6 key home loan terms that will make the home buying process easier

6 Key Home Loan Terms That Will Make the Home-Buying Process Easier

As the home-buying season kicks into gear, now is a great time to think about accumulating a down payment to buy a new home. While many people browse for homes online and tour neighborhoods, it’s still important to learn key home loan terms so you can pave a smooth foundation for mortgage approval.

After all, even if you’re a repeat homebuyer, there are unique terms you’ll hear during the application and approval process. If you familiarize yourself with these terms before you begin to work with your mortgage loan officer, it will make you more comfortable and help facilitate an easier loan process.

Key home loan terms to learn that will make home-buying easier

Like any industry, there are plenty of terms to learn, but for new homebuyers, there are a few that form the basis of the mortgage underwriting process. Familiarize yourself with these home loan terms to get you one step closer to owning your home!

Rate lock: A rate lock for your loan protects you from an increase in interest rates from the time when your application is approved through the end of the rate-lock period, usually 30 days. (Fortunately, most borrowers tend to close their loan within 30 days of approval!) At the end of the rate-lock period, lenders can either extend it, or it will adjust to market. Without a rate lock in place, your loan will be subject to changes in interest rates. When you apply for a loan, the interest rate depends on a variety of factors, including your credit score and the type of loan you’re applying for.

Appraisal: This is the value of your new home as determined by a certified appraiser. The appraiser will provide a report that details your home’s value based on location, comparable home sales in the area and other factors. Lenders offer loans based on loan amounts that are within a specified percentage of the home’s appraised value.

Loan-to-value: The loan-to-value is the amount of the loan divided by its appraised value. Your loan amount is determined by your down payment percentage. Higher loan-value ratios require higher monthly payments. So, if you have the ability to put a higher down payment down on your home, it will smooth the loan qualification process.

Debt-to-income ratio: Your lender will review your monthly total debt payments to your gross income and will, in most instances, want this to be below 43%. For many lenders, this ratio is the best indicator of a borrower’s ability to manage their debt and make payments in a timely fashion.

Prepayment penalty: This is a clause built into some mortgages that will charge the borrower if they drastically pay down (or completely pay off) their loan before their term ends. Usually, this penalty applies only within the first three years of the loan. But don’t worry – if a prepayment penalty applies to your loan, your lender has to tell you about it. This is helpful so you won’t be caught off guard, and you can prepare accordingly.

Amortization: Amortization is the amount of principal you pay off with each monthly payment. An amortizing loan is one that reduces the principal you owe with each payment. With an amortizing loan, there is a zero balance if you make all your payments on time through the end of the loan. Most amortizing loans also allow for making extra principal payments at any time to reduce your loan balance and accelerate the time for paying off your loan.

By taking a moment to learn about these key home loan terms, you can make the process easier on yourself and set your sights on the path toward homeownership. First Centennial Mortgage is excited about the prospect of helping you find a new home. Please contact us to learn more about common home loan terms and discover how our expert team can help you finance the home of your dreams.

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