If you've never made a home purchase, you may be unfamiliar with some of the terms and acronyms mortgage lenders use or some of the tools you can use yourself to learn about home financing. Understanding what these are and how they play into homeownership is a great way to get started!
FICO is an acronym for a credit scoring model developed by the Fair Isaac Corporation. A FICO score ranges between 350 and 850 and is a quantification of various factors in a person’s credit history, such as the current amount of debt, how long a person has made purchases on credit, and how well a person has made timely repayments. The higher the number, the better the FICO score. You can learn a lot from myFICO.
A credit report is a summary of your financial history and includes information collected from your use of credit as reported to or collected by the major credit-reporting agencies, Experian, Equifax, and Transunion. Your FICO score is typically included in your credit report.
Federal law entitles you to a free copy of your credit report every twelve months. To obtain your credit report from all three credit reporting agencies, go to the Annual Credit Report website.
Creditworthiness is a valuation performed by lenders to determine a person’s eligibility to borrow money. Most lenders use your FICO score in combination with your current income, your current level of debt, and how much of your available credit you currently use. Having credit cards with minimal or no balance impacts your credit worthiness differently than if your cards have balances near their maximum limit.
A down payment is a portion of a home’s purchase price that you pay with your own funds. The amount you will ultimately need will depend on the purchase price and the mortgage program you decide to use as different home loan programs have different down payment requirements. Additionally, First Time Home Buyer programs are often available that provide down payment or closing cost assistance grants, tax credits, or other features that may help you achieve your down payment faster.
There are a variety of loan programs available to people that meet various eligibility requirements, such as active duty or military veterans, residents of rural areas, low-to-moderate income families, etc. If you research mortgage options online, you will probably run into these terms. Typically these are nationally available mortgage programs that work with local lenders who will help you understand if any of these programs are a good option for you.
Closing costs are fees due at the time a mortgage is "closed", when ownership of the property is officially transferred from the seller to the buyer. There can be a variety of fees involved, such as, an origination fee, legal fees, credit report fees, appraisal fees, etc.. The kinds of fees and the dollar amount of these fees can vary depending on the type of property and the type of loan. When you apply for a mortgage, within three days, your lender is required to provide you with a loan estimate which summarizes the initial loan amount, interest rate, monthly payment and loan term. It also indicates whether escrow fees and property taxes will be collected and a summary of estimated settlement fees. The loan estimate helps you know the approximate amount of cash you will need to bring to your mortgage closing.
PMI stands for Private Mortgage Insurance and is typically required when your down payment is less than 20% of the purchase price. The cost of PMI varies depending on the size of your down payment, your credit score and the insurer you choose and is often an additional monthly payment in addition to your actual mortgage payment. When you’ve paid down your loan principal balance to 80% of the home’s original appraised balance, you are eligible to cancel your PMI.
LTV is a financial acronym for Loan to Value and represents the ratio of the mortgage loan compared to the purchase price or appraised value of the property, whichever is lower. This ratio is a factor in determining the minimum amount required for your down payment and is also a factor in determining whether you need to purchase PMI.
Pre-qualification is an important preliminary step in the home purchasing process that helps you understand how much you may be able to borrow. A lender will ask you for some financial information about your income, credit and debt history, and assets and will provide you with an estimate of how much house you can afford. If you get pre-qualified and then delay your home search or have any other changes in your finances, consider getting an updated pre-qualification as your estimate could change. Working off current information gives you the best chance of successfully obtaining a mortgage without unexpected surprises or disappointments.
Budget and Mortgage Calculators are great learning tools. Plugging numbers into calculators lets you see the impact of financial decisions. You can model situations such as:
We have a lot of financial calculators available here and encourage you to use them to assist you as you plan for your home purchase.
4800 Mills Civic Parkway
West Des Moines, IA 50265
102 S. Main, PO Box 67
Baxter, IA 50028