Are you buying a house but are having trouble keeping up with all the real estate lingo?
In this episode of Give, Work, Play, we’re going to talk all about the terminology you’ll hear when buying a home from a lender’s perspective. We’ll be joined by Jessy Printz of USA Mortgage to navigate the words and phrases you’ll encounter so you’re best prepared for the home buying experience.
The Language Of Lenders
If you’re planning to buy a house, you likely have a lot of questions. Where are you going to get the money to finance your home? Are you financing your home? What type of loan are you using? And wait…what language is my lender even speaking?
Jessy and I are here to break it all down for you—from different types of loans and basic terminology to some new or interesting words you might not have ever even heard of before. As an agent talking to a buyer, one of the things that we want to do is make sure that they’ve spoken to a lender. This will ensure that they understand what they can comfortably afford for a payment and what they can comfortably afford in a price range.
There are two different things that we will do for clients that haven't spoken to a lender yet. The first thing we're going to do is provide them with some options to speak with a lender (like Jessy). When they’ve spoken to that lender, they're going to get a letter.
The Prequalification
There are two different types of letters that a buyer can receive. One is a prequalification or a prequal letter. The other one is a pre-approval letter. What's the difference?
While the prequal and preapproval are sometimes used interchangeably, they shouldn’t be. If you were to go and apply on a website, state your income and assets, and the lender pulls your credit, they can issue a prequalification letter.
A prequalification means that the lender has reviewed what you have provided them, typically in writing or over the phone. That is a great start, as it gives us a place to begin.
The Preapproval
To make this prequalification even better, however, we like to elevate it to what’s referred to as a preapproval. Depending on the lending institution, some will refer to a preapproval as being “accomplished” once they have been in their receipt of asset information. This includes bank statements, proof to get your downpayment, and income information. It also means that they have run what is referred to as an automated underwriting system.
This underwriting system is available to pretty much any lender. It’s a third-party tool that the industry uses to read your entire profile—including your credit, income, and otherwise. You’ll then know if you’re eligible for approval or not.
Underwriting
At this point, a lot of lenders stop there and tell people to go shopping. However, some lenders go one step further. Many don't do this because it requires additional resources from the company itself, but we like to fully underwrite our clients before they go under contract.
This means we're actually putting the client before an underwriter for a full preliminary underwriting. Knowledge is power, and this extra step allows buyers to have a full game plan. Jessy doesn’t like surprises unless it's her birthday or anniversary, so she and her team try to keep those out of their loan files whenever possible.
The Underwriter
Along with the underwriting process, you’ll want to understand what an underwriter is. They are our friends, and we love them. While they've gotten a bad rap, the underwriter is basically your liaison between the house that you want to buy and your overall financial picture. They are looking at the guidelines associated with the loan program either issued by the investor or the federal government—or both.
Sometimes there are extra rules in place, so the underwriter will check to see if they have every piece of information they need. Additionally, they make sure that information makes sense in the context of the other pieces of information.
Overall, they are here to help—especially if you have a team environment at your lending institution. They work hard to help strategize and act as professional problem solvers and financial strategists.
Submitting An Offer
Once we’ve got the lender’s preapproval letter and we're ready to see houses and get under contract, there’s one critical thing we need to do first. Before we offer the appraisal gap guarantee, we need to actually have a conversation with the lender to make sure that we can offer that sum of money. While it seems like a simple concept, it’s a critical step.
This is because as we're navigating these very competitive markets, we get emotionally invested in these homes. We want to take a step back to make sure we can actually deliver on that which we are promising. Do we have that extra $10,000, or will it put us in a pinch for some things we're planning for moving forward?
That's why we work as a team as agents and lenders. It's the planning that matters.
Your Debt Profile
Along with ensuring you have the funds needed for the transaction, you always want to make sure you don’t go out and buy a truck in the middle of the loan process. Once your loan is preapproved, remember that the preapproval is based on your loan profile at the time that your application was submitted. This includes not only your income but any debts you're obligated to pay.
When the lender preapproves you for a home, it's not actually for a purchase price. Rather, they’re looking at a maximum monthly mortgage payment as it relates to your gross monthly income. There's another little factor that goes into that: your debt profile. This includes your housing payment plus all of the other debts you currently have to pay.
So if you qualify for a home loan but then go out and buy a truck, you’re truck payment could be up to $1,000 or more. This can totally throw off your ability to qualify for your home. Remember, just because your loan application has been submitted and preapproved does not mean that the lender is not revisiting your debt profile over the course of the loan.
The lender is checking your finances all along the entire process. You should remain financially quiet during the loan process. Just be cool and calm and don't make any rash decisions before you get into the house. Once the keys are in your hand and the deed has been recorded, you're free to move about the cabin. Until then, remain buckled to avoid turbulence.
The Appraisal
Now we’ll look at the difference between an appraisal and a home inspection—because they're not the same thing. One of them may be required and the other one may not. A contingency that possibly could be in the timeframe of the contract is an appraisal for the loan as well as a home inspection. While a home inspection is not always something that is in the contract, it could be in the contract.
If you're borrowing money, an appraisal is always in a contract. The appraisal is basically an inspection created by an objective third party on behalf of two parties involved in the transaction—the seller and the lender. It's meant to protect both sides. Lenders want to make sure that they’re only lending in relation to a value that has been substantiated by the market.
The appraiser is going to go out to the property and do a couple of things. One, they're going to make sure that the home itself meets the minimum required guidelines of the program. Certain programs might require more than others, but it's going to make sure that it checks all those boxes. The other thing it's going to do—perhaps even more importantly—is determine value using comparable market sales.
Those comps help the lender to structure and bracket home values. They can look at a property that’s higher in value, one that’s a little bit lower, and compare how your property in the middle fits into that overall picture.
The Home Inspection
A home inspection is different from the appraisal, and it’s not necessarily required in the continuum of the contract. Rather, it’s something that's negotiated, at least in our area. A licensed home inspector will go out to the property and check things like appliances, the roof, the attic, and the basement.
They'll look everywhere and test all different types of outlets and more. Home inspectors do all different types of things, and different types of inspections can be done. This is not what the appraiser does. The appraiser is going to be more concerned with value and general property condition.
The home inspection, however, is like a physical for the house that you're getting. It's going to be a top to bottom analysis, and you're going to hear about everything you want to know and don't want to know in great detail. Again, information is power, so these are important things to hear.
Specific Inspections To Northern Virginia
In this area of Northern Virginia, we do have houses with land, which have wells and septic tanks. With those types of properties, there are some requirements for certain inspections. Additionally, some of the loan programs will defer to the appraiser to flag anything that may be related to the well and septic.
Other programs, such as the VA, require a termite inspection. While there may be certain inspections required, the good news is that as a buyer, you don't have to worry about it. If you're working with a realtor and lender, a lot of that's going to happen on the back end.
For example, some loans actually require a water test or a water sample. You simply want to consult with your realtor in the area that you are living or looking to buy a property in. They'll help guide you on what's required in that area for the loan type that you're currently working with or looking to work with.
Interest Rates
Now that you know about the continuum of the contract, some of the terminology, and the things that have to happen along the way, let’s go back to the beginning to ask an important question. When someone first calls their lender and is asking about interest rates, they have to lock the loan somewhere along the process.
Since rates are a little bit more up and down lately, when does that rate actually get locked in? According to Jessy, it’s complicated and depends on the buyer’s overall plans. If the home is new construction, that might be a different conversation than someone who is closing in three weeks and needs a competitive offer.
Locking It In
Jessy’s company does have options that allow buyers to lock and shop. Because we now know that the rates are going to continue increasing for at least the foreseeable future—a five to six-month minimum—you can always steal one of those opportunities to lock that rate.
Once you have an approved application and you're ready to go shopping, that helps to offset some risk associated with the fact that you may not get your first house that you write an offer on. Historically, rates are locked once you're under contract.
What you're doing is you are reserving an interest rate for the term of your loan (if it’s a fixed-rate loan). That interest rate is the rate at which you're paying back that money that you're borrowing or buying.
Understanding The Process
We hope this helped you understand the mortgage terms and process of buying a home. If you have any questions, feel free to reach out to me or my team, we’re here to help walk you through it.
