Buying a home can be a strenuous and confusing task, especially if you are new to the home buying processes. But, if you have a knowledgable real estate agent, as well as the patience and willingness to learn, buying a home will be a lot easier than you think. One of the most important, lengthly, and sometimes confusing processes when buying a home is dealing with your mortgage.
We’ve compiled a list of 10 terms to know about the mortgage process to get you started on your journey to homeownership!
Getting prequalified is the first step in the mortgage process, and no worries here, it’s usually quite simple. Once you’ve selected a lender, you give them your overall financial picture. The lender then evaluates your information and gives you an idea of the mortgage amount that you will qualify for. But here’s where things can get a bit tricky. Pre-qualification is not a done deal. In fact, you may not qualify for the loan for which you are pre-approved.
Preapproval is the second step in the mortgage process. During the pre-approval process, you will complete a mortgage application and provide detailed information to the lender. The lender will approve you for a specific amount and you will get a better idea of your interest rate.
If you get prequalified and pre-approved before you pick out a home, you can move quicker on purchasing your dream home. You’ll also have an advantage with a seller because the seller will know you’re one step closer to getting a mortgage.
3. Conventional Loan
A conventional loan is a loan that is not backed by the government. This means that the government does not make any guarantee that you will pay the mortgage, and therefore, will carry a private mortgage insurance if you put less than 20% down. Conventional loans adhere to guidelines set by Fannie Mae and Freddie Mac and are available to everyone, but are more difficult to qualify for than VA or FHA loans.
4. FHA Loan
A FHA loan is a loan insured by the Federal Housing Administration, meaning that if you default, the FHA will repay the note to the bank. Because the loan is insured, the lender usually offers a low down payment requirement and low closing costs. Anyone can apply for an FHA loan and an FHA loan is easier to qualify for than a conventional loan. Instead of PMI (see number 6) on your FHA loan, you will have MIP (see number 7), which stays with the life of the loan. That means that unlike a conventional loan where you can remove the PMI, on an FHA loan, you cannot remove the insurance without refinancing the entire loan…which you have to qualify for as well.
5. VA Loan
A VA loan is guaranteed by the Veterans Administration and is available only to certain borrowers through VA-approved lenders. Typically, you need to be in the military or a veteran to qualify. VA loans do not carry PMI and there is no money down required.
6. PMI – Private Mortgage Insurance
PMI stands for private mortgage insurance. As part of qualifying for a conventional loan, you will have to get PMI if you put down less than 20%. Once your equity in your home reaches 20%, you can get the PMI removed, in turn lowering your monthly mortgage payment.
7. MIP – Mortgage Insurance Premium
MIP stands for mortgage insurance premium and is the private insurance on a FHA loan. Unlike a PMI which can be removed, MIP insurance stays on the loan for the life of the loan, regardless of the equity in the loan. There is no way to avoid MIP on an FHA loan.
8. Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) offers homebuyers a low interest rate on their loan for an initial period, after which time, the interest rate increases or fluctuates for the remainder of the loan.
9. Fixed Rate Mortgage
A fixed rate mortgage means that the interest rate on the mortgage is fixed at a specific rate for the entire life of the loan. For example, if you have a 15 year fixed mortgage at 5%, this means that your interest rate will be 5% for the full 15 years, regardless of the market.
10. Amortization Schedule
An amortization schedule is a complete table showing your payments, principal, and interest over the course of the loan.