Terms from A-Z that will help you understand and speak the mortgage industry lingo.
Just to make life a little bit easier, we've rounded up the most common terms that will help you understand and speak mortgage industry lingo.
The gradual repayment of a debt in small, scheduled payments, which combine the principle as well as the interest. An “amortization schedule” shows the amount of balance or interest on each payment, as well as the time frame to pay off the loan.
A professional assessment of the value of the home. Completed by trained professionals, appraisals are used to help lenders make decisions on whether or not to write a loan. They can impact loan approval.
Annual Percentage Rate. This is the cost to borrow money as stated on an annual basis. APR is used on almost all loans, including mortgage loans. In some cases the APR can include the interest rate as well as the fees.
A mortgage loan with an interest rate that can be adjusted over time. They are usually adjusted annually, and most have a cap on the amount of interest that can be charged. They usually come with an early period during which the rate is fixed.
A large payment at the end of a “balloon mortgage.” Balloon mortgages have low rates and smaller monthly payments, but do not fully pay off the loan. Once the terms are complete, the borrower has to make one large payment, the “balloon payment,” to finalize the debt.
Borrower-Paid Mortgage Insurance. This is an insurance program that covers the lender from financial loss but is paid by the borrower. Almost all mortgage insurance is paid by the borrower, but the advantage is that more loans are available thanks to BPMI.
A short-term loan used to help homeowners go from one house to another without selling their current home. These loans usually last long enough to sell the previous home, often less than a year.
A refinancing option that lets you turn current equity into cash. The cash can be used for many different purposes, but it’s often converted into home repairs, remodeling, or paying off debt.
Fees related to the real estate transaction and mortgage loan. The closing costs can include a wide range of items, including a loan-origination charge, realtor fees, government-recording fee, and taxes.
The property that secures the loan. The “collateral” is the property and home, and the bank keeps a right to claim this collateral if the loan is not repaid.
A formal letter issued by the lender that declares their intention to fund the loan. The letter generally states the terms and conditions that will be provided, as well as the total amount. This letter is often required by real estate agents and sellers before they will show a home.
A loan that is eligible for purchase on the secondary market by Fannie Mae or Freddie Mac. These loans will meet the guidelines, including loan limits, of these two government-backed organizations.
A home loan that is not guaranteed, supported, purchased, or provided in any way by a government office such as the VA, FHA, and USDA, or government-supported companies like Fannie Mae and Freddie Mac.
Debt-To-Income ratio. This is a representation of the amount of debt a borrower has compared to the amount of income they earn in a month. The total is used to make lending decisions. In general lenders like to see low DTIs; usually reaching 40% to 50% DTI creates financial risk to lenders.
When loan payments have not been made. A loan goes into delinquency after multiple payments have been missed. Delinquency can technically occur after a single missed payment, but usually the lender won’t take significant action unless multiple payments have been missed.
A portion of the purchase amount that comes directly from the borrower. The borrower usually borrows a specific amount, and the lender will require that they bring a down payment. However, there are loans that require no down payments.
The percentage of the home that you own. If you have a mortgage loan, the bank owns a portion and you own a portion. If you completely own the home, with no other ownership against your house, you have 100% equity.
Property, usually money, that is kept by a third party until a specific condition is met, at which point the property is released from escrow. In real estate, the home buyer pays money for closing the deal to an escrow agent, which holds the finances. Once the payments are made, the agent releases the money to the seller.
Federal National Mortgage Association. Fannie Mae is a publicly-traded company created and supported by the United States government that purchases loans on the secondary market. Created in 1938 and part of the New Deal, Fannie Mae works to make home loans more available for borrowers.
The Federal Housing Administration. Created in 1934 as part of the National Housing Act, this agency is now under the Department of Housing and Urban Development (HUD). This administration is responsible for setting construction and housing standards, and insures loans that meet their specific guidelines, which increases loan availability for the general public.
A loan insured by the FHA. The FHA does not loan money, but instead provides insurance to lenders on loans that meet the administration’s specific guidelines, which can include requirements for credit, down payments, and income.
The Federal Housing Finance Agency. Not to be confused with the FHA, the FHFA sets lending limits and provides oversight for Fannie Mae and Freddie Mac. It was created in 2008 as a response to the financial crises.
A loan with an interest rate that does not change. Unlike adjustable-rate loans, fixed-rate loans allow the borrower to know exactly how much they will pay in the future, as the rate and total payment will not fluctuate.
Seizure of property by a lender. When a lender makes a mortgage loan, they keep a legal right to take possession of the home if payments are not made. The home may then be sold in a “foreclosure auction.”
The Federal Home Loan Mortgage Corporation. Like Fannie Mae, this is a government-sponsored company that provides support to the real-estate lending sector. It was created in 1970 with the goal of expanding the secondary market.
A Home Equity Line of Credit. This is a line of credit secured by your home that gives you access to a revolving fund of money. It is not a lump-sum loan, but rather an account from which you can make withdrawals. To secure the loan, the lender is given the rights of a lien against your home.
The Department of Housing and Urban Development. This is a cabinet-level department that directly advises the President and oversees agencies such as the FHA and FHFA.
A loan where the borrower only pays the interest on a mortgage loan for a specific term, usually about five to seven years.
A large loan that is above and beyond the limits set by government institutions. Jumbo loans, which do not have government insurance or support, generally have tighter approval requirements, although they may not have higher interest rates as is often assumed.
A legal right to your property. If a lender has a lien against your property, they have the right to take possession of the property in order to be compensated for the loan.
Loan-To-Value ratio. This is an expression of the total loan amount compared to the stated value of the home, which is usually established with an appraisal. If the loan covers the entire value of the home, the LTV is 100%. Generally lenders want the LTV to be low, which reduces risk.
The process of borrowing money and creating the loan. Origination includes many different steps, starting with the loan application, submission of documents, and assessment by the lender. There are usually loan origination fees involved in the loan.
A person who owns the home and also lives in the property. If you own the house where you live, you are an owner-occupant. Some loans require owner-occupant status for a certain period.
An initial approval of the loan for which you have applied. Pre-approval generally includes credit checks and document verification, so it is more significant, but also more time-consuming, than pre-qualification.
Private Mortgage Insurance. This is the insurance policy paid by the borrower on conventional loans, which are not supported by government programs. Usually PMI is removed once the borrower reaches 20% equity on the property.
Also called “discount points,” these are fees paid to the lender that reduce the total interest rate you pay. Essentially, you pay for points to get a lower interest rate.
Land and any property attached directly to it. Real property doesn’t just include the land, but can also include buildings, fixtures, materials, equipment, and structures that are attached to the land. Real property can also include the resources attached to land, such as oil or crops, assuming the crops have not been harvested yet.
A process of getting a new mortgage loan in place of your existing one. Most borrowers will refinance in order to get better terms, such as a lower interest rate. They may also refinance to a longer term, such as a 15-year to a 30-year mortgage, which will have lower monthly payments.
Cash reserves kept on hand by the borrower to help increase the chances of mortgage approval. Lenders will often require cash reserves, which gives them assurance that if the borrower loses their income, the payments can still be made. They are especially common for high-risk loans, such as jumbo loans.
Any home that is not your primary residence. Second homes typically include vacation homes and weekend homes.
Insurance that provides compensation if there are issues with the home’s title after a purchase. For example, if an estate home is sold but a family member appears years later with a legal claim to the property, the title insurance will provide financial resources to settle the issue.
The process of determining whether or not a loan should be made. Underwriting will include a wide variety of information, including credit checks, debt-to-income ratios, and loan-to-value ratios. Most lenders use risk-assessment software as part of their underwriting process.
Loans backed by the United States Department of Agriculture. These loans are part of the USDA’s Rural Development program, which seeks to improve homeownership in rural and small-town areas. One of the top advantages of USDA loans is that you can get 100% financing (no down payment), assuming the house you buy is in a qualifying area.
Loans guaranteed by the Department of Veterans Affairs. They are available to qualifying service members, veterans, and some family members, including spouses and children. They also include the option of 100% financing.