Homebuyer’s dictionary: Must-know terms for every stage of buying a home
Don’t know your LTV from your DTI? Here are key terms you’re likely to hear at each stage of the homebuying journey—defined.
Stage 1: Prepare your finances—before leaving the gate
Annual income—Money you receive over the course of a year, whether it’s from wages or salary, alimony or child support, rental payments, commissions, investments or other sources.
Conforming loan—A mortgage loan that meets guidelines established by Fannie Mae and Freddie Mac and falls below a loan amount specified by the Federal Housing Finance Agency. In 2017, that amount was $424,100 for a single-family home in most of the U.S.
Debt-to-income ratio (DTI)—One way to measure your ability to repay debt, DTI is the comparison of your monthly debt payments to your monthly income before taxes, expressed as a percentage. Many mortgage lenders prefer this figure, including a mortgage payment, to be no higher than 36 percent.
Down payment—The amount of cash you can put toward the purchase price of a home. Down payments often range from 3 to 20 percent of the home price.
Loan-to-value ratio (LTV)—The total amount of your mortgage compared to the home’s appraised value, expressed as a percentage. If your down payment is less than 20 percent of the purchase price, your LTV is above 80 percent, so you generally pay a higher interest rate on your mortgage and may need to pay private mortgage insurance (PMI).
Stage 2: Land on a loan that’s right for you—and prequalify
Loan estimate—A disclosure to help consumers understand the key loan terms and estimated costs of a mortgage. After a consumer submits six key elements—name, income, Social Security number, property address, estimated property value and desired loan amount—the lender is required to provide this form. All lenders are required to use the same standard loan estimate form to make it easier for consumers to compare and shop for a mortgage. Learn more about loan estimates from the Consumer Financial Protection Bureau.
Preapproval—A lender’s conditional agreement to lend you a specific amount of money, made after confirming your financial information such as income and assets. Conditions may include a home appraisal and no significant changes to your finances.
Prequalification—When a lender estimates in advance how much you can borrow to buy a home, based on financial and other information (such as employment history) that you provide. It is not a commitment to lend, and you will need to submit additional information for review and approval.
PITI—An acronym for principal, interest, taxes and insurance. Sometimes called your monthly housing expense, it includes your mortgage payment and a monthly portion of your real estate taxes and homeowners insurance.
PMI—An acronym for private mortgage insurance, which protects the lender against losses if you cannot repay your loan. Your lender may require it if your down payment is less than 20 percent.
The Affordable Loan Solution® mortgage from Bank of America offers eligible modest-income borrowers a down payment as low as 3 percent with no private mortgage insurance required.
Stage 3: Zoom in on a property and get your offer accepted
Comps—Short for “comparables.” These are recently sold properties similar to the home you want, with approximately the same size, location and amenities. They help an appraiser determine a property’s fair market value.
Contingencies—Conditions in a sales contract that must be satisfied before the home sale can occur. Some common contingencies: The appraised value must support the sales price, the house must pass inspection, and the borrower must be approved for a loan. Others might require a check for termites or the sale of the buyer’s current home.
Inspection—A visual and mechanical examination of a home to identify defects and assess the home’s condition.
Stage 4: Hold on through the mortgage process
Appraisal—An informed estimate of a home’s value, generally done by an independent, professional licensed appraiser and typically required and ordered by the lender in conjunction with the mortgage application.
Closing costs—Also known as settlement costs, these are the costs incurred when getting a mortgage. They might include attorney fees, preparation and title search fees, discount points, appraisal fees, title insurance and credit report charges. They are typically 2 to 5 percent of your loan amount and are often paid at closing or just before. You can estimate closing costs in advance using Bank of America’s calculator.
Escrow—Funds deposited with a third party and held until a specific date is reached and/or a specific condition is met. For example, when you make an offer on a home, your earnest money deposit may be held in an escrow account until closing. Some lenders may require borrowers to establish an escrow account at closing comprised of future tax and insurance payments. The loan servicer then makes your property tax and insurance payments on your behalf.
Mortgage points (or discount points)—An amount paid to the lender, typically at closing, to lower (or buy down) the interest rate if the buyer chooses to do so. One discount point equals one percentage point of the loan amount. For example, 2 points on a $100,000 mortgage cost $2,000.
Origination fee—A fee from the lender that covers expenses of processing a mortgage loan. It is usually a percentage of the amount loaned—often 1 percent. It can be expressed in the form of points or a flat fee.
Title insurance—Insurance that protects against issues, such as a tax lien or other legal claim, that would affect ownership of the property.
Underwriting—The lender reviews submitted documents to verify the borrower’s finances and other factors related to the home, such as the title search and appraisal, then decides to approve or deny the loan.
Stage 5: Coast into your closing
Closing—The last step of homebuying, also called the settlement. You sign all the necessary documents to finalize the sale and take responsibility for the mortgage loan.
Closing disclosure—A document that provides key information about your loan, such as the interest rate, monthly payments and closing costs. The lender must give you this document at least three business days before you close on the loan, and the information should match the loan estimate you received when you applied. You can find out more about what’s on a closing disclosure from the Consumer Financial Protection Bureau.
Deed—A document that legally transfers ownership of real estate.
Learn more about each stage of the homebuying process in a home of your own.