Every industry has their own language. There terms they throw around like everyone knows what they're talking about but no one outside the industry really does. In most cases that's okay. I don't need to know what megabits and RAM are as long as my computer works. But in Real Estate, it's your money and your home we're talking about, so a little education can go a long way.
There are a LOT of Real Estate terms, so I'll break them down by category. Here are a few mortgage terms to keep you going.
Pre-qualification v. Pre-approval
We discussed this one in my last Dictionary post but it's important, both to starting the house hunting process and to the financial end of things, so it's worth repeating.
Pre-qualifying is the first step and gives you an idea of how much of a loan you may qualify for. Pre-qualification is vital because you don't want to look at (and fall in love with!) a home you can't afford.
Pre-approval is the second step, and is a conditional commitment to actually grant you the mortgage. In the current seller's market, many sellers aren't even looking at offers from buyers who aren't pre-approved. In this market, if you can't write an offer the same day it's not worth looking at the house.
FHA - Federal Housing Administration
Many people think the "FH" stands for Firstime Homebuyers, and therefore if you've purchased a home before you won't qualify for an FHA loan, but in reality, FHA is a government administration that sets standards for construction and underwriting, and insures loans made by banks and other private lenders for home building. Both first time buyers and current homeowners can qualify, but because current homeowners are more likely to have a significant down payment (from selling their current home), they're less likely to use an FHA loan.
FHA provides government backed loans with lower down payments and lesser credit requirements than conventional loans, but with stricter guidelines.
Minimum credit score 580
Down payment of at least 3.5%
Credit score as low as 500 might qualify with 10% down payment
Generally lower interest rates but higher closing costs than conventional loans
Mortgage Insurance Premium (MIP) is required to protect the lender in case borrowers default on the loan
Home must be the borrower's primary residence (can't be used for an investment or vacation property)
Borrower must have proof of steady income through employment
Stricter requirements for a house to appraise. Most requirements focus on safety, and buyers can negotiate with sellers to have these issues resolved prior to closing.
USDA Loan
USDA Loans are government backed loans specifically for select rural and suburban areas. USDA mortgages are the only mainstream zero-down program for buyers who didn't serve in the military.
Minimum credit score 640
Zero down payment
Home must be in an eligible rural area
Borrower must conform to monthly income caps
Borrower must have proof of monthly income through employment
Can make down payment to be able to get better interest rates
Requires mortgage insurance (MI) to protect lender in case borrowers default
Requires borrow to take a fixed rate mortgage
Home must be the borrower's primary residence (can't be used for an investment or vacation property)
Conventional Loan
Conventional loans are the most popular, both for purchasing and refinancing homes. Lenders are allowed a lot more flexibility in setting their own requiements, as long as they fall within the conforming loan limits set by Fannie Mae and Freddie Mack.
Minimum credit score 620
Debt to income ratio lower than 43%
Down payment of at least 3%
Credit score of 740 or more and down payment of 20% or more will get best rates and payments
Down payments of 5% or less will require private mortgage insurance (PMI)
Ultimately, the right loan for you is dependent on a lot of different factors, so it's best to shop around and make sure you're getting the best loan you can qualify for. Any Realtor worth your time will have a list of lenders she has a good working relationship with. Don't hesitate to ask for a lender referral, more definitions or any questions you have.
No matter what kind of loan you are hoping for, there's more to qualifying than a credit score and down payment. Credit history, late payments and prior foreclosures can make a bigger impact on your loan approval than your actual income. I'll go deeper into that in the next edition.
Buying and selling your home can be stressful but knowing a few terms can help make the process feel so much less intimidating. If ever you need to know more, I'll be doing more posts like this to share more terminology. Or better yet, ask your friendly neighborhood Realtor (that's me)!
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