Mortgage Terms You Should Understand

August 9, 2019
Author: New England Home Mortgage

The process of getting a loan and buying a home can be confusing and overwhelming, especially if you don’t know the mortgage jargon. Here are mortgage terms to know and understand to aid you in your home buying process.

Adjustable Rate Mortgage (ARM) - A home mortgage loan with interest rates that can change.

Amortization - Paying off a loan in fixed, regular installments that cover both the principal and interest of the loan.

Appraisal - A certified professional’s estimate of the market value of a home.

Clear to Close - A letter from a loan officer stating final approval for a home mortgage loan. This is issued after the underwriter has approved all documentation necessary to schedule a closing.

Closing Disclosure (CD) - A five-page document received at least three days before closing that reviews details about your loan, its terms, projected monthly payments and closing costs.

Conforming Loan - A mortgage loan that conforms to guidelines set by Fannie Mae and Freddie Mac.

Conventional Loan - A mortgage that is not guaranteed or insured by a government agency.

Credit Report - A full history of your credit prepared by a credit bureau.

Credit Score - A number based on credit history to determine creditworthiness. Scores range from 300 to 850. The higher the score, the more trustworthy the person is to a lender.

Down Payment - A portion of the purchase price, paid upfront in cash. Down payments for mortgages range from 3% to 20% of the price of the home.

DTI - Debt-to-Income Ratio. This is your total monthly bills divided by your gross monthly income, expressed as a percentage. The lower the DTI, the less risky you are to lenders.

Earnest Money - A deposit made to a seller to secure the contract. This becomes part of the down payment.

Escrow - A contractual agreement when a third party receives and distributes funds in a transaction. When there are conditions to the sale of a house, the down payment is held in escrow until the conditions are met.

Fannie Mae and Freddie Mac- The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are government sponsored enterprises that help make mortgages more accessible by guaranteeing loans for lenders.

Fixed Rate Mortgage (FRM) - a home mortgage loan with interest rates that remain the same for the entire term of the loan

Foreclosure - A legal process that takes place when a homeowner fails to make mortgage payments. The home may be sold in a short sale or foreclosure auction. If the home does not sell, ownership is taken over by the lender.

GSE - A Government Sponsored Enterprise is a financial service corporation created by U.S. Congress. Fannie Mae and Freddie Mac are both GSEs.  

Home Equity - The amount of your home’s market value minus loan balances and any liens on the property. As mortgage balance is paid down, home equity goes up.

Jumbo Loan -  A mortgage that exceeds loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are non-conforming.

Lien - A legal claim to property if the owner does not fulfill obligations to the creditor. A mortgage is a type of lien.

Loan Estimate - A three-page document detailing important information about the loan when you apply for a mortgage.

Loan-to-Value Ratio (LTV) - Expresses (as a percentage) the ratio of the loan to the appraised value of a property. Lenders examine the LTV before approving a mortgage. Those with a higher LTV may require mortgage insurance.

Mortgage - A loan to help finance purchasing a home, paid back in monthly payments.

Mortgage Broker - Reviews the borrower’s financial situation and matches them to a lender that will give the best rate and terms.

Mortgage Lender - Licensed professionals who fund your loan directly or through a third party.

Non-conforming Loan  - Loans that do not meet the criteria set by government-sponsored enterprises. Fannie Mae and Freddie Mac cannot buy non-conforming loans.

PITI - The four parts to a mortgage: Principal, Interest, Taxes, Insurance.

PMI - Private Mortgage Insurance is insurance you are required to have if you put less than 20% down with a conventional loan. PMI protects the lender if the borrower stops making payments.

Pre-approved - Getting pre-approved requires a mortgage application and appropriate documentation for the lender to run a credit report. The lender can then tell the borrower the specific amount they are approved for.  

Pre-qualified - A lender gives an idea of the size of loan you may qualify for, based on information you provide. This step is more informal than getting pre-approved and does not require an in-depth look at the borrower’s credit history.

Refinance - When a borrower replaces an existing mortgage with a new one. Refinancing is done for better rates and terms.

Second Mortgage - A loan taken out on a property that is already mortgaged, using the borrower’s home as collateral.

Short Sale - When a house is sold for less than the outstanding mortgage on it.

Title Insurance - Provides insurance to show the borrower has ownership of the home. There are two types of title insurance: one protects the lender, the other protects the borrower from unknown claims to the ownership of the property.

Underwriter - Mortgage underwriters evaluate an applicant’s income, credit history, debt ratio, and savings. The underwriter gives final approval or denial of the loan.

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