While applying for a home loan, at first, it may seem like mortgage professionals are speaking a foreign language. You will probably hear terms like PMI, LTV, and FICO thrown around and wonder if you are in over your head. However, all of this technical jargon is not as complicated as it might seem. Don’t be alarmed by the jargon. Check the simple explanations of the common mortgage lingo below.
What is a home appraisal?
Part of applying for a mortgage application is to determine the value of the property. This is where the appraisal comes in. An independent third party, a licensed appraiser, is hired to appraise the market value of the property. The appraiser analyzes the size of the property, updates to the home, the age, and the sale price of comparable homes in the neighborhood. If the property appraises at a lower price than the sale price, you might have to pay the difference or use the lower appraised home value to renegotiate the price with the seller.
What is an earnest money deposit?
When you make an offer on a home, you make an earnest money deposit. You give the deposit to the home seller in the form of a personal check. This is done when your offer has been accepted, and a purchase agreement has been signed. If the transaction goes through, your earnest money will be applied toward your closing costs and down payment. However, if you break off the deal without a valid, permissible reason, you might lose your earnest deposit, which is somewhere between one and ten percent of the sale price.
What is escrow?
Escrow is an important part of buying a house. The escrow becomes part of the home buying process after the seller accepted your offer. The escrow is an independent third party that administers the transaction. For example, your earnest deposit check is deposited into an escrow account. That means that the deposit you paid is kept in a neutral escrow account. Neither the seller nor the buyer has direct access to the account. Both sides are protected. The most important aspect of escrow is that it is an independent third party. It is set up to protect both sides.
What is a lender escrow account?
A lender escrow account includes the property taxes, mortgage payment, and homeowner’s insurance into one payment. Your yearly insurance total and property taxes are divided by 12 and added to your monthly mortgage payment. This helps borrowers avoid paying out large amounts all at once for taxes and insurance. You only have to make one payment instead of three of four each month. It is simpler for everyone. The lender keeps the partial payment in escrow. The money collects in the escrow account until it is time to pay your taxes and insurance.
What is a FICO score?
Your FICO (Fair Isaac Corporation) score is more commonly known as your credit score. The FICO score is based on various credit-related factors, including your debt-to-income ratio, payment history, and the variety of loans you have. Scores can be anywhere from 300-850, and your credit score is one of the critical factors that lenders consider when evaluating your mortgage application.
What is an inspection?
An inspection is essentially a check-up for the house, conducted by a licensed inspector hired by you, the borrower. The inspector will inspect the property and point out potential problems. If the inspector finds any problems during the inspection, you can ask the seller to make repairs or lower the price to compensate for repairs. The seller can make the repairs prior to finalizing the sale.
What is LTV?
LTV (Loan-To-Value) is a ratio that is calculated by dividing the dollar amount you want to borrow by the appraised value of the house. Lenders limit the maximum loan-to-value. A simple way to think about LTV is that it is the amount left after making your down payment. For example, a borrower taking on $100,000 mortgage to buy a home appraised at $250,000 would have an LTV ratio of 40% (100,000/250,000).
What are discount points?
Discount points are a way to pay for a lower interest rate. When you pay for discount points on your mortgage, you are prepaying some of the interest. For example, if you pay 1 percent of your loan amount, you could reduce the interest by one point. Use a mortgage calculator to see the effect of discount points on a mortgage. It’s up to you to determine if it is worth the upfront cost.
What is PMI?
PMI stands for private mortgage insurance. Lenders require it if your down payment is less than 20% of the loan amount. PMI allows you to avoid putting down a large down payment, but it does mean that an additional fee will be tacked on to your mortgage payment each month.
Do you have any mortgage-related questions? Talk to a mortgage broker now.
Why home appraisals are important?
Lenders need to know the value of a property before they approve a mortgage. The appraisal also protects the home buyer from paying more than the market value.
What’s Your Home Really Worth?
The home appraisal is a critical step in getting a mortgage. This is true whether you are a first-time homebuyer, relocating to a new house, or refinancing your current property.
What does an appraiser look for in a home?
Lenders require a home appraisal before they qualify you for a mortgage because they want to protect their investment. The purpose of the appraisal is to determine the value of the home. During the home appraisal, a professional appraiser evaluates your home and provides an estimate of its market value.
You should expect an appraisal to be part of the loan application process. Therefore, it’s best to know what to expect.
How Much Does an Appraisal Cost?
On average, a home appraisal can cost several hundreds of dollars. The price of the appraisal depends on the value and size of the property and location. For example, a luxury beachfront home will cost a lot more to appraise than 700 square feet condominium.
When getting a home appraisal for your mortgage, your lender will probably require you to use a specific appraisal company. This means that you might be unable to shop around for an appraiser. When you apply for a home loan, you should ask your lender which company you need to hire for the appraisal.
Do they come in your house for an appraisal?
The short answer is yes. The appraiser has to come to your house. Most of the time, the appraiser must be able to come inside your house to complete the appraisal.
What hurts a home appraisal?
Many factors can hurt the appraisal of a home. If comparable homes are valued much lower than your home, it could result in a low appraisal. A property in poor condition will appraise lower than a tip-top shape property.
How should I prepare for a home appraisal?
You can try to improve the home’s appraised value by:
- Creating a staged home
- Repainting inside the home
- Manicuring the yard
- Making your home show like a model home
- Cleaning up the clutter
- Decluttering your garage
What Do Appraisers Look at During an Appraisal?
When appraisers evaluate a home, they assess just about everything imaginable. The square footage, the number of bedrooms and bathrooms, the property’s overall condition, and so forth all go into appraising the house. Appraisers also look at issues with the property, such as cosmetic damage, plumbing or electrical issues, leaks, and so on.
They also try to find comparable homes in the area to determine the current market value. They can get a good estimate of the value of the property by comparing it to similar properties in the same area.
How to Review the Home Appraisal?
When the appraisal is complete, the appraising company is required by federal law to share a copy of the appraisal with the borrower. The document includes a lot of information that can influence the appraised value of the property.
Here are a couple of things to check when reviewing the appraisal:
- Confirm that comparable sales are comparable. There are many unique properties that require special attention.
- Verify that the property is described correctly. Check to make sure that square footage, number of bedrooms, and bathrooms are correct. An incorrect property description could lead to an inaccurate home appraisal.
It’s a good idea to examine your copy—if something seems amiss, you should talk with your lender about it.
What happens if the appraisal comes in low?
If a property is appraised below the asking price, go over the appraisal with your mortgage broker. You may find inaccuracies that account for the low appraised value. For instance, the appraiser may not have noticed the recent remodeling in your kitchen, or they may have compared it to the wrong types of properties.
These issues can be disputed, but you need to make sure you have a solid case for it. Without clear and noteworthy evidence to prove your point, change is unlikely.
Other Ways to Deal with Low Appraisals
If you can’t get a higher appraisal, there are still other options. If you’re buying, then renegotiating the price with the seller might work. If you have the required cash, you could try to cover the difference yourself. That way, you don’t need to borrow as much. This can bring the LTV down and may even improve the mortgage rates you qualify to receive.
In any case, contact a mortgage broker and learn about your mortgage options.