The Charleston real estate market is still very hot. With that being the case buyers do not have the luxury of starting the financing process after finding a home. Sellers are requiring pre-approval letters before accepting offers. It is important that buyers understand as much as possible about the financing process when looking to purchase a home in Charleston or any market.
Do you ever feel like when you talk to a real estate agent or a lender that they are speaking a foreign language? Every industry has its own set of terms and lingo. Mortgage terms can be normal words, used in a totally different way - so while you speak English, and you understand the words, the context is lost!
Well, let me share some of the secret meanings of the everyday words that are used in a different manner and also explain the insanely detailed and stressful process that is getting qualified for financing on your new home.
First, let's start with the most common word used MORTGAGE. What does it actually mean?
The official definitions are:
· The charging of real (or personal) property by a debtor to a creditor as security for a debt (especially one incurred by the purchase of the property), on the condition that it shall be returned on payment of the debt within a certain period.
· a loan obtained through the conveyance of property as security
· Convey (a property) to a creditor as a security on a loan.
· Expose to future risk or constraint for the sake of immediate advantage
But most interesting, I believe, is the origin of the word. It is from Old French, literally "dead pledge" (from Latin mortuus 'dead" and gage "pledge"
Given that the majority of mortgages are written for a term of 30 years, I imagine it does sometimes feels like you are pledging to pay until you are dead. However, by spreading the payments over a long term, it keeps the monthly payment manageable, provides an asset for the lenders to insure they receive the return of their funds plus the income made from the interest paid, and in the current market as property values increase and the principal is paid down, can create a valuable asset for the home owner.
Now, let's review some of the terms that are used and the basic process of getting that mortgage to buy your home.
Pre-qualification - this is the first step in seeing if you qualify for a mortgage. You will speak with a lender who will get basic personal, employment and residential history. They will then pull your credit and enter your details into an automated system that will review your situation and see if you fall within the basic guidelines and requirements to purchase a home. There is a long process to get the full loan approval, but at this point, you know what price of home you can purchase and an estimate of the funds you will need for the down payment and other costs for the purchase of a home.
Processing - once you have entered into a Purchase and Sale Agreement, you will provide copious amounts of documentation to your lender that is required for a full loan application and they will tell you that you are now being moved to "Processing". This is a department that each lender has which organizes your information, collects additional information that is required by rules and regulations for the loan you are getting, verifies your employment and income, and even checks government sites to make sure you are not on a terrorist list. The Processors are the detail and paperwork people. They will contact you often during the loan process and while they seem to need to know your family history back to 1870, your blood type, DNA makeup, and how many family pets you own; they are truly making sure that all information required by the next step is as complete and accurate before they forward your file onto:
Underwriting - this is where you finally get full approval to receive the funds for a mortgage and actually purchase your home. The Underwriter for your loan is the one responsible for ensuring that all government guidelines have been met, that we know where the money you are using for this purchase are verified from an acceptable source, that everything in the file has been explained, researched, verified and proven to be acceptable to the myriad of rules and regulations that are applied to the lending of money. Once the file is sent to underwriting, they will review everything that processing forwarded to them. If the loan fits the guidelines for income, employment history, and debt levels, they will then send to processing a list of items where they desire more documentation or explanation. This is called:
Conditional Approval - this means that your income is acceptable to cover the cost of the new mortgage and the current debts. Also, your employment history and credit history are such that you meet the guidelines for the particular mortgage for which you have applied. There are just items Conditions that they want satisfied with additional documentation or explanation to give you full loan approval.
Clear to Close - this means your loan is fully approved, you have jumped through every hoop, written every letter of explanation to answer concerns from the underwriter, and provide all information required to get your loan!
That is a BASIC overview of the process. Below are some more terms and acronyms that will be used by your lender and your realtor that may be confusing to you.
Closing - the actual transfer of the property title from the current owners to you. In South Carolina this is done by an attorney. The purchaser(s) and seller(s) will sign documentation to transfer ownership, sign the mortgage documents, and money will be properly distributed by the attorney. The attorney will receive the loan funds from the lender, collect the purchaser's down payment money and other funds required for closing costs and pre-paid items, and disburse the proper funds to pay off any current mortgage the seller may have, pay real estate commissions, and finally give net proceeds from the sale to the seller of the property.
Closing Costs - there are several costs incurred for the purchase of a home. These include, but are not limited to; attorney fee for settlement or closing, title search to assure that you are getting clear ownership free of any prior liens or encumbrances, lender fees for underwriting and processing, title insurance which insures coverage for anything missed in a title search, appraisal of the property, etc.
Pre-paids - some items are required to be paid at closing even though they are not yet officially due. You must pay for one full year of hazard insurance for the home - when getting a mortgage you are not allowed to set up quarterly or monthly payments, guidelines require at least one year paid in full at the time of closing. Also, since mortgages are due the 1st of each month, you will pay interest charged from the day of closing through the end of that month. You will then make your first mortgage payment on the first of the 2nd month following closing.
Escrow - this is an account of funds held by the lender, that are your funds, but are set aside for the payment of taxes and insurance. Your mortgage payment will include these funds. Each month a portion of your payment is for principal reduction and interest costs. The remainder is for escrow. These funds will be kept separate, will be accounted for on your monthly mortgage statement and will be used by the lender to pay property tax bills and insurance payments when these become due each year.
DTI - this is a ratio of Debt-to-Income. There are two different ratios that are used. Front-end DTI is the ratio of the total mortgage payment (including escrow) to your gross monthly income. Back-end DTI is the ratio of your TOTAL monthly payments to your gross monthly income. The total for the back end will include all debt that shows on your credit report (car payments, credit card payments, etc.) plus the mortgage payment. All mortgages have certain ratio limits and you must meet the guidelines. Also, your DTI can have an effect on the interest rate for your loan.
This is a very short list, but hopefully it is your first step to understanding the process of getting a loan to purchase a home. I am always happy to discuss your particular situation, answer questions regarding rate, the process, and the loan programs available.
Call me at 843-300-5789 so I can put you in touch with a lender that speaks your language.