Include all of you and your co-borrower's monthly debts, including: minimum monthly required credit card payments, car payments, student loans, alimony/child support payments, any house payments (rent or mortgage) other than the new mortgage you are seeking, rental property maintenance, and other personal loans with periodic payments.ĭo NOT include: credit card balances you pay off in full each month, existing house payments (rent or mortgage) that will become obsolete as a result of the new mortgage you are seeking, or the new mortgage you are seeking. Make sure you still have cash left over after the down payment to cover unexpected repairs, financial emergencies, closing costs, and any other unexpected costs associated with buying a house. This is the amount of money you will put towards a down payment on the house. Include all income before taxes, including base salary, commissions, bonuses, overtime, tips, rental income, investment income, alimony, child support, etc. This is the combined annual income for you and your co-borrower. Without further ado, here are some basic mortgage terms that every potential home buyer should understand: You may not understand the entire process until you've bought and sold a few houses, but at least you'll be able to follow along with the lingo being used by real estate professionals so you can ask the right questions. Hopefully this example stressed the need to understand the fundamental, often used terms in real estate. The answers to these questions will give Charles and Becky a way better understanding of their credit profile and loan situation. If Charles knew what a FICO score or a back-end DTI was, he might ask the questions: “What were our FICO scores and are they going to negatively impact our interest rate?” and "Well what is our back-end DTI? We're only comfortable if our back-end DTI is under 33% so we do not overextend ourselves.” BAM, Charles just killed the question game. Although, some borrowers, if spoken to in real estate code, freeze up and only hear what they want to hear (we're qualified for this home, yay!). Just because Charles and Becky's back-end DTI is under 43%, does not mean that this mortgage payment is comfortable for their budget. If it is 43%, then 43% of the borrower’s income is going towards their proposed debts. A back-end debt-to-income ratio (DTI) is what the borrowers debt-to-income will be once they begin paying their monthly mortgage payment (front-end DTI is what your current debt-to-income is before taking on a mortgage payment, and may include your rent payment, if applicable). Credit score is a huge determinant of your approval status and what interest rate you will pay. Most lenders use the middle score to determine what credit score to attribute to your loan file. A FICO score is essentially your credit score derived from three credit bureaus. Your savior, me, is here to decode this response from the mortgage lender. Therefore, don't make a stupid mistake because you're too afraid to ask a simple question. My motto is that there are no stupid questions, only stupid mistakes. This is, most likely, the biggest purchase of your life. Awesome! Move on, right? Absolutely not. You should never be afraid to ask questions, that is why you've hired real estate professionals. Leverage their expertise. What in the hell is a FICO score? Or a back-end DTI? As a home buyer, all you've heard is that you absolutely qualify for this home. Looks like you and Becky's FICO scores are excellent and your back-end DTI is under 43%, so you absolutely qualify for this home." A mortgage lender should never talk to an inexperienced borrower(s) in real estate code, but work with me for this example because it does happen. Mortgage Lender: "Hey Charles, thanks for sending in all of your information online, I’m thrilled to help you purchase your first home. These experts use many terms and acronyms that to the first-time home buyer make no sense. Luckily, there are many experts like lenders, realtors, inspectors, appraisers, escrow agents, and friends and family to help guide you through the process. Mortgage Banker, Umpqua Bank NMLS # 1424295 Apply Hereīuying and selling real estate is a daunting and expensive process.
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