When it comes to the mortgage industry there are many terms that can leave borrowers scratching their heads.  As with any industry, there are several words and phrases that are used mainly by the people working in that industry.  For those looking to apply for a mortgage when buying a home or those wanting to refinance their existing mortgage, understanding these terms will help one in navigating the process.

Adjustable Rate Mortgage (ARM)

The ARM is a mortgage that has an interest that can change during the life of the mortgage.  The rate can go up or go down based on market interest rates.  Often these ARM loans have annual, periodic and/or lifetime caps which limit how much the interest rate can rise at any one given time and over the life of the loan.  See also Fixed Rate Mortgage

Appraisal

The process where an Appraiser provides an opinion of value on a home.  When borrowing to purchase a home the opinion of value is used to determine if the home is within the Loan to Value (LTV) requirements for the lender.  If the value is lower than needed the buyer may need to come with more cash to closing or the seller may need to reduce their price.

Appraiser

A trained, licensed person who is responsible for preparing an appraisal report.  The appraisal report is used by lenders to obtain the value of a home.

Cash Out Refinance

Refinance of an existing mortgage along with additional cash provided to the borrower based on equity they have in the home.

Clear to Close

The amount of money that a homebuyer will need to bring to closing. Depending on the amount and local rules and regulations the money may need to be brought in the form of a certified check or may need to be electronically wired into the title company’s escrow account. Instructions on how to provide funds for cash to close should be provided to the homebuyer well in advance.

Cash to Close

The amount of money the borrower may need to bring to closing.  Usually, cash to close is required when buying a home and can include the down payment, closing costs, taxes, first year homeowners’ insurance payment, other taxes and fees and more.  Sometimes closing costs may be required with a mortgage refinance, but more likely those costs will be financed into the loan and no extra cash will be required.

Closing Costs

Amounts that are paid upon closing of the purchase of a home.  These expenses will include pro-rated taxes, one year homeowners’ insurance premium, HOA fees (if any), lender costs, real estate agent commissions, title company costs.  Generally, these fees are paid out of pocket and are over and above any down payment requirements, though home buyers can have these costs financed into the mortgage.

Conventional Mortgage

Conventional mortgages are loans to purchase a home which are not guaranteed by the Federal Government (USDA, FHA, VA).  These mortgages are usually provided by a private lender.

Credit Pull

Soft and Hard credit pulls.  Refers to obtaining a credit report and FICO score from one of the three credit reporting companies.  A soft credit pull means the homebuyer’s credit score is not impacted and is done prior to an actual application being put in.  With a hard credit pull the homebuyer’s credit score can be impacted, especially if more than one hard credit pull is done within a short period of time.  Soft credit pulls can only be seen by the borrower whereas hard credit pulls show up in the general credit report that any lender can view.

Down Payment

The amount of money the homebuyer is bringing to closing to meet down payment requirements of the loan.  With a conventional mortgage, a down payment of at least 20% ensures the homebuyer is not paying any mortgage insurance.

Debt to Income Ratio (DTI)

Is the ratio mortgage lenders use to determine how much money a homebuyer can borrow to purchase a home.  Mortgage lenders want to make sure homebuyers have the ability to pay back the loan without getting behind due to not having enough income.  The DTI compares a homebuyer’s income to their debt obligations.

Earnest Money

Earnest money represents a good faith deposit by the homebuyer to show the seller they are serious about purchasing a home.  Usually, the earnest money is to be deposited within a real estate broker’s trust account or the trust account of a title company who will handle the closing.  The earnest money is held in the trust account until closing in which case it is credited towards the buyer’s payment.  If the purchase contract is cancelled prior to closing the earnest money could go back to the buyers depending on the terms of the purchase agreement language, the sellers may also have a claim to the earnest money.

Escrow Account

Escrow accounts are trust type of bank accounts where money is held by the account owner on behalf of another. Real estate brokers and title companies maintain escrow accounts to hold money in anticipation of a real estate transaction. Once the transaction closes or cancelled the money in the escrow account should be transferred in accordance with the terms of the contract. A mortgage servicer who maintains escrow accounts on behalf of borrowers hold the money to pay for taxes and insurance as those payments come due.

FHA Mortgage

Federal Housing Administration (FHA) is a US Government agency that falls within the Department of Housing and Urban Development (HUD).  The FHA Mortgage offers lower down payment requirements and lower credit score thresholds as compared to conventional mortgages.  FHA mortgages will require a Mortgage Insurance Premium (MIP) and an upfront mortgage insurance premium (UFMIP).  The MIP is paid monthly in addition to the principal and interest payments and the UFMIP is paid at the start of the loan.  The MIP and UFMIP payments will be based on LTV amounts.

FICO Score

FICO is short for Fair Isaac Corporation, who is responsible for the credit score that is used as part of the mortgage application to determine how much and at what rates a mortgage borrower is eligible for.  FICO scores range from 300 to 850.  A higher credit score means a borrower can get better numbers on their mortgage in terms of the interest rate, how much can be borrowed and how much down payment is required.

Fixed Rate Mortgage

In a fixed rate mortgage the interest rate does not change for the entire term of the loan. See also Adjustable Rate Mortgage.

Form 1003 Uniform Residential Loan Application (URLA)

This is the standardized form used by most mortgage lenders to determine whether a homebuyer qualifies for a mortgage.

Home Equity Line of Credit (HELOC)

This is a line of credit with access to cash that can be drawn as the need arises. One can have a HELOC and not have anything used on the line of credit thus owning nothing.  One can also borrow the maximum allowed on the line of credit which will requirement repayment in accordance with the terms of the HELOC. The interest rates on HELOCs are usually adjustable but there are HELOCs with fixed rates as well.

Home Equity

The value of the home which is in excess of the amount owed on a mortgage.  For instance if a home is valued at $400,000 and the homeowners owes $250.000 on the mortgage their home equity would be $150,000.  Homeowners can use their home equity to borrow money through the use of HELOCs or Home Quity Loans.  Homeowners can also get cash back with a cash out refinance based on having equity in excess of the amount of the loan being taken out with the refinance.

Loan Estimate

The loan estimate is a document required to be provided to mortgage applicants within three days after the lender has received a completed application. The loan estimate will provide an estimate of the interest rate one can expect to pay, origination fees, closing costs and more. Loan estimates are what can be used for a direct comparison between different lenders to determine who has the best lending deal.

Loan to Value Ratio (LTV) Cumulative Loan to Value Ratio (CLTV)

LTV is short for Loan to Value and CLTV is Combined Loan to Value.  Loan to value is a ratio that represents the amount of money being borrowed for the purchase (or refinance) of a home in relation to the total value of the home.  Whereas the LTV only looks at the primary mortgage, the CLTV looks are all loans on a particular property (such as HELOC and primary mortgage).  A home buyer looking to put down 20% on their mortgage will have an LTV of 80%.

Home Equity Loan

A home equity loan is a onetime draw loan where the homeowner gets a lump sum amount of money based on equity they have in their home.  Usually with a home equity loan repayment begins immediately on a monthly basis after the loan is taken out.  Since the home acts as collateral for the loan, interest rates are lower as compared to unsecured personal loans.  Home equity loans will have fixed interest rates for the term of the loan.

Interest Rate Buy Down

Money paid up front in order to temporarily or permanently reduce one’s interest rate for a mortgage loan. Also known as mortgage points.

Mortgage Insurance Premium (MIP)

Mortgage Insurance Premium is the amount required to be paid as part of an upfront mortgage insurance premium (UFMIP) cost and monthly cost (MIP) added to the principal and interest payments for FHA mortgages.  The amount of the MIP and UFMIP will be based on the LTV of the loan.

Mortgage Refinance

The process of taking out a new mortgage to refinance the old mortgage. Usually this is done when a lower interest rate can be obtained compared to the current interest rate. Some homeowners opt to do a cash out refinance where additional cash from home equity is taken out as part of the refinance.

Mortgage Term

The mortgage term is the time in which one must pay back the loan.  Most mortgages offer 30- or 15-year payback periods.  Some lenders may offer 40, 20, 10 year and other length of loan payback period.

Origination Fees

Fees charged by the lender for providing a mortgage loan. Origination fees will vary between lenders.

Principal, Interest, Taxes and Insurance (PITI)

The PITI represents the entire mortgage payment of principal and interest payment along with taxes and insurance when taxes and insurance are being paid into escrow. Escrow payments of insurance and property taxes will be required of certain borrowers depending on the LTV, credit score, property risk and more.

Private Mortgage Insurance (PMI)

Required insurance payment when the homebuyer is making a downpayment less than 20% of the home’s purchase price with a conventional mortgage.  The amount of the PMI payment will be based on total loan amount, down payment amount and the homebuyers credit score.  PMI can be requested to be stopped when the homebuyer has reached 20% home equity in the home and must be stopped when the homeowner has reached 22% home equity.

Pre-Approval Letter

A letter stating a buyer is pre-approved to purchase a home up to a certain amount based on full review of financial documents along with a credit check.  Home sellers prefer a pre-approval letter as opposed to a pre-qualification letter due to the more thorough review of the homebuyer’s credit and financial information. In order to get a pre-approval letter with sufficient time the homebuyer should be getting ready with their paperwork and financial information well before starting the home search process.

Pre-Qualification Letter

A pre-qualification letter is not as common as the pre-approval letter mentioned above and is based more on an initial review of the homebuyer’s personally reported credit and financial situation.

USDA Mortgage

A mortgage available for certain rural properties and guaranteed by the U.S. Department of Agriculture.  The USDA mortgage offers no down payment options, low interest rates with flexible credit requirements.

VA Funding Fee

A one time fee paid when closing on the VA Mortgage and is used by the VA to help cover the costs of the program.  The fee will be based on the loan type, down payment amount, first or subsequent use.  It can be paid up front or financed into the loan.  Certain Veterans may be eligible to have the fee waived based on their service connected disability rating.

VA Mortgage

A mortgage guaranteed by the U.S. Department of Veteran Affairs (VA) and available to military veterans, current serving military members (Active Duty and qualified Reservists) and select surviving spouses. VA mortgage benefits include zero down payment, no private mortgage insurance, easier credit qualifications and more.

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