Key Terms Every Colorado First Time Home Buyer Must Know
If you’re in the middle of a home purchase or just in the information-gathering phase, you’ve probably come across some terms that sound unfamiliar. Afterall, if you’re a first time home buyer, you’re being introduced into a whole new world!
We compiled a list of some of the most frequently asked about terms to help make your Colorado home purchase easier. Knowing what these terms mean and how they impact you will set you up for success throughout your real estate transaction and beyond.
Appraisal: Whether you’re a first time home buyer or you’re purchasing your tenth home, if you get a loan, you will need to have an appraisal. The appraisal will determine the home’s value. Your appraiser will look at the property itself and see how it measures up to recently sold homes similar in size and amenities. This is an extremely important event during the escrow process since your lender will not approve a loan for more than the appraised value.
PMI: PMI is an acronym for Private Mortgage Insurance. Not every first time home buyer will have to pay PMI. You will only be responsible for paying this fee if you do not have at least a 20% down payment. The purpose of this insurance is to protect the lender in case you were to default on the loan. You can expect to pay between 0.25% and 2% per year in PMI. Depending on the type of loan you get, you may be able to have this additional fee removed once you have 20% equity in your home.
To learn more about PMI, check out this article.
DTI: Another acronym you will likely hear while going through the loan application and approval process. DTI stands for Debt-to-Income. This ratio is important because it is part of a lender’s decision-making process to approve your loan. If you already have too much debt, they will worry that you won’t be able to make your mortgage payments.
Learn more about calculating your DTI here, or give us a call, and we would be happy to help!
Earnest Money: Once you get under contract on a home, you will be required to give an earnest money deposit to the title company immediately. The amount of your earnest money will be determined when you make your offer, and if everything moves along as planned, this money will go toward your down payment or closing costs at the close of escrow.
Earnest money is used to show that you are acting in good faith and intend to follow the steps of the purchase contract and ultimately close on the property. If the transaction falls through because you got cold feet or did something outside of the contract terms, your earnest money will be given to the seller. However, if you were to cancel the transaction based on, let’s say, something that was found during the home inspection, you would get the earnest money returned to you as long as all proper documentation was submitted in the allotted time.
What else would you like to know about the home buying process? We are here to help! Send us a message or give us a call to get started.