[This 5-part series features a deep dive into each of Enact’s FTHB Kit topics. We will also go in-depth into other topics relevant to first-time homebuyers like questions to ask a real estate agent, understanding credit, using a house hunting checklist, and more.]
Don’t expect first-time homebuyers (FTHBs) to remember all the terms they’ll hear when they’re buying a home. Loan officers and lenders should provide borrowers with the resources and information they’ll need to successfully close on a house. Educating and assisting FTHBs requires many resources and constant communication to properly build trust.
We understand the importance of having quick access documents for prospective buyers readily available. Because the more informed your borrowers are, the better their homebuying journey could be. Position yourself as their go-to expert when you use our “Terms to Remember” Sheet.
Be sure to download the Terms to Remember Sheet to distribute to your potential FTHBs.
Terms to Explain to FTHBs
Use these definitions to help explain to FTHBs what each of these terms mean during the homebuying process – having a clear explanation ready for your borrowers helps position you as the subject matter expert, further strengthening your client relationships. The more they understand, the better their buying experience will be.
Repayment of loan principal over time with scheduled payments that consist of both principal and interest. The loan balance declines by the amount of the principal in the scheduled payment.
This portion of the process is an important visual reference for FTHBs, as it shows that over time, the portion of the mortgage payment that is applied to principal (paying off the loan) increases over time. At the beginning, more of the monthly payment goes towards interest, but as principal reduces through payments, interest also reduces, and so more of the monthly payment can go towards principal. Explain to borrowers that while the monthly payment doesn’t change, the amounts applied to principal vs. interest change over time.
Annual Percentage Rate (APR)
The APR shows the costs of their mortgage loan as a yearly rate. The APR includes up-front fees (such as points) as well as interest and is intended to show them the true cost of their loan. When comparing one loan to another, be sure to compare APRs to get a true picture of what each one will cost them.
The lower the APR, the better the cost will be for your prospective borrowers.
The cost of getting a mortgage in addition to the down payment. Usually 3-6% of the total loan amount.
Closing costs include lender fees, title fees, property-related fees and more! This total amount is what the FTHBs will be responsible for, in addition to their down payment, at closing. They are given a loan estimate & closing disclosure that shows closing costs. Reviewing with the borrower the closing costs on the forms the borrower receives during the homebuying process will better prepare them for this date.
An agency that collects data on individual payment records on loans, credit cards, and other debts, and compiles a credit history based on this information. They also provide credit reports to lenders, creditors, and consumers.
Payment history for credit cards, loans, and other debts are tracked by the credit bureaus and compiled into a credit report and it’s vital for borrowers to understand that the credit check is a part of their homebuying journey. Wherever their credit level is at, the credit reports and scored compiled by the credit bureau will give the parties involved in homebuying a better depiction of what their borrower might be able to afford.
Debt-to-income (DTI) Ratio
The DTI ratio compares how much a borrower owes with how much they earn in a given month.
This ratio is relevant for calculating the monthly debts that a FTHB faces and is a part of the equation to determine how much of a monthly mortgage payment they can afford. Understanding this helps the borrower know what debts they’ll face in addition to their mortgage payment – it becomes much easier for a borrower to budget when all parties know this ratio.
The portion of the property that a homebuyer actually owns through their payments, versus the portion that they still owe the mortgage lender. The longer they stay in their house and make the required payments, the more equity they will have.
As soon as your borrowers close on their house, they’re building equity. Homeownership is one of the main ways that people, especially FTHBs, build wealth through equity.
An account set up on the borrower’s behalf in which a portion of their monthly payment is held to pay property taxes and insurance.
The escrow account is a proactive measure for the management of payments that will be due after a borrower buys their home, including property taxes, insurance and MI premiums. The borrower makes one monthly payment to the lender; part of this goes toward principal and interest, and the other part goes into the escrow account. This account is also set up by the lender, as they are responsible for receiving mortgage payments and paying the bills when they are due.
Amount earned before taxes or types of payroll deductions. Gross income may include overtime commissions and dividends and come from any other sources for which steady history can be shown.
Total income is determined based on the factors mentioned above, and is important when trying to calculate how much of a monthly mortgage payment a borrower could afford. Knowing their income levels (pre-tax) is important for a number of calculations a LO or lender will have to make.
Loan-to-value (LTV) Ratio
A mortgage’s LTV ratio describes the ratio of the value of the property to the amount of outstanding mortgage balance.
This ratio is useful for the lender to determine if a FTHB needs MI. If they can put over 20% down, MI isn’t needed and their loan amount will be lower.
Points, also known as discount points, lower your interest rate in exchange for paying an upfront fee.
By paying these points upfront, the borrower may be able to trim the interest rate on the loan, which allows the borrower to pay less over the course of the loan’s lifetime.
While not an approval, this gives borrowers an estimate of how much money they could borrow to purchase a home.
This estimate will help a borrower understand the potential loan amount they could afford, based on the requirements set in place by their lender. Having this estimated number helps with budgeting and understanding what home price point they’ll be facing.
A commitment from the lender to make a loan to a specified borrower prior to identification of the specific property.
The above step is crucial to help FTHBs understand how much they’ll be approved for and how much they should budget for, as they begin looking at homes and understand what range of listing prices they should aim for.
Those of us in the industry may know all these terms like the back of our hands, but FTHBs may need reminders and extra guidance to help them build their confidence in not only you, but themselves too. It’s an intimidating and anxious process that requires so much of these prospective buyers’ time, so patience and compassion go a long way. This might look like calling and communicating with them on a consistent schedule, sending them email reminders about to-dos and next steps, or even giving them documents to have handy when questions come up during late hours. Mindfulness and preparedness are important for all parties involved and giving extra information to FTHBs can’t hurt.
Regardless of where you are in your career, it’s vital to a successful homebuying journey to help FTHBs, and all your borrowers, throughout the time they’re buying their home. This looks differently depending on their individual needs, but one thing remains true… education and resources can help streamline this process and ease the minds of those pursuing the dream of homeownership.
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