Are you looking for a new home and want to better understand home loans? It helps to know a few of the important terms related to mortgages, as well as a typical timeframe and other general information.
Key mortgage loan terms
Here are a few terms you will want to understand as you prepare to apply for a home loan.
- annual percentage rate / annual percentage yield (APR/APY): A number representing the true interest cost your mortgage generates, with the lender fees included.
- credit score: A number that, using your credit history to establish your creditworthiness, is leveraged by lenders to determine probability that a debt will be repaid. A higher number denotes a better score, with a possible 300 to 850 points. Generally speaking, you can get a mortgage if your score is at least 650.
- debt-to-income ratio (DTI ratio): Your total monthly debt payments, or just the mortgage payment, divided by your monthly pre-tax income.
- loan term: The amount of time during which the full loan is completely paid back.
- loan-to-value ratio (LTV ratio): The total amount of your mortgage divided by the value of the home to which it applies (which is securing the loan).
How much time passes between application and closing?
The process of landing a mortgage is getting faster. Mortgage industry tech service Ellie Mae found that the average closing times for all mortgages (refinances and purchase loans) was approximately 43 days for January 2018 through January 2019. Compare that to 46 days, the comprehensive average for January 2015 through January 2016.
What is the safest mortgage?
Particularly if you plan to stay in your house for five years or more, usually the safest home loan is a 30-year fixed rate mortgage.
What role does your budget play?
A mortgage lender does not want you to take a loan that is too big for you to handle. They will assess your income, current debt, and credit to determine what amount you will likely be able to afford.
What’s the first thing you need to do?
If you want to buy a home, the current seller’s market in the Twin Cities makes it especially important to get home loan preapproval. In a seller’s market, the inventory of available properties is relatively low compared to the number of interested buyers. Sellers will be confident you are serious about buying if you have selected a lender and have a preapproval letter.
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