Adjustable Rate Mortgage (ARM): interest rates on this type of mortgage adjusted up or down periodically depending on a specified financial index.
Amortization: repayment of a mortgage debt with equal periodic payments of both principal and interest. Monthly payments on fully amortizing loans are calculated to payoff the obligation at the end of the mortgage term.
Annual Percentage Rate (APR): the finance charge for a loan recalculated to including points and loan fees in addition to the stated interest rate. Important: there is controversy as to how APR is calculated and the APR for the same loan can vary by Lender.
Appraisal: an expert opinion of the value or worth of a property. Important: an appraisal is not a home inspection and the appraised value as an opinion is more art than science.
Automated Underwriting: also called desktop underwriting, AU, and DU, are software programs that approve or deny mortgage applications. Almost all mortgage are run through automated underwriting for a decision.
Closing: also called settlement or passing papers, the meeting where the deed to property is legally transferred from seller to buyer and the mortgage documents are signed.
Closing Costs: all the fees you will be charged to close your loan other then points and pre-paids.
Conforming Loan: also called a conventional loan, a loan that conforms to Fannie or Freddie Mac requirements, these are the basic primary mortgage programs.
Counteroffer: when the seller or buyer responds to a bid. If you decide to offer $200,000 for a home listed at $225,000, the seller might counter your offer and propose a purchase price of $220,000. This new proposal and any subsequent offers are called counteroffers.
Credit Report: a credit report lists all of your credit accounts and provides a detailed payment history. Lenders use this information in determining eligibility for loans.
Credit Score: also called FICO scores, a computer generated score produced by a formula that rates your credit history.
Debt-to-Income Ratio (DTI): all your monthly debt plus your proposed housing payment (PITI) in relation to your gross (pretax) monthly income.
Discount Fee: also know as points, interest paid up front at the time the loan to buy down the interest rate.
Down Payment: the percentage or amount in dollars of the purchase price that the buyer must contribute with their own funds.
Earnest Money: a deposit paid when the purchase contract is signed. In some areas this is called the “Binder.”
Equity: the difference between the market value and what is owed on a property.
Escrow: a fund or account held by a third-party custodian until conditions of a contract are met. Earnest money is normally held in escrow as are the property taxes and insurance made with monthly mortgage payments.
Fee Simple: the most basic type of ownership, under which the owner has the right to use and dispose of the property at will.
FHA Loan: a mortgage that is insured by the Federal Housing Administration which has lower down payment requirements.
Fixed-Rate Mortgage: interest rates on this type of mortgage remain the same over the life of the loan term compared to Adjustable Rate Mortgages.
Foreclosure: legal action taken to remove a homeowner’s rights and interest in a property so that the property can be sold to satisfy a mortgage debt.
Good Faith Estimate (GFE): a government form supplied by your Lender listing all the terms and costs of your loan.
Hazard Insurance: insurance for property damage from specified hazards such as fire and wind.
Homeowner’s Insurance: insurance coverage that included hazard insurance as well as personal liability and theft.
Home Warranty: insurance that covers the home and appliances (with exclusions) to be in working condition for a certain period of time, usually one year. Sellers normally purchase home warranties as an incentive for buyers to purchase their home.
Income Ratio: your proposed monthly housing payment (PITI) in relation to your gross (pretax) monthly income.
Interest: the cost of borrowing money, usually expressed as a percentage over time.
Lien: a security claim on property until a debt is satisfied. A mortgage is a lien.
Loan Officer: also called loan consultant, mortgage consultant, and originator, this is your primary contact at your Lender that takes your application and helps you through the loan process.
Loan-to-Value Ratio (LTV): the ratio of the loan amount to the value of the property.
Mortgage Insurance (MI): insurance that protects the Lender and secondary market in case of borrower default. MI is typically required when the borrower makes less than a 20% down payment.
PITI: also called the housing payment, it is the monthly principal, interest, taxes, and insurance which forms the monthly mortgage payments.
Point: one point is 1% of the loan principal paid up front to reduce the interest rate on the loan.
Pre-paids: are items that you will pay at closing to obtain your loan that are not closing costs. Pre-paids are not costs to obtain a loan, rather they are items you are pre-paying, such as hazard insurance.
Prepayment Penalty: a fee paid by a borrower in addition to the principal when paying off a loan before an agreed time period.
Pre-approval: a mortgage approval subject to finding a property. Pre-approval and pre-qualification are often confused. You must apply and fill out an application, all disclosures, and supply your documentation to be pre-approved.
Pre-qualification: an informal estimate of how much financing a potential borrower might expect to obtain versus a pre-approval when a mortgage is applied for prior to finding a property.
Principal: the amount of money borrowed on which interest is charged.
Truth-in-Lending (TILA): a government form supplied by your Lender listing additional loan information including whether or not there is a prepayment penalty and the APR.
Title: the ownership of a specific property.
Title Insurance: insurance that protects against loss from legal defects in the title.
Title Search: a detailed examination of the entire document history of a property title to make sure there are no legal encumbrances.
Underwriter: the person who approves or denies your loan application, generally using automated underwriting, and clears your loan to close once they are satisfied.