Thinking about applying for a home? Trying to figure out the path to owning the home or property of your dreams? There are many factors that go into applying for a mortgage. It's important to understand the terms used in mortgage transactions to decide if a certain loan is right for you. Here is a list of some mortgage-related terms that will help you in your home-buying process.
Adjustable rate mortgage (ARM): a mortgage in which the interest rate is adjusted periodically in accordance to a pre-selected index. An ARM has a fixed interest rate for a certain number of years, which is usually at a lower rate. After that period is over, the interest rate can increase or decrease during specific intervals.
Adjustment date: the date when an ARM’s interest rate will change.
Adjustment interval: the time period between interest rate changes for an ARM. Depending on what type of ARM it is, this number is fixed.
Amortization: the schedule for paying back a loan. Usually includes the amount borrowed for the loan with the interest accrued. Each month, the borrower can see how much of their payment goes to the amount borrowed as well as interest.
Annual percentage rate (APR): a yearly rate of how much interest and fees are made payable to the lender. This is the price that the borrower pays for using the lender’s funds.
Application: A mortgage application is a document completed by one or more individuals applying to borrow money to purchase real estate.
Appraisal: an estimate of what the property is worth. This is determined by an appraiser, qualified to assess the value of the property.
Assessed valuation: the value that a taxing authority places on property for tax purposes.
Assessment: a determination of market value that is typically utilized to calculate property taxes.
Borrower: a person or entity that obtains funds in the form of a loan in exchange for a promise to pay.
Buydown: money paid up front by an individual to reduce monthly payments for a mortgage. This can be done for the entire life of the loan or for an initial period of years.
Cash to close: the liquid assets that are available to be used to pay the closing costs of a mortgage transaction.
Closing: the last step in buying and financing a home. During this meeting the borrower will be signing documents such as the Mortgage and Loan Note. A Deed will be prepared to show the transfer of ownership in the property from the Seller to the Buyer.
Closing costs: the costs a buyer pays in conjunction with purchasing a property. This can include fees such as attorney, origination, credit report, appraisal and flood determinations.
Co-borrower: additional buyers whose credit and income contributes towards qualifying for the loan. The name(s) of co-borrowers appear on documents, holding equal legal obligations.
Collateral: property pledged as security for debt.
Commitment letter: formal offer by a lender which states the terms under which it agrees to loan money to a borrower.
Conventional mortgage: a mortgage that is not obtained under a government insured program such as FHA or VA.
Debt-to-income ratio: Compares a borrower’s monthly payments on debts to the borrower’s monthly income. This is one factor that a lender considers when making a decision on a loan request. It also helps to estimate if the borrower will be capable of repaying the loan.
Default: the failure to perform an obligation as agreed through the Promissory Note.
Delinquency: a loan payment that is overdue within the period allowed, before the default is declared.
Deposit: (Also known as earnest money,) a certain sum of money given to bind a sale of real estate.
Depreciation: a loss of value in real estate property brought about by age, deterioration, and functional or economic obsolescence.
Down payment: the money that a borrower puts down on a home. Lenders often require specific down payments in order for borrowers to qualify for a loan.
Equal Credit Opportunity Act (ECOA): a Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs, or past of exercising rights under the Consumer Credit Protection Act.
Equity: the difference between the fair market value of a home and the outstanding balance on the loan, or the ownership of interest.
Escrow Account: an account established to collect funds for your property taxes and homeowners insurance. When these payments come due, the lender will pay the appropriate party.
Fair Credit Reporting Act (FCRA): a Federal law that promotes accuracy, fairness and privacy for data used by consumer reporting agencies. Consumer reporting agencies include credit bureaus and financial agencies that collect, store, use, and disseminate consumer information for use in credit background checks.
Fixed rate mortgage: a mortgage that has a set interest rate throughout the entire term of the loan.
Foreclosure: a legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower’s debt.
Gross monthly income: total monthly income earned before tax and other deductions.
Homeowner’s insurance: property insurance on a home. Some lenders may require this insurance within the terms of a mortgage in order to protect the property.
Interest rate: the percentage of an amount of money which is paid for its use for a specific time.
Lien: a legal claim or attachment against a property as security for payment of an obligation.
Loan-to-value ratio (LTV): the ratio between the amount of a given mortgage loan and the lower of sales price or appraised value.
Monthly payment: the amount of principal, interest, taxes and insurance (PITI) paid each month on a mortgage note.
Mortgage: a loan to purchase a home.
Mortgagee: the lender on a mortgage transaction.
Mortgage Insurance Premium (MIP): the consideration paid by a borrower for mortgage insurance either to the FHA or to a private mortgage insurer.
Occupancy: use of property as a residence, either by the title holder or another party through a rental agreement.
Origination fee: The amount charged for services performed by the company handling the initial application and processing of the loan. These costs can include application fees, appraisal fees and others.
Points: also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments..
Preapproval: an amount of money that the lender determines a borrower may be eligible for. This is recommended before you begin shopping for a home.
Principal balance: remaining balance due on a loan, exclusive of accrued interest.
Private mortgage insurance (PMI): an insurance that may be necessary in order to secure a mortgage.
Survey: measurement and description of land by a qualified surveyor.
Title: the document which proves legal ownership of a property.
Title insurance: insurance policy that protects a borrower from errors with a property’s title. May be necessary to obtain some mortgages.
Truth in Lending: set of federal regulations that lenders must adhere to.
Underwriting: a lender’s decision to approve or deny a loan. Takes into consideration all factors that are relevant. Examples of this are credit scores, debt-to-income ratios, and loan-to-value ratios.