June is National Home Ownership Month, and many North Carolinians are entering the market hoping to purchase their very first home. Buying your first home can be intimidating, especially once you start hearing all the real estate jargon that comes out with a home transaction. However, you don’t have to let some unfamiliar lingo derail your quest for a new home! Learn the home finance vocabulary every first-time buyer should know, so you can be real estate savvy.
First things first, what is a first-time buyer? While you might think that a first-time buyer is just someone who has never owned a home, that’s not true! In mortgage terms, a first-time buyer is someone who has not owned a principal residence in three years. That means if you bought a home in the past but haven’t owned one as your principal residence in the past 36 months, you may qualify as a first-time home buyer! In addition, if you are a military veteran or are buying a home in certain targeted census areas, you are considered a first-time buyer for many mortgage programs.
Annual Percentage Rate (APR)
Annual percentage rates can be confusing, but put simply, an APR is the yearly cost of credit expressed as a percentage. This number includes your interest rate, discount points and other charges that are required to close the loan. The APR is what you want to use to compare lenders when you are shopping for a mortgage.
You may have heard a friend selling a home saying “We’re in escrow!” in triumph and wondered what they were talking about. Escrow is just an arrangement using a third party to hold funds during a home purchase negotiation. Funds are held “in escrow” until the buyer and the seller meet their obligations. This way, both the buyer and the seller are protected. Escrow is exciting, because it means a home purchase is moving forward.
When you purchase a home, you usually will be expected to pay a down payment. A down payment is an initial outlay on the home, usually paid at closing, that allows you to gain financing and complete the home purchase. In general, a down payment can be any number decided between you and your lender, however, the expected down payment is usually 3% or more as required by your mortgage terms. A down payment of 20% is required to avoid having to pay mortgage insurance on your loan.
Mortgage insurance protects your lender. If a buyer purchases a home with a down payment of less than 20%, the lender may view the borrower as a higher risk and require mortgage insurance to approve the loan. In general, this insurance is included as part of your monthly mortgage payment. The good news is, mortgage insurance isn’t forever. In most cases, once you have 20% equity in your home, it is no longer required but you may need to contact your loan servicer at that point to get it removed.
While mortgage insurance protects your lender, homeowners insurance protects your both. When you rent your home, your landlord is responsible for and damage or injuries caused by the property, including the costs associated with it. When you own your own home, however, those costs fall on to you. Thankfully, if disaster strikes, homeowners insurance policies are designed to help. These policies protect you from the excessive financial burden that can result from damage to your home or injuries on your property for which you are legally responsible.
In addition to the down payment, there will be closing costs that you need to pay for before you can complete your home purchase. Closing costs could include appraisal fees, credit check fees, points, loan origination fees and more. If this seems overwhelming, don’t worry! Check out Closing Costs 101 to learn more.
Debt to Income
Your lender will not only look at your credit and your financial history to determine if you are eligible for a loan, he or she will also consider your debt to income ratio, or DTI. This number is the total of your monthly debt payments divided by your gross monthly income. This number, which generally must be below 43% for most lenders, establishes if you have too much debt to afford a mortgage payment.
Rent to Own
If you’ve heard of rent to own and you’re currently renting your home, it might sound like a great option. After all, you currently rent and you want to own. Seems like a no-brainer, right? Not so fast. Renting to own can be a very complex process and one that you should not enter without all the facts. A rent-to-own lease option agreement is a contract that states a lessee (that’s you) will agree to rent for a set period with the option to purchase the home when or before the lease expires. To learn more about this complex process and see if it might be right for you, check out How to Rent to Own.
You may have heard that one of the biggest perks of home ownership is that you build up equity in your home over time, but what does that really mean? Paying your mortgage each month is a bit like paying into a very long-term savings account. Every time you make a payment to pay back your lender, you are building equity. One day, that mortgage will be paid off, the home will be yours free and clear and you will have a sustainable investment. To learn more about home equity and what it can do for you, check out Home Equity FAQs.
Understanding home buying terms is one of the first steps toward making one of your largest purchases. The NC Housing Finance Agency provides many educational materials and resources to help potential buyers become successful long-term homeowners. For more information on how the Agency might be able to make home happen for you, visit www.nchfa.com/home-buyers.
And don’t miss next week’s Home Ownership Month blog, How to Build Your Home Buying Team!