Applying for a home loan can seem daunting, although the process itself is fairly simple, provided you can make sense of the information that is provided to you by the lender. To fully understand the process, it’s important to know what various terminologies mean. So, with that in mind, we have listed out some common terms that are used by lenders.
Mortgage
Most lenders use the words “mortgage” and “home loan” interchangeably. A mortgage loan essentially involves borrowing money from a lender to buy a home. In return, your home acts as collateral. If you are unable to pay your monthly dues, you may lose your home.
Subprime Loan
Lenders evaluate how risky a borrower is by checking factors like their credit score and debt-to-income ratio. If your credit score is less-than-desirable and you have a high debt-to-income ratio, you are considered a subprime borrower. The loan that is offered to you is called a subprime loan.
Interest
As in the case of any loan, lenders who offer home loans charge borrowers interest on the loan amount. The interest is a fee you pay to the lender for borrowing money. The amount you pay every month as interest will be based on the interest rate set by the lender.
Down payment
In the case of conventional loans, you cannot expect the lender to loan you 100% of the home’s purchase price. Instead, most conventional lenders will require you to make a down payment of at least 20%. The higher the down payment you make, the lower will be your loan amount.
Points
Some mortgage lenders allow you to pay additional fees to buy interest points. Interest points, in turn, help to lower your interest and monthly payment.
Underwriting
Before approving your loan application, the lender initiates an underwriting process. This is the process through which the lender determines which type of loan and how much loan you qualify for. Your interest rate is also decided at this time.
Buying a home can become an overwhelming task. However, if you are aware of the process, it can help immensely. If you still have any queries, don’t hesitate to ask your lender to explain the terms they use.
