If you want to start dabbling in financial investments, it may feel overwhelming as you come across various investment terms and phrases. The good news is that you don’t have to know everything about investing to simply get started. All you really need is a grasp of the basics and from there, your investment knowledge and experience will only grow.
Real Estate Financial Terms to Know
Every industry has its terminology. Real estate is full of terms that can add some confusion to the complicated process of buying a home. Knowing some of the real estate jargon can make a big difference in home buying, whether it is reducing your stress level or increasing your confidence. There seems to be an endless number of real estate terms. Yet, there are only a few terms that are important to understand. Here are a few financial terms you should know when you are buying a home.
1. Prequalification
Before you can get a mortgage, you need to go through the prequalification process. During this process, a loan officer will review your credit report, income, and assets. They will use this information to estimate how much money they will lend you. This estimate is not a guarantee, but it will give you an idea of how much you can borrow. Use this pre-approved amount as a ballpark estimate and a reference point when you dive into your finances. Though your income and credit are reviewed, the bank doesn’t account for all current bills and expenses in creating your pre-qualified amount. Therefore, the amount you qualify for can often be more than you can afford.
2. Credit Score
When a loan officer looks at your credit report, the first thing they will see is your credit score. This score reflects the amount of debt you have, your payment history, and the length of your credit history. Try to improve your credit score before applying for a loan by paying down your debts and paying off your delinquent accounts. A high credit score will help you qualify to borrow more money and get a lower interest rate.
3. Debt-to-Income Ratio
The DTI ratio reflects how much your monthly gross income is for housing payments and debt expenses. To calculate your DTI ratio, you add your monthly housing and debt payments and divide this number by your gross monthly income. This ratio helps a loan officer determine how much you can afford to pay monthly on a mortgage. You want the lowest DTI ratio possible to qualify for as many loan programs the lender has available. Paying down your debts will help to lower your DTI ratio.
4. Escrow Deposit
An escrow deposit is the initial funds you put down once the seller accepts your offer to buy their home. Sometimes you will hear the terms earnest money deposit or a good faith deposit. These are the same as an escrow deposit, which shows the seller that you are serious about buying their home. This deposit is up to 5 percent of the home’s sale price, though it also pays the closing costs, and it can be a part of the down payment.
5. Down Payment
The down payment is the amount of cash you pay upfront to purchase a home. First-time buyers and buyers who qualify for government-backed mortgage programs like Veterans Affairs Loans may take advantage of zero down payment options. Make as high of a down payment as you can. A high down payment will help you get approved for a loan, and it will lower your monthly payments.
6. Loan-to-Value Ratio
The LTV ratio is your mortgage amount divided by the appraised property value of the home you want to buy. For example, if you buy a $300,000 home and make a 20% down payment of $60,000, your loan amount is $240,000. The LTV ratio is 80%. High LTV ratios are riskier loans for the lender, so you want to get the LTV ratio as low as possible.
7. Clear-to-Close
The CTC meaning in real estate is terrific news for everybody. The CTC mortgage term means all the loan conditions are complete, and the home purchase is ready for closing. The CTC meaning in real estate is a goal that can occur at any point during the home buying process.
8. Loan Estimate
Interest, closing costs, and other fees are factored into a mortgage. The loan estimate shows how much the loan will cost while the loan is in effect. This estimate also includes the monthly payment.
9. Interest Rate
The interest rate is the cost of the mortgage. It can be a fixed interest rate, or it can be a variable interest rate. A variable interest rate can change while the loan is in effect.
10. Annual Percentage Rate
The APR represents the total cost of the loan. It includes the interest rate, application fees, processing fees, and other charges in the loan.
Final Thought
These are just a handful of financial terms you will see when buying a home. You can always ask a real estate agent to explain any terms you do not know or find confusing.
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