Do’s and Don’ts When Getting a Mortgage
Things To Do
- Do continue making your rent payments.
- Do keep working at your current employer.
- Do continue using credit as usual.
- Do keep the same insurance company.
- Do invest in a professional inspection.
- Do get Pre-Approved for your purchase
Things NOT To Do
- Don’t make any major purchases.
- Don’t apply for new credit.
- Don’t change bank accounts.
- Don’t give everyone your Social Security Number.
- Don’t consolidate debt or credit cards.
- Don’t shop for, lease, or purchase a vehicle.
Path to Homeownership
Glossary of Real Estate Terms
80/20. An old way of getting 100% financing that’s generally not available any more. Instead of making one loan at 100%, lenders would make one at 80% and another at 20%. Doing so avoided PMI, which was good for borrowers, but left banks unprotected when borrowers defaulted, which is why 80/20 loans are generally not available any more.
Agent. See “Real Estate Agent”.
Amortization. Paying a debt through periodic payments, rather than all at once.
Appraisal. A professional estimate of value prepared by an appraiser. The bank requires this because if you fail to make your payments and they have to foreclose on your home and sell it, they want to make sure the home is worth more than the amount they’re loaning to you.
Assumption. Buying a home by paying some cash and then taking over the seller’s existing mortgage yourself, continuing to make the monthly payments to the bank. Saves you from having to qualify for your own loan, but fairly rare.
Borrower/Buyer. These terms are generally used interchangeably, though technically there’s a difference. The buyer of course is the person buying a property, and the borrower is a person who gets a loan to buy a property. We use “buyer” when we’re talking about the purchase, and “borrower” when we’re talking about the loan. Note that not every buyer is a borrower, since some buyers pay cash.
Closing. The actual purchase transaction. You go to the office of the company handling the transaction (often a title company) and sign all the papers.
Closing Costs. Various fees you pay related to the purchase, often around 2-5% of the purchase price.
Contract. The document in which the seller agrees to sell the home to you and you agree to buy it. You often have a number of “outs” which let you back out of the contract.
Conventional. Fancy word for “normal”. A conventional loan is a normal loan. No wonder real estate is confusing, huh? The other kinds of loans are FHA and VA.
Debt Ratio. The ratio of your debt to your income. Banks use this to figure out how much money they’re willing to loan you, which of course impacts what price home you’re able to buy.
Deed. A document that transfers ownership of property from one person to another. You’ll get a copy of this at closing.
Disclosure (Seller’s Disclosure). Prior to closing, the seller is required to give you a form detailing all the physical problems with the home that they’re aware of.
Down Payment. The portion of the sale price that you pay in cash. The rest is paid with the mortgage.
Earnest Money. A deposit you pay when you sign a contract with the seller to show that you’re serious about buying and not just window-shopping. This amount is deducted from the sale price at closing.
Equity. The amount of value you own in a property, after subtracting the outstanding loan. For example, if your home is worth $200,000, and there is $150,000 left on your mortgage, your equity is $50,000.
Escrow. A free service offered by the lender to make it easy for you to pay your property taxes and insurance. Taxes and insurance are generally due once a year, but your lender will build a little extra into your monthly payment for taxes and insurance, saving it on your behalf, and then forwarding the payments to the tax assessor and insurance agent once a year as your bills become due. While escrow is convenient and free and most borrowers use it, you don’t have to; you can opt-out of escrow and pay your taxes and insurance manually yourself if you prefer.
FHA Loan. A program in which the federal government insures the lender if you fail to pay and they have to foreclose and wind up losing money. The government doesn’t make the loan, they just offer the guarantee to the banks. So “FHA Loan” doesn’t refer to where the loan comes from, it refers to the flavor of loan. Homes have to be in good shape to qualify for FHA Loans (not “fixer-uppers”). The other kinds of loans are Conventional and VA.
FICO score. Your credit score.
Foreclosure. The lender’s taking ownership of a property because the buyer failed to make payments.
GFE / Good Faith Estimate. An estimate of closing costs that the lender is required to give you. Make sure you get it.
HUD. The HUD is actually the Department of Housing and Urban Development, which oversees mortgage lending practices. But when you hear the term “HUD” from your real estate agent, they’re probably talking about the Settlement Statement, which is also called a HUD Statement since it’s required by that agency.
Financing. A mortgage loan to buy a home.
Interest. The extra amount you pay to the bank for the privilege of borrowing money. This is the bank’s profit on the loan.
Lender. The bank that makes the loan for you to buy a home.
Mortgage. The loan from a bank used to buy a home.
Mortgage Broker. A company which shops various lenders to get you a good deal on a mortgage. They charge a fee for doing so, but it’s often well worth the cost.
Option Fee. A small, optional fee you can pay to the seller when you sign the contract which gives you the right to back out of the contract for any reason within a certain period of time.
Origination Fee. A one-time fee charged by the lender for making the loan to you. Yes, this is in addition to all the interest they’re going to charge you. Some banks don’t charge an origination fee, and others will drop the fee if you negotiate well.
Owner/Seller. The person selling a property. These terms are used interchangeably, and there is no difference.
PMI / Private Mortgage Insurance. If your down payment is less than 20%, you’ll have to buy Private Mortgage Insurance which protects the bank if you fail to make your payments, they have to foreclose, and they lose money.
Points (Discount Points). Points are a fee charged by a lender in exchange for giving you a lower interest rate.
Premium. The amount you pay for an insurance policy.
Prepayment. A portion of the loan principal paid early, to save on interest and end the loan faster. Most loans let you pay a little extra at any time without any penalty, but there’s often a small penalty if you want to pay off the entire balance early and don’t give your bank enough notice.
Principal. The outstanding balance on a loan. Also refers to the portion of a loan payment that pays down your debt (as opposed to interest, which is the bank’s profit). For example, of an $900 mortgage payment, $200 might be for principal (reducing the outstanding balance of the loan), and $700 might be interest.
Property. In a real estate context, property is the land and any homes on it. On this site we talk about buying a “home”, but you’re not just buying a home, you’re buying property, because you’re also buying the land that goes with it — which in many cases, is actually worth more than the home itself.
Property taxes. Taxes paid annually to state and local governments on property you own. Most borrowers use the bank’s free escrow service to pay these taxes. (See Escrow.)
Qualifying. Getting the bank to think you’re worthy of loaning money to. You fill out an application, and if you’re approved, then you’ve qualified.
Real Estate Agent. The person who represents a buyer or seller in a real estate sale. Not all real estate agents are Realtors. (See Realtors, below.)
Realtor. A real estate agent who’s a member of a special trade organization (The National Association of Realtors).
Seller Take Back. Partial financing provided by the seller. For example, on a $150,000 home, you might put $15,000 down, get a bank loan for $115,000, and get a seller take back for $20,000.
Settlement Statement (aka “HUD”). The standard document with the details of the sales transaction, and the closing costs.
Term. The number of years a mortgage lasts. Usually 15 or 30.
Title Company. A company that handles a real estate transaction, and which verifies and insures title (ownership) of property.
VA Loan. Similar to FHA Loans, the federal government insures the lender if you fail to pay and they have to foreclose and wind up losing money. The government doesn’t make the loan, they just offer the guarantee to the banks. “VA Loan” thus refers to the flavor of the loan, not where the loan comes from. It’s possible to get a 0% down loan through the VA program. The other two kinds of loans are Conventional and FHA.