10 Important Mortgage Terminology About Home Loan Financing and Banking Terms

This article contains 10 important Mortgage Terms you should understand after getting a mortgage loan to acquire your dream home. However, in this article you will get know the few important mortgage terms you should become familiar with, as you’ll come across them during the application process.

Therefore, we’ve put together a list of 10 essential mortgage terms that you’ll encounter when you’re ready to apply for a mortgage loan. Meanwhile, these are the Advantages and Disadvantages of Joint Mortgage Loan for Family Home.

Below are the key mortgage terms:

Appraisal Mortgage Terms

An appraisal is a process carried out by the bank to evaluate the income, net worth, and cash flow of a potential borrower. Its purpose is to determine if the individual is capable of repaying the mortgage loan. After completing the appraisal, the request loan amount may be adjust based on certain factors.

In some cases, the bank may require additional collateral or assets to approve the mortgage loan. The appraisal provides assurance to the bank that they are not lending more money than the borrower can afford to repay.

Credit Scoring Mortgage Terms

Credit scoring is a process use to evaluate the financial reliability of an applicant. It involves considering personal characteristics like household size, age, and economic factors such as income level, employment status, cash flow, and credit score.

Additionally, the valuation of the property is also taken into account. The bank uses these factors to determine if the applicant meets the requirements for a mortgage loan. The credit scoring system helps the bank assess the qualification of the applicant.

Equity Contribution Mortgage Terms

Equity contribution refers to the money you can immediately put towards buying a property. Since many people don’t have enough savings to buy a property outright, there is a gap between the equity contribution and the total house price, which needs financing.

The bank typically requires applicants to provide an equity contribution ranging from 20% to 30% or more, depending on the loan value and the applicant’s risk profile.

Debt-To-Income (DTI) Ratio

Your DTI (Debt-to-Income) ratio is calculated by dividing your total fixed and recurring monthly debts by your total monthly gross household income. Mortgage banks examine your DTI when evaluating you for a loan to ensure that you have sufficient income to make your monthly payments.

If your DTI is too high, it could be challenging to find a loan. Most lenders typically prefer applicants with a DTI of 50% or lower.

Principal Mortgage Terms

The principal refers to the initial amount of money borrowed when you first obtain a home loan. To calculate the principal, subtract the down payment you made from the total selling price of the home.

For example, let’s say you purchase a home for N 6,000,000 with a 30% down payment. In this case, you would make a down payment of N 1,800,000. The remaining amount of the loan, which is N 4,200,000, would be covered by your mortgage lender. Therefore, your principal balance would be N 4,200,000, as this is the amount you owe to your mortgage lender.

Term/Tenure

Your mortgage term, also known as tenure, refers to the number of years over which you will make monthly payments on your loan until you fully own your home. For instance, if you choose a mortgage loan with a 10-year term, it means that you will make regular monthly payments for 10 years until the loan reaches maturity.

Amortization

Amortization refers to the way your mortgage payments is distribute over time. Each payment you make is divide into two parts: a portion that goes towards paying off the interest and a portion that goes towards reducing the loan principal.

At the start of your loan, a larger proportion of your payment is allocate towards interest, while a smaller portion goes towards the principal. However, as time passes, you gradually reduce the principal amount, resulting in lower interest payments.

An amortization schedule helps you visualize your consistent monthly payments and ensures that you stay on course to fully repay your loan within the specified term.

Asset

An asset refers to a valuable item or property that is used as collateral to secure the loan. When you apply for a mortgage to purchase a home or property, the lender typically assesses the value of the property and considers it as the primary asset. If you fail to repay the loan as agreed, the lender may have the right to seize and sell the property to recover the outstanding balance.

Assets can include various types of properties, such as residential homes, commercial buildings, or undeveloped land. These assets serve as a form of security for the lender, providing assurance that they can recoup their funds in case of default.

The specific asset considered in a mortgage depends on the nature of the loan and the property being financed. It’s important to note that other factors, such as the borrower’s income, credit history, and debt-to-income ratio, also play a role in determining mortgage eligibility and terms.

Fixed-Rate Mortgage

A fixed-rate mortgage means that the interest rate remains constant for the entire duration of the loan. For instance, if you secure a 15-year fixed-rate loan with a 4% interest rate, you’ll pay 4% interest on your loan every month throughout the 15-year period. In Nigeria, fixed-rate mortgages are commonly use in offering borrowers the stability of consistent monthly payments over the loan term.

Title

A title serves as evidence that you are the rightful owner of a home. It contains important information about the property, such as its physical description, the names of the property owners, and any existing liens. When someone mentions being “on the title” of a home, it means they have some legal ownership rights to the property. In Nigeria, there are several recognizable titles, including Certificate of Occupancy, Deed of Assignment, Deed of Lease, Deed of Sub-Lease, Land Certificate, Deed of Mortgage, and Survey Plan.

These are the 10 Important Mortgage Terms you should understand and be familiar with as these terms provides applicants with a better understanding of what to expect during the mortgage application process. It allows them to communicate more confidently with the account officer assisting them and avoids appearing inexperienced or uninformed.

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