Are you getting ready to buy your first home?
Before you shop for a mortgage, it’s important to become familiar with the industry terms (and there are quite a few) that are commonly used. “Speaking the language” will help you make a better-informed decision and lead to the perfect mortgage for that perfect new home.
We put together a list of terms that will help you navigate the homebuying process like a pro.
Adjustable Rate Mortgage (ARM)- A mortgage loan with an interest rate is likely to change based on how the market is doing. An index (a rate based on market conditions) and a margin (a rate set by the lender before you apply for a loan) are added up to determine your ARM interest rate. Although an ARM may start with lower monthly payments than fixed-rate mortgages, they come with the risk that your payment will rise because the index changes.
Amortization- The repayment of a loan through installment payments.
Amortization Schedule- A schedule of payments designed to liquidate a debt. May be over any agreed upon period. An example of this would be a standard 30-year mortgage amortization wherein a borrower would make 360 equal consecutive monthly payments at the end of which the original loan would be paid in full.
Annual Percentage Rate (APR)- The APR is the cost of credit expressed in terms of an annual rate. This includes the interest rate plus additional charges that you pay for the loan. These charges may include other costs like points, private mortgage insurance, origination fees, and mortgage broker fees.
Appraised Value- The value assigned to a property by a licensed professional to assess its fair market value.
Balloon Payment- An inflated payment that comes due at an agreed upon time, usually at the end of the loan term.
Bankruptcy- A debtor that is judged legally insolvent and whose remaining property is then administered for the creditors or is distributed among them.
Cash Out Refinance- A type of loan wherein an existing loan is refinanced and the borrower can receive cash in addition to the amount of the home loan. The cash is considered part of the lien against the property securing the loan. A loan is considered a cash out refinance if cash out exceeds the greater of 2% or $2,000.
Closing Costs- Fees paid at the closing of a real estate transaction. Closing is considered the point in time when the property is transferred to the buyer. Closing costs are incurred by either the buyer or the . Examples of typical closing costs include attorney fees, title service fee, recording cost, and brokerage commissions.
Closing Disclosure (CD)- A closing disclosure is a five-page form that provides the final details about the mortgage loan. The CD includes the loan terms and projected monthly payments, as well as the fees and costs associated with the mortgage.
Conforming Loan- A loan that conforms to the loan amount guidelines set by Fannie Mae and Freddie Mac.
Conforming Loan Limits- The lending limits set by Fannie Mae and Freddie Mac.
Consumer Financial Protection Bureau (CFPB)- An agency of the United States Government responsible for consumer protection in the financial sector. They track payment history, account activity, and other relevant public records for the purposes of determining creditworthiness of individuals.
Conventional Mortgage- A loan not insured by any government program. Conventional loans are the most common type of mortgage.
Co-op- An apartment building or a group of dwellings owned by a corporation, the stockholders of which are residents of the dwelling(s).
Credit History- A history of an individual's ability to pay their bills on time as well as any other relevant public records.
Documents- Disclosures and written agreements that are required for the closing of the loan. Documents are the contract upon which the terms of the loan are outlined and agreed upon.
Equal Credit Opportunity Act- A federal law aimed at protecting borrowers from being discriminated against based upon such things as ethnicity, sex, location of property, andreligious beliefs.
Equity- The difference based between what is owed against a property and its fair market value.
Expense Ratios/Housing and Debt to Income Ratios- The number calculated by dividing all a borrower's monthly obligations by their gross income. Example: Mark has a total of $1200 in monthly bills and his gross income is $2400 per month. Mark's Debt to Income Ratio is 50% ($1200/$2400).
FICO Score- The best-known and most widely used credit score model in the United States. The FICO score is calculated with information from a consumer's credit files. It provides a snapshot of risk that banks and other institutions used to help make lending decisions.
Fannie Mae (Federal National Mortgage Association)- A publicly owned, government-sponsored corporation chartered in 1938 to purchase mortgages from lenders and resell them to investors. It packages mortgages backed by the Federal Housing Administration, but also sells some non government-backed mortgages.
First Mortgage- The loan in first position against a property that is usually the balance of the loan used to purchase a property in the first place.All other loans against the property are subordinate to this loan.
Foreclosure- Procedure whereby property pledged as security for a debt is sold to pay the debt in the event of a default in payments or terms.
Freddie Mac- A Congressionally chartered corporation that purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and securities for sale in the capital markets.
Interest Rate- Percentage charged on a mortgage that must be paid in addition to the principal.
Joint Tenancy- Ownership by two or more persons with right of survivorship. All joint tenants own equal interest and have equal rights in the property.
Jumbo Mortgage- A loan that exceeds conforming guidelines as defined by Fannie Mae on single family dwellings. A Jumbo mortgage is any mortgage that exceeds $417,000 for single family dwellings.
Liability- An obligation, responsibility, or debt. Examples of liability would include, a mortgage payment, a tax bill, an insurance bill, etc.
Lien- A form of encumbrance which usually makes property security for the payment of a debt or discharge of an obligation. Examples would include: judgments, taxes, mortgages, deeds of trust, etc.
Loan Estimate (LE)- A three-page form that the borrower receives after applying for a mortgage. The lender must provide the borrower with a Loan Estimate within three business days of receiving an application. The form provides key information including the estimated interest rate, monthly payment, and total closing costs for the loan. The form also provides information relative to the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.
Loan Origination- Initial contact where the borrower and lender agree to work together to secure a loan. Usually an application is taken and an initial quote is given. The borrower is asked to supply documents supporting the information that is included in the application and upon which the quote is based.
Loan to Value (LTV)- The percentage of your new home’s value that your mortgage will cover. For example, a home valued at $200,000 with a $160,000 mortgage has an LTV of 80 percent. This is one of the key factors lenders consider after appraising the home. The higher the LTV amount, the riskier it is for the lender to loan out the money.
Lock (Rate Lock)- A commitment from a lender to guarantee an interest rate for a borrower for a period. Rate locks expire after an agreed upon time.
Mortgage- An instrument recognized by law by which property is hypothecated to secure the payment of a debt or obligation; procedure for foreclosure in event of default is established by statute.
Mortgage Banker- A direct mortgage lender who funds loans in his or her own name and is usually more competitive than a broker in terms of "points" and "fees".
Mortgage Broker- A person who arranges mortgage loans through mortgage bankers. This person acts as a middleman and can "shop" your loan to get you the best rate and term available.
Mortgage Underwriter- The individual responsible for determining the final lending decision on the mortgage loan application. The underwriter approves or denies the loan based upon review of all pertinent documentation including appraisal of the real property, credit report detailing credit-worthiness, income documentation to establish ability to pay, as well as loan to value and other guidelines established by Fannie Mae and the Lender.
Mortgagee- The individual pledging (or mortgaging) property as security for the loan (mortgage). The borrower is the mortgagee.
Mortgagor- The recipient of a mortgagee’s pledge. The lender is the mortgagor.
Negative Amortization- A loan in which the interest rate and payment may change independently from each other creating the potential for the principal balance of the loan to increase rather than decrease over the term of the loan.
Net Worth- The difference between an individual’s assets and liabilities. Net worth takes into consideration all assets and liabilities (liquid and non-liquid) and can be a positive or negative number.
No Cash Out Refinance (Also known as a "Rate and Term" Refinance)- A loan in which a lender refinances the existing first mortgage, no other bills are paid off and the borrower receives no cash as part of the transaction. These loans are usually done to improve the borrower's interest rate and lower their mortgage payment.
Origination Fee- Fee charged by the lender for processing a new loan application.
“Piggyback” Second Mortgage- Either a home equity line of credit (HELOC)” or a home equity loan (HE-Loan), which is made at the same time as a first mortgage. A HELOC is a revolving line of credit and a HE-Loan is a fixed rate product. The purpose of a piggyback second mortgage is to allow individuals with low down payment savings to borrow additional money to qualify for a first mortgage without paying for Private Mortgage Insurance(PMI).
PITI- Acronym for “Principal, Interest, Taxes and Insurance the four basic elements of a monthly mortgage payment.
Point(s)- Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point costs 1% of the mortgage amount ($1,000 for every $100,000 borrowed).
Prepayment- Provision made for loan payments to be larger than those specified in the note.
Principal- The amount of money borrowed.
Principal Balance- The balance of the amount of the loan that is outstanding.
Private Mortgage Insurance (PMI)- A type of special insurance that may be required if the borrower has a conventional loan with a loan to value exceeding 80%. PMI protects the lender should the borrower stop making payments on the loan. PMI is arranged by the lender and provided by private insurance companies.
Processor- An employee who is responsible for disclosing the loan file and collecting documentation on the loan including, gathering all documentation and the clarification of information.
Qualifying Ratio- Qualifying ratios help lenders determine if they can lend money to the borrower based on their income and total expenses (also known as Housing to Income and Debt to Income ratios).
Rate Lock- See Lock.
Remaining Term- The time that is left before a loan is paid in full.
Second Mortgage- Another loan secured by the property much like a first mortgage. It is subordinate to the first mortgage. Second Mortgages can be fixed rate or Home Equity Lines of Credit (HELOC).
Security Instrument- Allows the lender to foreclose on your property if the borrower doesn’t pay back the money borrowed. The lender is given this right when the closing documents are signed.
Sub-Prime- Any loan in which the borrower has challenges in obtaining mortgage financing because of poor credit, hard to document income or assets, or any unique situation that would prevent them from obtaining funding through "conforming" lenders.
Tenancy in Common- Ownership by two or more persons who hold undivided interest, without right of survivorship; interests need not be equal.
Term- The agreed to amount of time for repayment of a loan.
Title Insurance- An insurance policy that protects the borrower and/or the lender against problems with the title to the property, such as someone with a legal claim against the home. Lenders Title Insurance is something that paid for by the borrower and only protects the Lender. The borrower may also purchase Owner’s Title Insurance which can help to protect his or her financial investment in the home.
Title Service Fees- Part of the closing costs paid when getting a mortgage and are the costs associated with issuing a title policy for the Lender.
Tri-Merge Credit Report- A credit report that pulls FICO Scores from all three major credit reporting bureaus—Experian, TransUnion and Equifax.
Speaking and understanding the lingo will help you through buying your first home with less stress.
Before long, you'll be the proud owner of a home you can afford and love for years to come. Ready to tackle the process like a pro?