Glossary of mortgage terms
Buying a home can be a high-stress time and it feels even more stressful when you don’t understand the lingo being tossed around. From abbreviated words in listings to acronyms used by real estate agents and loan officers, sometimes it can feel like everyone is speaking a different language. Knowing these terms will keep you on the same page as everyone you are working with.
Have more questions about the mortgage process? Ask a loan officer and he or she will be happy to help you.
Adjustable-Rate Mortgage (ARM)
An ARM is a mortgage option thats interest rate changes after an initial period (typically five or seven years). After this fixed period of time, the rate will adjust periodically to reflect market conditions for the remaining term (typically ARM Mortgages have a 30-year term). Most ARMs have caps on how much the interest rate may increase. ARMS usually are a good option if you don’t plan on being in your home for more than five years.
Amortization is the gradual reduction of your loan’s balance through regularly made payments. Most borrowers take out a loan with the goal of full amortization in mind. A fully amortized loan would result in the principal balance dwindling to zero at the conclusion of the loan’s term.
How much money do you make in a year? Not just for full-time work, but any part-time work, self-employment, tips, bonuses or from other sources. Your lender will use this information to determine how much you can afford on a monthly basis.
Annual Percentage Rate (APR)
An APR is a standardized method of calculating the cost of a mortgage, stated as a yearly rate which includes such items as interest, mortgage insurance, and certain points or credit costs. It is meant to help you compare different loan options. Comparing loans without the APR is like comparing apples to oranges. For example, a lower interest rate with high fees might not be as good of a deal as a slightly higher interest rate with lower fees. By incorporating these fees into a single rate, you can easily compare loans with different fees, rates, or different terms.
A residential appraisal is an unbiased opinion of the market value at a specific point in time, meaning what is the most probable price a willing buyer would pay for a specific property, conducted by a third-party expert known as an appraiser. The appraised value of a home is based on an analysis of the property’s condition and similar home sales. Appraisal happens after an initial offer is accepted and is one of the first steps towards closing the sale of a home.
Many banks and mortgage servicing companies allow you to set up automatic payments, which will deduct the funds needed to pay your monthly payment directly from you bank account. You don’t have to remember to pay your mortgage payment every month because it happens automatically.
A balloon payment — or balloon note — is a large lump sum payment that borrowers owe before a home loan can fully amortize. Backloading the bulk of the principal comes with a couple of benefits for homeowners — namely reduced interest rates and lower mortgage payments.
These are the fees that you must pay to complete the transaction of purchasing a home. Closing costs can often include loan origination fees (which cover the cost of underwriting and more), payments to the lender’s attorney, credit report fees, and the title search fee. Figure all of these costs combined can be anywhere from 2 percent to 5 percent of the total price of the house.
Under CFPB rules, the Closing Disclosure must be provided to you at least three business days prior to the loan closing. It’s designed to present a uniform accounting of rates, terms and costs and the clearly marked sections make it easy to compare to the previously issued Loan Estimate. It’s issued for new home purchases as well as refinances.
A construction loan is a specialized type of loan used to finance building residential property. They may also be called self-build construction loans, home-building loans, construction mortgages, “one-time close loan” or “two-time close loan.” Either a professional builder or a consumer homebuyer can take out a construction loan for the purpose of building a house.
Conventional loans are mortgages that are not insured by any government agency, with the terms of the agreement settled between you and your lender. Among conventional loans are some of the most popular home loans in the mortgage industry, like fixed-rate mortgages of 30-, 15-, or 10-year terms, adjustable-rate mortgages, and non-conforming jumbo mortgages.
A cosigner effectively acts as a backup source of repayment should the primary borrower fail to keep up with installments. This arrangement is especially helpful for young people without borrowing experience who might have trouble securing a line of credit on their own. Not only does this arrangement help your financing application get approved, but the added security of a cosigner might lead to more favorable terms for your loan.
A credit history is a record of all of your credit account and shows how responsibly you’ve used your credit and repaid your debts.
A credit score is a three-digit number that succinctly articulates your credit history and financial reputation to future lenders. Essentially, it’s a reflection of your ability to pay your debts in a consistent and timely manner.
Debt-to-Income ratio (DTI)
The DTI ratio is the percentage of your income that goes toward paying monthly bills with your new mortgage payment. The lower your DTI is, the more likely you’ll be able to get the loan you are looking for. You will need a 43 percent DTI or below to get a Qualified Mortgage, which is a category of loans that are more stable.
Down payments are an initial investment in your new home that establishes your ownership of the property. Down payments typically amount to 20% or more of the home’s sale price, but that can vary depending on which type of mortgage you choose.
The rest of the sales price is loaned by your lender, establishing their lien on the property as well.
Earnest money is a deposit, usually somewhere around 1% or 2% of the purchase price, you put down on a new home before closing. Whereas a down payment is meant to show lenders you have the funds to cover a good portion of the sale price, earnest money is focused on easing the seller’s concerns. It tells the seller that you’re making an offer on their house in good faith. If for some reason the sale falls through, the seller can hold on to the earnest money.
Equity outlines how much you owe on your mortgage loan compared to what the home is worth. The amount of equity you have in your property is first established through a down payment and gradually increases as you pay off the remaining balance on your mortgage. Any rise in the value of your property also impacts your share of equity.
Escrow is a legal agreement where a neutral third-party stores funds until a certain process is fulfilled. In some states, any funds or assets associated with a home sale are held in escrow until all terms of the purchase agreement are satisfied by both parties. Once the sale is complete, the escrow company will distribute those funds according to the agreed upon contract. Also, many lenders use an escrow account to hold funds that will be used to pay for homeownership costs like taxes and insurance.
The Federal Housing Administration of the U.S. Department of Housing and Urban Development insures against loss for certain qualifying residential mortgage loans made by private lenders. These loans must meet FHA standards for construction and underwriting. The FHA does not lend money directly.
It does offer mortgage insurance to FHA-approved lenders, encouraging them to extend home loans to borrowers who might otherwise be viewed as too risky. The FHA was created in 1934 as part of the New Deal. Its purpose: to make it easier for people everywhere to qualify for a mortgage and buy a home.
An FHA loan is a mortgage that is backed by the federal government. FHA collects insurance premiums from borrowers through the lenders, and these funds are then used to insure against losses from defaults or foreclosures. Because of the nature of this program, homebuyers with higher debt-to-income ratios, lower credit scores, and lower incomes are able to still purchase a mortgage. FHA loans have been the way for millions of homeowners to secure a primary residence.
FHA mortgage limits
There is a limit to how much you can borrow with a FHA loan, so it is important to make sure that you know how much of a loan you are able to get. The limits depend on the type of home being purchased, the state where it is being purchased, and the county it is located in. The maximum amount that is allowed is known as the FHA lending limit. These are usually updated every year.
According to most federal agencies, including HUD, a “first-time homebuyer” is defined as any individual who has no ownership in a principal residence over the last three years. Because both the federal and state governments have long believed in homeownership as a key driver of personal and generational wealth, there are certain programs, policies, and products in place to provide incentives to first-time homeowners.
A home loan with an interest rate that is set when you take out the loan. The interest rate will not change during the life of the loan and provides you with a clear amortization schedule that shows how much you’ll be paying in principal and interest over time.
This is the nickname for Federal National Mortgage Association. It is a government-chartered non-bank financial services company and the nation’s largest source of financing for home mortgages. It was started to make sure mortgage money is available in all areas of the country. It is important to note that you cannot get a loan directly through Fannie Mae. You must work with a mortgage professional to obtain the loan.
When a homeowner misses or completely stops making their mortgage payments, the lender can repossess the property and the home goes into foreclosure. A mortgage acts as a lien on the property to secure financing when applying for a loan. This lien gives the lender the right to repossess the property in the event of a mortgage default. Failure to pay homeowners association fees or property taxes can also result in home foreclosure.
When a lender does reclaim a property, they will attempt to resell it. These homes are usually priced below market value and can be purchased from a variety of sellers.
FHLMC is the nickname for Federal Home Loan Mortgage Corp. A financial corporation chartered by the federal government to buy pools of mortgages from lenders and sell securities backed by these mortgages. Like Fannie Mae, Freddie Mac does not work directly work with consumers. You must work with a mortgage professional to obtain the loan.
For Sale by Owner (FSBO)
A method of selling property without the use of an agent or broker.
Home Equity Conversion Mortgage (HECM)
A home equity conversion mortgage (HECM) is a loan that utilizes the equity in your home, and the lender pays you based on that equity. This flips the roles of the lender and the borrower. HECMs are specialized financial tools designed specifically for seniors who may need extra money to cover their expenses. However, there are certain criteria you must meet to qualify for a FHA HECM.
A HELOC means home equity line of credit and it's a revolving credit line that converts your home equity into funds you can withdraw at any time during your draw period. A HELOC will use your property as collateral. You can usually use the funds from a HELOC on anything you choose to.
Home Equity Loan (HEL)
A home equity loan is when you use your home as collateral to access cash in the form of a lump-sum payment. In effect, you are borrowing against your built-up equity at a fixed rate determined by current interest rates.
Homeowners Association (HOA)
This nonprofit association manages the common areas of a condominium or planned unit development. Unit owners pay an association fee to maintain areas owned jointly. These dues are not part of your mortgage payment but will be considered as part of your debt-to-income ratio. If you are buying a condo, your mortgage lender will require information from the association to determine the health of the association.
Homeowner’s Insurance (HOI)
An insurance policy that combines personal liability insurance and hazard insurance coverage for a residence and its contents. You are usually required to have this coverage to close on your loan.
The objective of a home inspection is to uncover any existing issues with the physical structure of the house before purchase. This is typically done once under contract but before final closing. It is paid for by the buyer and often allows you the opportunity to back out of the deal depending on what’s found.
The index serves as a reference point for prevailing interest rates, mirroring overall market conditions. It fluctuates in response to market dynamics. When combined with the margin of your loan, variations in the index influence adjustments to the interest rate for adjustable-rate mortgage loans.
An interest-only mortgage requires the borrower to make payments solely on the interest due on the loan monthly rather than both the interest and the principal — at least at first. This arrangement lasts for a set amount of time — say, 5 years — before adding the principal back into the equation. Essentially, you’re reducing your monthly mortgage payments in the short term. That also means, however, that you’ll wind up spending more on housing costs once the interest-only period comes to an end.
Interest rates, calculated as a percentage of the overall loan, describe how much you’ll pay to borrow money for a home purchase throughout the duration of the loan.
A jumbo loan, or jumbo mortgage, is a financing structure that is typically used to purchase larger properties or luxury homes in high-end real estate markets. These loans exceed the limits set by the Federal Housing Finance Agency, and therefore, can’t be guaranteed or securitized by government-backed enterprises like Fannie Mae or Freddie Mac.
A lien is a legal claim to assets used to secure the repayment of a debt or loan. When a lien is put on a house, for example, the homeowner does have the opportunity to fully repay the debt or loan, but the lien allows the creditor to take legal possession of the property if the terms of the obligation are not met. Every type of mortgage effectively places a lien on the property.
A loan estimate is a three-page form issued to you by your lender after you have applied for a loan. It details important information regarding your loan including terms, interest rate, estimated taxes and insurance, total monthly payment and an array of key features affecting your loan.
A loan-to-value ratio measures what percentage of a real estate purchase comes from financing. Basically, lenders want to know how much of the total cost they’re loaning compared with the amount the borrower is paying. To do that, your lender compares the value of the property with the amount of the loan.
Mortgage insurance is usually paid by the borrower and works to protect the lender in the off-chance that you won’t be able to keep up with the payments. Your lender will likely attach a private mortgage insurance requirement if your down payment isn’t at least 20%.
The length of time that a borrower and lender agree to take to pay off the home loan.
Multiple Listing Service (MLS)
A service used by real estate brokers to distribute information on properties for sale to other brokers in the community. When you visit websites like Zillow or Redfin, the information you see is being pulled from the MLS.
The payoff amount is the total payment needed to fulfill your mortgage loan and clear your debt. It encompasses the principal, interest, and any outstanding fees incurred until the intended payoff date, which is different from your current balance.
Mortgage points are credits you can purchase from your lender—on top of your closing costs and down payment—to lower your interest rate when you take out a new home loan. Lenders may refer to these credits as mortgage points, mortgage discount points, lender credits or even simply “points,” but the basic concept will always remain the same.
Purchasing mortgage points is also known as “buying down the rate.”
A penalty for paying off a mortgage early. It’s usually specified in your loan estimate but can also be found in a prepayment clause or closing disclosure.
Principal, Interest, Taxes and Insurance (PITI)
PITI stands for principal, interest, taxes, and insurance, which are the four main components of your mortgage payment. Depending on the exact terms of your lending agreement, you may have additional expenses that are bundled into your monthly housing costs. But PITI represents the lion’s share of your mortgage payments.
Private Mortgage Insurance (PMI)
Insurance that protects mortgage lenders against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if your down payment is less than 20 percent of the sale price. You pay for the coverage in monthly installments and can often have it removed once your equity is greater than 20%
A property tax is a tax paid on a residential or commercial property owned by individuals like you or a legal entity. The rate is determined by your local government and are used to fund schools, safety, public spaces and parks, streets, sanitation, and government services.
A purchase agreement is a legal document detailing the terms of a potential real estate transaction. Once signed, you are contractually bound to hold up your end of the deal and the seller is bound to hold up theirs.
Refinancing a property is a method of obtaining a new mortgage so you can take advantage of lower prevailing interest rates in the marketplace. This is accomplished by applying for a new loan with the intention of seeking a more favorable credit agreement between yourself and the lender.
A mortgage servicer is the organization that you will be sending your monthly payments to who acts on behalf of the owner of the loan. In the weeks after you close on your mortgage, you may receive a Notice of Servicing Transfer from your lender or servicer.
A Temporary Buydown reduces your interest rate on your mortgage for the first year or two of your loan. The seller is required to contribute to your loan to lower the rate during the initial period, and then payments go back up after that initial period is over. This is called a ‘sellers concession’, and it’s necessary for the program to function.
Truth In Lending Act (TILA)
The Truth in Lending Act (TILA) is a piece of federal legislation engineered specifically to help protect you from unfair lending practices. The intended effect was to create increased transparency in lending, protect consumers from misleading or inaccurate information and help borrowers make better decisions as they shop around for the best home loan or credit card.
TILA RESPA Integrated Disclosures (TRID) (aka Know Before You Owe)
This is a rule from the CFPB (Consumer Financial Protection Bureau) that amends components of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The new rule replaces and integrates several disclosures into two separate and distinct disclosures known as the Loan Estimate and the Closing Disclosure. By law you must be provided with the Loan Estimate within three days of the initial application and Closing Disclosure at least three days in advance of closing, so that you are aware of the costs in advance of signing the paperwork and writing the check. The Closing Disclosure is a financial disclosure accounting for all funds changing hands at the closing. It is one of the most important documents you will get when you close on your home. Make sure you hold on to it because you will need it when you refinance, sell your home or try to get another mortgage.
The U.S. Government offers a number of mortgage products that are less restrictive and more affordable than conventional loans. One example is the USDA Rural Development home loan, backed by the U.S. Department of Agriculture, originally designed to help rural citizens become homeowners. Because the USDA guarantees 90% of each loan in case of borrower default, lenders can extend attractive features to borrowers like low down-payment options, low interest rates and minimal insurance costs.
Provided by the U.S. Department of Veterans Affairs, VA loans provide affordable mortgage options for military veterans, active service members and their families by easing some of the financial burdens associated with buying a home. The VA guarantees private lenders that home loans for qualified military members will be backed up should the home fall into foreclosure. This added government assurance grants lenders with the flexibility to expand homebuying opportunities for service members looking to apply for a mortgage.
Hopefully, this glossary of common terms you’ll encounter when buying a home will help you prepare yourself. If you have any more questions, be sure to reach out to an expert loan officer who’ll be able to take you through the whole process, step-by-step.
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