Financial Real Estate Terminology
If you are going to be a new home buyer in the near future, there are some financial terms that you need to know. Failure to understand all the terms in your mortgage contract can be a costly mistake. You also need to understand the jobs of each person that you might interact with while buying a home. That is the goal of this article, to arm you with the knowledge you need to protect yourself.
Mortgage Lender vs. Mortgage Broker
What is the difference in how these two people get involved with your home mortgage? Failing to understand the difference could cost you thousands of dollars. A mortgage lender is essentially anyone who is loaning the money to pay for the mortgage. Typically, these lenders consist of banks and businesses, but have been known on occasion to incorporate individuals. The mortgage broker, on the other hand, is an individual who works for the borrower to find the best opportunities available. Although some brokers will develop working relationships with lenders, many will still opt to use a different lender if the outcome is more beneficial for
The broker is usually responsible for taking a great deal of the work out of your hands. They understand how the game is played and are experienced in securing the best possible loan term they can. They know the trends, changes in policies, and usually have connections in various locations specifically for the needs of the client. Going directly to the mortgage lender forces you to acquire all of the needed materials for the loan yourself putting additional strain on your abilities to gather all of the essential documents and researching your loan needs personally.
For the most part, a broker’s fees are rolled into the loan. In few circumstances, this fee can be from out of the pocket of the borrower. As the loan processing time and better terms can be acquired by the broker, this fee is well worth it if you have to pay it yourself. However, these circumstances are nominal and shouldn’t be viewed as a common practice among brokers.
In the end, you’re almost always going to get a better rate when you use the services of a mortgage broker. The entire purpose surrounding the broker is to find the best deal they can for your specific needs and alleviate the legwork. In some cases, they have been able to help those who have a less than stellar credit rating get some of the best terms possible.
FHA Loans and VA Loans
The term FHA loan is actually a misnomer. In fact, there is no such thing as a loan that comes from the FHA. The Federal Home Administration has programs to help more people be able to get loans. This is done by backing loans with a type of home mortgage insurance. The catch is that the cost of the insurance is often hidden in the loan. The lender pays nothing for this gift or mortgage insurance. It is the borrower that pays a fee at loan inception and an insurance premium every month with their mortgage payment.
VA loans are not available to everyone. A loan applicant must have completed some active duty military service, with an honorable discharge, to be eligible for a VA backed loan. Like the FHA backed loans, the VA does not lend money directly. The FHA provides enough guarantees to lenders that veterans can buy homes with low or even no down payment required. Basically, the guarantee from the Veterans Administration replaces the down payment the lender would have normally required.
PMI Mortgage Insurance
If your lender is supporting a contractor building spec homes, the lender may offer loans with a smaller than normal required down payment. This could be done to help the contractor compete with homes that are sold to a buyer with VA or USDA loan financing . The lender also has backing because you are required to pay PMI, otherwise known as a private mortgage insurance premium each month. The amount of the premium is set based on the amount of the loan. Usually the price is equal to one-half of one percent of the loan. One bad thing about PMI charges is that they are not tax deductible.
These are just three of the many financial terms and definitions of people working in the home mortgage industry. You need to protect yourself with as much knowledge of these terms as possible. Most states require you to be given a one page full disclosure list of all such terms.
This is a guest post by Liz Nelson from WhiteFence.com. She is a freelance writer and blogger from Houston. Questions and comments can be sent to: liznelson17 @ gmail.com.