When you’re getting ready to apply for a mortgage loan, you’re likely to hear a lot of terminology (or “gobbledeygook” … “mumbo-jumbo” … whatever you’d like to call it) with which you might be unfamiliar. Here’s a glossary of terms you’re likely to hear, and it’s probably a good idea to know their meanings.
1. Conventional financing: this is the traditional method of financing real estate purchases. Typically referred to as 30-Year fixed-rate mortgages, they may have level payments or graduated payments. If less than a 20% down payment is made, private mortgage insurance (PMI) is required. The typical minimum down payment for these loans is 5%.
2. VA Loans: eligible veterans may qualify for Veterans Administration loans. The VA guarantees a portion of these loans. The veteran, depending on the sales price and financial qualifications, may obtain a no-down-payment loan. The VA determines the maximum interest rate.
3. FHA Loans: these loans are insured by the Federal Housing Administration (FHA). There is an up-front mortgage insurance premium (MIP) regardless of the down payment. FHA has a variety of loans (some with down payments of less than 5%). Fixed rate, graduated payments and adjustable rate loans are also available.
4. Adjustable Rate Mortgages (ARM): the interest rate may change at regular intervals based upon a pre-determined index.
5. Credit Report: a report of the past ability of a loan applicant to pay installment payments, and also provides the lender with the applicant’s credit score.
6. Appraisal: a report written by a qualified expert stating an opinion of value of the property based on its particular characteristics and the selling prices of similar properties in the area.
7. Fixed rate mortgage: a loan with an interest rate that remains constant for the entire repayment term.
8. Equity: your ownership interest or the portion of the value of the property that exceeds the current amount of your home loan. Example: if the property is valued at $100,000 and your mortgage loan is $75,000, you have $25,000 in equity in the home.
9. Commitment letter: a binding, written pledge by the lender to a mortgage applicant to make a loan, usually under certain stated conditions.
10. Debt-to-income ratio: a formula that lenders use to determine the loan amount for which you may qualify. This is also known as back-end ratio.
11. Bridge loan: a loan which enables homebuyers to obtain financing on a new home prior to selling their currently-owned home.
13. FICO score: a numerical rating developed and maintained by Fair Isaac, the company that indicates a borrower’s credit worthiness based on specific criteria.
13. Front-end ratio: also known as the housing-expense-to-income ratio, it compares your proposed monthly house payment (PITI) to your total household gross monthly income.
14. “Float the rate”: this term is used when a mortgage applicant chooses not to secure a rate lock, but instead allows the interest rate to fluctuate until the applicant decides to “lock in”; usually no later than five days prior to closing.
15. Good faith estimate: a document that tells mortgage borrowers the approximate costs they will pay at or before closing.
16. Homeowners or hazard insurance: real estate insurance policy required of the buyer by the lender, protecting the property against loss caused by fire, some natural causes, vandalism, etc.
17. HUD 1: a settlement statement, which is a standard form developed by The Department of Housing & Urban Development, used to disclose costs at closing.
18. Mortgage insurance: an insurance policy that will repay a portion of the loan if the borrower does not make payments as agreed in the note. Mortgage insurance may be required in cases where the borrower makes less than a 20% down payment on the home loan.
19. Origination fee: the amount collected by the lender for making a loan. It is generally equal to a 1% (or one point) of the principal amount borrowed.
20. Points: 1 point equals 1% of the loan amount. Total points on the loan include origination points, used to offset the cost of making a loan and discount points, which can be paid to reduce the interest rate.
21. Pre-approval: a written statement from a lender, subject to specific conditions such as a property appraisal and other stated conditions, that lets you know exactly how much home you can afford.
22. Pre-paids: that portion of your loan closing costs which must be collected at settlement to cover future taxes, interest and insurance.
23. Principal: the amount of the loan, excluding interest; or the remaining balance of a loan, excluding interest.
24. Private mortgage insurance (PMI): a mortgage insurance policy on a Conventional mortgage issued by a private insurance company.
25. Processing: the completion of a mortgage loan application with supporting documents.
26. Rate lock: the borrower and the lender agree to protect the interest rate, points and term of the loan while the loan is being processed.
27. Sub-prime loan: a home financing program that accommodates borrowers with special qualifying factors, including poor credit histories.
28. Truth in lending statement: required by federal regulations; the statement tells buyers the cost of financing their loan expressed as an annual percentage rate (APR). Do not confuse the APR rate with your interest rate, which is used to determine your monthly principal and interest payment.
29. Annual percentage rate (APR): a term used to represent the percentage relationship of the total finance charge to the amount of the loan, over the term of the loan. Do not confuse the APR with your quoted interest rate, which is used to determine your monthly principal and interest payment. The APR reflects the cost of your mortgage loan as a yearly rate. It will be higher than the interest rate stated on the note because it includes (in addition to the interest rate) loan discount points, fees and mortgage insurance.
30. Underwriting: the process of the lender reviewing the application, documentation and property prior to rendering a loan commitment.
Melissa DelGaudio is a REALTOR and is an expert in Real Estate Sales in Annapolis, Anne Arundel County and the Chesapeake Bay Region of Maryland.
