Home Loan Terms Around Credit
Credit Score – a number between 300 and 850 that is used to help companies such as mortgage lenders determine how well you manage your finances. Your credit score is based on several factors such as your payment history, credit utilization rate, credit history, and credit mix. The ranges are:
- Exceptional: 800 – 850
- Very Good: 740 – 799
- Good: 671 – 739
- Fair: 580 – 669
- Poor: 300 – 579
Credit Utilization Rate (CUR) – a ratio of how much debt you owe vs your maximum credit. If you own $7,000 on two credit cards with maximums of $14,000, your CUR is 50%. The lower your Credit Utilization Rate, the higher your credit score.
Credit History – how long you have held credit lines open. If you have heard before that you shouldn’t cancel a credit card, this is why. Keep that credit card active even if you don’t use it because it lengthens your credit history and increases your credit score.
Credit Bureau – a company that calculates your credit score. The main credit bureaus are Experian, Equifax, and TransUnion.
Adjustable Rate Mortgage (ARM) – a type of home mortgage where your interest rate is locked for a period of time, then can fluctuate due to market conditions. The type of ARM is often displayed as a ratio, such as 5/1. A 5/1 adjustable rate mortgage is one with a locked interest rate for 5 years, afterwards, the interest rate can be adjusted every year.
Fixed Rate Mortgage – a type of home mortgage that will have the same interest rate for the duration of the loan.
Conventional loan – the most common type of home mortgage, a conventional loan is not offered or secured by a government entity but through a private lending company.
Federal Housing Administration (FHA) Loan – a type of loan insured by the FHA and offered by FHA-approved lending companies. This type of loan was created to help people become first-time, low-income home buyers.
Veterans Affairs (VA) Loan – a type of home mortgage secured by the federal government and is only available to military veterans.
United States Department of Agriculture (USDA) Loan – a type of loan offered to low-income Americans to help them purchase homes in rural parts of the country.
Home Loan Terms around Buying a House
Pre-approval letter – a letter given to you by your mortgage lender to show home sellers. This letter exists to help them feel more comfortable that you are indeed pre-approved and will most likely be able to afford the home.
Down payment – how much money you are willing to pay in cash for the purchase of the home.
Offer– when you decide you want to purchase a home, you submit an offer including the amount you are willing to pay for the property and the conditions to do so.
Counteroffer – when a home seller responds to your offer asking for different terms, such as more money for the home.
Contract – a document that legally binds the home buyer and seller on the sale of the home.
Inspection – an event where a licensed home inspector checks the property for both major and minor issues such as rodent activity, water leaks, or equipment malfunctions.
Appraisal – where a home value expert surveys the property to verify it is worth at least the amount listed on the contract.
Underwriting – the process used by the mortgage lender to finalize the loan conditions such as the amount, interest rate, and terms.
Closing – the final step of the home buying process where the buyer legally takes possession of the home.