Demystifying the mortgage process

Mortgage and Lending with Horizon Lending Services, LLC NMLS # 942863

Buying a new home can be exciting for first-time and seasoned homebuyers alike, but the mortgage process can often take away from some of the fun. In addition to having to bring in mountains of paperwork to verify your income and assets, the process of shopping around at various lenders and trying to keep your credit in tip-top shape to get the best interest rate can make the entire thing into a stressful headache.


Add to that the jargon that's being thrown around by your real estate agent, seller, and lender, and you can feel ready to throw in the towel before you even really begin...but don't! While it can be time consuming and a tad bit frustrating, the whole mortgage process will be much easier to understand if you just take a few minutes to understand some of the common and important terms you're likely going to hear during the process. Here's a look:


APR (annual percentage rate)

The APR is the annual percentage rate of your mortgage. You want to aim for the lowest APR you can find, as this is the interest you'll be paying on your loan's principal amount. Not sure what that is either?

Your loan's principal amount is the actual amount your lender is financing. For instance, if you’re buying a home for $230,000 and putting $20,000 down of your own money, your lender is financing $210,000. That's your loan's principal amount. Keep in mind some closing costs and other fees are likely to be added on to the principal, but we'll use $210,000 in our calculations to keep things simple.

If your ARP is 5.016% (average for a 30-year fixed mortgage), your monthly payment will be $1,129.38. Over the life of the loan (30 years), you'll actually pay a total of $406,576.66 even though the home was only $210,000. That's where your lender is making their money. In all, you'll have paid $196,576.66 in interest (or "finance charges"). Most people refinance their mortgages at some point, however, or pay them off early. Don't let this scare you away!


Earnest Money Deposit

An Earnest Money Deposit or "good faith" deposit is something a buyer may give to a seller to show that they’re seriously interested in purchasing the home and closing the deal. While an Earnest Money Deposit is not a necessity to making an offer on a property, it can help your offer stand out by showing that you’re serious with money in hand and ready to make the next move. How much Earnest Money you put down will be dependent on your home's cost, the home's popularity, and how much you can afford to put down. Your real estate agent can help guide you on a good amount to put forth.

If a seller gets a $5,000 earnest money deposit, for example, they're going to be motivated to accept your offer right away compared to an identical offer made by another buyer who didn't put any earnest money down.



"Escrow" is the process of having a middle-man hold your funds to ensure that both parties (the seller and you, the buyer) hold up your end of the bargain when purchasing a home. The escrow process ensures that you have the funding available to purchase the home and finalize the deal, without fully passing it over to the seller. When the money is in escrow, neither you or the seller have access to it. The release of the money to the seller may be dependent on a final inspection or some other contingency in your contract. If things fall through, the money will be removed from escrow and returned to you/your lender.


FICO Score

You'll definitely want to become familiar with your FICO score in the coming months as it’ll play a huge role in helping you acquire financing and a good interest rate. Your FICO score is a credit score calculated by FICO. FICO is a company that has their own scoring model, combining information from all three major credit bureaus (Equifax, TransUnion, and Experian). Your FICO score is the score most lenders use when financing you for a big purchase.

You may want to pay to signup for FICO's website in order to get a look at your FICO score. That's because scores showed to you through free platforms, such as Credit Karma, are calculated using a slightly different scoring model. This can mean scores shown to you by Credit Karma, and from individual bureaus, can be slightly higher or lower than the FICO score that lenders will use to determine your credit worthiness.



When it comes to getting a mortgage, you'll likely be tempted into buying points by your lender. These points (which are also called "discount points") will need to be paid directly to your lender when closing on your new home. By paying your lender a certain amount up front, you're able to reduce your interest rate. You may hear this process referred to as "buying down the rate" to help lower your overall mortgage re-payment cost. For every percentage point that you would like to buy off your interest rate, you'll pay 1% of your mortgage amount. 

This means that, for every $100,000 being financed, you'll have to pay $1,000.

For the $210,000 loan we used as an example earlier, one point would equal $2,100 (1% of the principal amount).


What are other real estate terms that you want to learn more about? Comment and let us know so we can create another similar post!

Learn more about Horizon Lending Services.


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Sharon Mistowski

Horizon Lending Services, LLC
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