 days.
During Rate Shopping
Points: Points are expressed as a percentage of the loan amount. So 1 point equals 1% of the loan amount. It’s a fee that a lender may charge for lending money.
APR: Annual Percentage Rate is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate to prevent lenders from “hiding” fees and up-front costs behind low advertised rates.
Closing Costs: When getting a mortgage, there are several closing costs charged by the lender, escrow/title company, etc. Closing costs also include government fees like transfer tax and recording fees.
Prepaids: Prepaid items are amounts that are required by the lender to be paid at closing, in advance of their due date. These may include property taxes, accrued interest, association dues, mortgage insurance premiums and home insurance premiums. Prepaid items are added to the total amount of the loan’s closing costs and will have to be paid at closing.
During the Loan Process
Loan Application: A loan application, also called Form 1003, details all of your personal information, including employment, income, assets and debts. It also lists the loan program, interest rate and proposed payments. Completing a loan application is usually the first step of a loan process.
Conditional Loan Approval: The lender’s underwriter reviews your income, assets, credit, employment history and property conditions to issue a conditional loan approval. This approval lists all the conditions that need to be met before a final approval can be issued.
Final Loan Approval: When all conditions are reviewed and cleared by the underwriter, he/she issues a final loan approval. At this time, the closing department prepares the loan documents that you will sign in presence of a notary/attorney.
Loan Funding: The actual funds are transferred from the lender to the closing agent. The closing agent then disburses the funds to the seller and all of the agents.
There you have it. Mastering this lingo will help you approach the first-time homebuying process with more confidence. But, always be sure to consult an expert loan consultant to understand your financing options better.