When buying a new home, sometimes it can feel like everyone is speaking a language you don’t understand — especially if this is your first time going through the process. Thankfully, a handful of key terms can help anyone throughout their homebuying journey.
Consult this handy list of essential terms before you begin and during your home search:
What are Closing Costs?
Closing costs are the expenses homebuyers incur in addition to the price of the home that is paid at the time of closing. These include taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other costs.
What is a Mortgage?
A mortgage is an agreement between a homebuyer and a lender where the purchaser borrows money to pay for their home. People with mortgages are typically obligated to make monthly payments toward this debt.
Mortgages are calculated using the loan amount, loan term (or length), interest rate, property tax, and, if applicable, private mortgage insurance (PMI) and homeowners' association (HOA) fees.
What is the Interest Rate on Your Home’s Mortgage?
The interest rate on a home loan is the cost of borrowing money from a lender to finance the purchase. Homeowners make interest payments as part of their monthly mortgage payments.
What is Earnest Money?
When a potential buyer signs their sales contract, they submit an earnest money deposit to show the sincerity of their offer to purchase the home.
In other words, earnest money acts as a measure of “good faith” on behalf of the buyer when purchasing a home. Once the buyer officially closes on the home, this earnest money is typically credited toward the closing costs or down payment.
What is a Credit Score?
Ranging between 300 and 850, a credit score determines a person’s “creditworthiness." It is impacted by someone's ...
- Payment history
- Amounts owed
- Length of credit history
- Types of credit used
- New credit.
A typical credit score for loan approval is 640+.
What is Escrow in a Mortgage?
When a homeowner makes a monthly mortgage payment, a portion of this is deposited into an escrow account held by the mortgage lender.
These funds are then used to cover annual property taxes and other payments like home and flood insurance. In essence, escrow accounts make life easier for homeowners during tax and renewal season, as they won’t have to worry about being stuck with a larger-than-expected property tax bill in April.
What is a Good Faith Estimate?
A good faith estimate is an approximate outline of charges that a homebuyer can expect to incur when they purchase their home. This estimate often factors in the actual price of the home plus closing costs and monthly investment.
What is the Debt-to-Income Ratio (DTI)?
The debt-to-income ratio (DTI) is a calculation that helps homebuyers understand how much room they have in their budget to be able to afford certain expenses like mortgage payments. ability to manage
DTI is calculated by dividing the sum of all monthly debt payments by gross monthly income (or, the total amount of money a household makes each month before taxes and other deductions).
A good rule of thumb is the 28% Rule. The experts at Chase Bank suggest that a borrower’s mortgage payment — including principal, interest, taxes, and insurance — shouldn’t exceed 28% of their monthly gross income.
To figure the max mortgage payment that fits your budget, multiply your monthly gross income by 0.28:
- Monthly Gross Income = $3,000 x 0.28 = $840
What is a Homeowner’s Association (HOA)?
A homeowner’s association (HOA) is an organization that develops and enacts rules and restrictions for a community of homes. HOAs can impact everything from the management of shared amenities (including pools and playgrounds) to landscaping and even cosmetic or practical changes to specific homes.
What is a Homestead Exemption in Texas?
Homeowners can file a homestead exemption on their principal residence to remove part of their home’s value from taxation. In so doing, these individuals can lower the cost of their property taxes when they file in April.
In Texas, homestead exemptions can only be filed on a person’s principal residence, meaning that vacation homes and rental properties do not qualify for exemption.
What is an Inventory Home?
An inventory home is a home that is already constructed or under construction, before it’s been purchased. These are also known as spec or speculative homes and offer a variety of benefits when compared to custom-build homes.
What is a Municipal Utility District Tax (MUD)?
Homeowners pay MUD taxes to supply water, sewage, drainage, and other services to their area.