The homebuying process is complicated, to say the least. Throw in some mortgage industry jargon and many potential homeowners are overwhelmed. The good news is that knowledge is power, and the more you know the smoother it becomes. Here are 30 loan jargon terms that tend to trip up first-time buyers.
Adjustable Rate Mortgage (ARM) - a mortgage with a changing interest rate, adjusting monthly, biannually, or annually.
Amortization - the process of paying a loan off over time in installments, detailing which portions go toward interest and principal.
Annual Percentage Rate (APR) - the rate of interest, either fixed or adjustable, that you will pay back to the mortgage lender.
Consumer Financial Protection Bureau (CFPB) - a government agency built to protect consumers by keeping banks and other financial service providers operating fairly.
Closing Costs - costs, including lender fees, third-party charges, taxes and transfer fees, the buyer must pay at closing when purchasing a property.
Conventional mortgage (conventional loan) - a mortgage offered by a government sponsored entity, separate from FHA loans or VA loans.
Debt to income ratio (DTI) - Your debt-to-income ratio DTI compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt. Higher percentages mean riskier investments for lenders.
Down Payment - the portion of purchase price the buyer is paying up front. Specific down payment amounts may be required in order to qualify for a mortgage.
Equity - the difference between the value of the home and the loan amount. Equity increases as a home’s value goes up and the loan amount goes down.
Escrow - allocated funds, held by a third party, to finance required property funds such as property taxes and insurance. The money is dispersed only when a specific condition is met, such as a borrower closing and taking possession of a property.
FHA Loan - a program allowing borrowers who may not qualify for conventional loans to obtain a mortgage, permitting they meet criteria set forth by the Federal Housing Administration, who insures the loans. These mortgages typically require a smaller down payment than other loan options.
Fixed Rate Mortgage - a mortgage with a consistent interest rate throughout the life of the loan.
Freddie Mac/Fannie Mae - two leading government sponsored enterprises (GSE’s), responsible for maintaining reasonable mortgage market stability.
Guarantor - a loan insurance program where the institution acting as guarantor assures repayment of loans in the event a borrower is unable to pay.
Interest Rate - fixed or variable percentages indicating the rate charged for use of money in a loan.
Jumbo mortgage - a loan amount above the conforming loan limits, typically with higher interest rates than conforming loans.
Loan-to-Value (LTV) ratio -. The ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value and make a $10,000 down payment, you will borrow $90,000 resulting in an LTV ratio of 90% (90,000/100,000)
Mortgage - the loan and supporting documentation for the purchase of a property.
Mortgage broker - an independent loan originator who works on behalf of consumers to obtain mortgage financing. Mortgage brokers are not tied to particular banks and instead work with numerous lenders. Motto Mortgage offices are an example of a mortgage brokerage.
Origination Fee - funds paid to the lender, possibly including an application fee, appraisal fee, fees for follow-up work and other associated costs with initiating the mortgage.
Points - percentage points of the loan amount.
Pre-qualification/Pre-approval– working with a loan originator, a both pre-approvals and pre-qualifications are process to determine how much mortgage you may be able to afford and what you potentially could be approved for. Pre-qualifications, unlike pre-approvals, do not require lender verification or underwriting.
Principal - the amount of money borrowed for the mortgage. The principal amount that is owed decreases as borrowers make regular payments.
Private Mortgage Insurance (PMI) - if a higher LTV deters lenders, borrowers can obtain private mortgage insurance. This guarantees that until the borrower reaches an 80% LTV, the lender is covered from default.
Processing fees - costs associated with creating the loan or mortgage, typically paid to the lender as part of closing costs.
Rate - a percentage reflecting the cost you pay to borrow money.
Servicer - an organization acting on behalf of a lender to administer the loan portfolio. This is the company that actually collects the mortgage principal, interest, and escrow payments from a borrower.
VA Loan - home loans guaranteed by the Veterans Administration, offered to veterans and their families.
1003 form - an industry standard loan application form used by nearly all mortgage lenders in the United States. The 1003 form details information about the borrower’s identity, employment history, income and more to convey whether a potential borrower is worth the risk. The form is either filled out directly by the borrower or, a loan originator works with the borrower to collect the information and submits to the lender on their behalf.
Still have questions? A mortgage expert, such as a loan originator in your local Motto Mortgage office, can help make sense of these and other mortgage jargon terms.
* Source: mortgagecalculator.org “Glossary Of Mortgage Terms”