The Top Real Estate and Mortgage Terms to Know When Buying a Home

Searching for a Home

If you're in the early stages of home buying, understanding these terms can help you get your finances in order:

• Credit Score: Your credit score reflects, among other factors, your payment history, your credit utilization, and the length of your credit history. It's important to know your credit score and, if possible, try to improve your score before applying for a mortgage. A higher credit score could help you get a better interest rate.
• Debt-to-Income (DTI) Ratio: The amount of your monthly gross income used toward paying debts. To find your ratio, divide your monthly debt payments by your pretax monthly income. Lenders look at your DTI ratio as it shows you can afford to pay the loan and your other living expenses. As with your credit score, try to improve your DTI ratio before applying for a mortgage.
• Down Payment: This is the amount of cash you put toward the purchase of your home. If you want to avoid private mortgage insurance (PMI), you usually need to pay at least 20 percent of the home's purchase price as a down payment. But, there are government-backed loan programs like Veterans Affairs (VA) Loans and other options, such as the Key Community mortgage, that offer zero down payment options with no PMI.
• Prequalification: This is the process by which a loan officer checks your credit, takes into account your stated income and assets, and estimates how much money they may be able to lend you. There's no guarantee that it's the amount you'll ultimately receive, but it will give you an idea of how much you may be eligible to borrow.
• Preapproval: The lender checks your credit, verifies documentation about your income and assets, and guarantees, in writing, to give you a loan up to a certain amount, pending your completion of certain steps and paperwork necessary to buy a home.

Making an Offer

After determining what you can afford and finding the home that checks all the right boxes, it's time to make an offer. Review this list of terms so you can feel as prepared as possible:

• Escrow Deposit: Also called earnest money, an escrow deposit shows the seller you're serious about buying the home. This is usually due when you sign the sales contract, but you may include it as part of your offer. This is held in an escrow account by a third-party until closing, at which point the money (which may have earned interest, so you may need to pay taxes on it*) goes toward your closing costs and down payment.
• Home Inspection: Though not required, a home inspection gives you a professional evaluation of the property's condition. A professional should inspect the home's foundation, roof, plumbing, heating and air conditioning systems, and more. Any items that need repair or replacement can play a factor while you negotiate the final selling price.
• Loan-to-Value (LTV) Ratio: The LTV ratio shows the amount of your home loan as a percentage of the total value of your property. Find this ratio by dividing your mortgage amount by the appraised property value. For example, if you want to buy a $200,000 house and you need a $160,000 loan, your LTV is 80%. Typically, higher LTV ratios carry more risk for the lender. If your ratio is 80 percent or higher, you may end up having a higher interest rate and/or having to pay PMI.
• Offer/Sales Contract: Once the seller accepts your offer, the offer becomes a sales contract, a legal agreement that lays out the purchase price and terms. This document may include agreed-to conditions that need to be met before the sale is finalized — for example, "The seller must replace the roof."
• Private Mortgage Insurance: You might need to pay this additional monthly payment on top of your mortgage, especially if you make a down payment lower than 20 percent of the home's purchase price. This money is meant to protect your lender in case you can't pay back your loan.

Applying for Your Loan

If you're like most homebuyers, you're not paying cash for a home. These terms can help you make sense of the mortgage application process:

• Annual Percentage Rate (APR): This includes the interest rate, but also factors in other charges you may have to pay to get your loan, such as application and processing fees.
• Interest Rate: This is the cost you pay to take out a mortgage for a house. Interest rates may be variable, meaning they can change over the course of the loan, or fixed, meaning they stay the same for the duration of your loan. When comparing mortgages, pay close attention to whether interest is fixed or variable.
• Loan Estimate: A Loan Estimate shows you how much the loan will cost you, including your estimated monthly payment amount and closing costs. You receive this estimate after you apply for a mortgage.
• Principal: The principal is the total amount of money you borrow, excluding interest.
• Home Appraisal: The appraisal is an unbiased estimate of the property's value conducted by a licensed or certified appraiser. If the appraisal value is lower than your agreed-upon price, you might be able to negotiate a lower price. The home's appraisal value often differs from its assessed value, which is used to calculate property taxes.

Closing

Once the seller accepts your offer and you have your mortgage financing and down payment ready, it's time to close on the house. But first, brush up on these basic closing terms:

• Closing: The final step in the process; this is the day you actually sign all of your final loan documents. This date is set during negotiation and is usually several weeks after your offer is accepted. Where closing takes place and who is in attendance varies based on state and local regulations.
• Closing Disclosure: Your lender should give you this document, which gives an overview of the terms of your loan, at least three business days before you're set to close on it. Compare the document to your Loan Estimate and use your three days to make sure everything looks correct.
• Closing Costs: These are additional costs, such as appraisal and credit report fees, that you're responsible for covering as the home buyer. Refer to your Closing Disclosure to know how much you will need to bring to closing. You can also explore ways to reduce closing costs.
• Deed: This is the document that proves you legally own your home. You and the seller will sign it to transfer ownership rights, or "title," to you.
• Escrow Account: This is an account, sometimes required by law and often required by your lender, that allows your mortgage provider to ensure bills, such as property taxes and homeowners insurance, get paid on time. The money in the account comes from closing costs and is maintained through a portion of your total monthly mortgage payment. The Consumer Financial Protection Bureau recommends requesting an escrow account even if your lender doesn't require it. That way, you can make several small payments versus one large payment to cover major expenses.
• Origination Fee: Also called an application fee or processing fee. This fee from your lender covers the cost of processing your mortgage application and underwriting the loan. It is sometimes collected when you apply for your loan.
• Title Insurance: One of your closing costs, title insurance protects the lender and the buyer against claims to the property, such as unpaid taxes from previous owners or contested wills. You'll need to purchase title insurance for your lender, to protect the amount they're lending you. Owner's title insurance is optional.

While it can sometimes seem like there are many real estate terms to know, remember that you can always stop and ask your real estate agent or Mortgage Loan Officer to clarify anything you're unsure about. And if you know you're going to buy, try to meet with a lender sooner rather than later to familiarize yourself with your mortgage options and to learn what type of mortgage, interest rate, and loan amount you might qualify for.