Amortization
repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years).
Annual Percentage Rate (APR)
calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Application
the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal
a document that gives an estimate of a property’s fair market value; a lender generally requires an appraisal before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
ARM
Adjustable-Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly-payment amount, however, is usually subject to a cap.
Closing
also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; at this time, the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Closing costs
Customary costs above and beyond the property’s sale price must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
Conventional loan
is a private-sector loan that is not guaranteed or insured by the U.S. government.
Credit report
a record that lists all past and present debts and the timeliness of their repayment; it documents an individual’s credit history.
Credit bureau score (FICO)
a number representing the possibility a borrower may default; it is based upon credit history and is used to determine the ability to qualify for a mortgage loan.
Debt-to-income ratio
a comparison of gross income to housing and non-housing expenses; with the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Discount point
typically paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.
Down payment
the portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan.
Fannie Mae
Federal National Mortgage Association (FNMA); a federally chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential home buyers.
FHA
Federal Housing Administration, established in 1934 to advance homeownership opportunities for all Americans, assists home buyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate mortgage
a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Foreclosure
a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac
Federal Home Loan Mortgage Corporation (FHLMC) is a federally chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new home buyers.
Interest rate
the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Loan-to-value (LTV) ratio
a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Mortgage
a lien on the property that secures the promise to repay a loan.
Mortgage banker
a company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
Mortgage broker
a firm that originates and processes loans for a number of lenders.
Mortgage Insurance
a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.
Mortgage insurance premium (MIP)
A monthly payment, usually part of the mortgage payment, is paid by a borrower for mortgage insurance.
Origination
The process of preparing, submitting, and evaluating a loan application generally includes a credit check, employment verification, and property appraisal.
Origination fee
the charge for originating a loan is usually calculated in the form of points and paid at closing.
PITI – Principal, Interest, Taxes, and Insurance
the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
PMI
Private Mortgage Insurance: privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of the purchase price.
Pre-approval
lender commits to lend to a potential borrower; commitment remains if the borrower still meets the qualification requirements at the time of purchase.
Pre-qualify
a lender informally determines the maximum amount an individual is eligible to borrow.
Refinancing
paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Underwriting
The process of analyzing a loan application to determine the amount of risk involved in making the loan includes a review of the potential borrower’s credit history and a judgment of the property value.
VA
Department of Veterans Affairs: a federal agency that guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
