Mortgage Terms (Glossary)

Refer to this list when you want to understand key words throughout the mortgage process; always reach out to me if you have any questions.

To search for a particular term:

• On mobile Google Chrome, tap the 3 vertical dots in the top right corner, then select “Find in        page”, then search for the term
• On a PC, simultaneously press the Ctrl and “F” key, then search for the term
• On a Mac, simultaneously press the Command and “F” key, then search for the term

Amortization

                Over the term (30yr, 15yr, etc.) of a mortgage, a portion of the set monthly payment is applied to the principal balance, and a portion pays for interest charges. As the principal balance get smaller after years of payments, a greater portion of the mortgage payment is applied to the balance because the interest charge is calculated based on that now smaller principal amount.

Appraisal

                A report which shows the market value of a home. This assures the bank that they are not lending more money than the property is worth, and gives guidance to the buyer if they are paying too much for the home.

ARM (Adjustable Rate Mortgage)

                A mortgage option in which the rate will be fixed for a number of years (5yrs, 7yrs, 10yrs) then will adjust based on market conditions at that time. Often, but not always, buying an ARM can give you a lower interest rate because you are taking a risk.

Assessed value

                The value of a home determined by the county tax assessor. This value is used to calculate real estate taxes.

Cash out Refinance

                Converting the equity in your property to cash by replacing your current mortgage with a new mortgage. The new mortgage will bring your principal balance to a higher amount, while giving you the difference between your current balance and value of your home in cash.

Cash (in order) to Close

                The amount of money not covered in your financing that will be needed to buy the property. Things you would be paying for include down payment, loan fees, recording fees, title fees, and prepaid insurance & taxes.

CD (Closing Disclosure)

                A form showing all the money, costs, and fees associated with the purchase of the property. This document is in the same format as the LE (Loan Estimate), which makes it easy to read and also compare with the LE.

Certificate of Occupancy

                After constructing a home, the local governing agency will issue this certificate to show that the property has passed all local codes and laws, and is now suitable for somebody to live in.

Closing Costs

                Common costs: Prepaid insurance & homeowner’s fees, recording fees, underwriting fees, origination fees, appraisal fee, credit report fee, title fees, government recording fees, and settlement fee.

Co-borrower

                Somebody whose assets, credit score, and income are considered in equal with the borrower when applying for a mortgage. The co-borrower has the same ownership rights and responsibilities as the borrower.

Conventional Loan

                Typically considered by those with good credit scores and a large down payment this is considered the best mortgage product. The qualifying guidelines for the borrower and subject property are typically less strict that government sponsored loan programs. Because of this, sellers are more likely to accept offers from buyers approved for a conventional loan.

Cosigner

                A person whose credit, income, and assets are used to help you qualify for a loan, however they will not have ownership in the property, but will still be held responsible for the loan repayment.

Debt to Income Ratio

                A ratio used to qualify borrowers for a mortgage. The formula is monthly debts (credit cards, car payment, etc.) plus proposed monthly mortgage payment, divided by your monthly income. Each loan product has a set limit for this ratio.

Mortgage Deed

                A legal document signed by the borrower which gives the lender rights to retain a lien on the property. Once the mortgage is fully paid, the deed is no longer in effect.

Default

                When the obligations of a contract are not met.

Delinquency

                Failure to make mortgage payments on time, which can lead to property foreclosure.

Discount Points

                When setting up a mortgage, the borrower can purchase discount points which are used to discount (reduce) the mortgage’s interest rate. The cost of discount points are paid at closing.

Down Payment

                The down payment is the portion of the sales price the borrower wants to pay upfront for the home. This is also the amount of money required to be paid by the borrower, outside of loan costs, to qualify for certain loan programs.

Draw

                On HELOC (Home Equity Line of Credit) or Construction loans, the borrower takes out a certain amount of money to pay for expenses. Several draws will occur over the course of construction, dependent on completion of the project.

Earnest Money

                The upfront amount of money required by the seller to make an offer on their property; this amount is considered part of your down payment. The earnest money deposit is typically negotiable.

Encumbrance

                A relation to the property by a third party which can effect the transferability, marketability, and overall use of the property. A mortgage lien on a property is an encumbrance because it prohibits the property from being sold without the lender’s consent. If a property has a road which a neighbor must use to access their own home, that would also be a type of encumbrance called an easement.

Equity

                The amount of ownership one has in their home. If the market value of your home is $200,000, and your current mortgage balance is $150,000, you have $50,000 of equity in your home. You can convert equity into cash with a cash-out refinance.

Escrow – Account

                An account held by a 3^rd party to hold funds until contract obligations have been met, and both parties agree to exchange. For example, the earnest money deposit can be held in an escrow account until the sale is complete.

Escrow – Payment Account

                The majority of borrowers choose to have their mortgage payment, real estate taxes, mortgage insurance (if applicable), and homeowner’s insurance all kept in one account so it is organized and easy to make one monthly payment for all of it; this is an escrow account.

Escrow – Closing agent

                The term “escrow” is commonly used when referring to the responsibility of the closing agent to administer funds to the correct recipients when closing a mortgage loan. Escrow can typically be handled by title companies and some attorneys. Example: “Do you have an escrow agent?”, “We will be using an agent from the title company for our closing.”

Funding Date

                The day which money is sent from the mortgage lender to the escrow agent prior to closing. Funding will occur after the borrower and property have been fully approved for the mortgage.

Homeowner’s Insurance / Hazard Insurance

                Required when applying for a mortgage, this insures the property against losses and damage to the home, as well as losses due to accidents on the property. Homeowner’s insurance is paid in advance by the year. A one year premium + 2 or 3 months of payment are included in the closing costs of a mortgage. The monthly cost can be collected with your mortgage every month in an escrow account.             

Home Inspection

                Before purchasing a home, it is a good idea to get the home checked out by a certified home inspector. If major repairs are needed, these can be negotiated by your realtor to be included with the sale.

Inquiry (credit)

                When a company pulls your credit, their “inquiry” is then added to your credit report.

Homeowner’s Insurance Binder

                Required before closing on your mortgage and home, this shows that your insurance agent has agreed to issue homeowner’s insurance on the property, which covers the mortgage amount and includes the mortgage company as the loss payee. Every insurance agent that deals with homeowner’s insurance should know what this is.

Jumbo Loan

                The Federal Housing Finance Agency sets conforming loan limits for loans that Fannie Mae and Freddie Mac will purchase. What this really means is that borrowers wanting loans valued over $453,100 on a single family residence will see slightly higher interest rates, all else equal.

LE (loan Estimate)

                The Loan Estimate is a document you will see early in the mortgage process which breaks down the costs of the mortgage, including payment, interest, homeowner’s insurance payment, and real estate tax payment. Once signed by the borrower, there are certain fees which cannot change, and others than can only change up to 10%. Required by regulations, you will see this same form from every lender when applying for a mortgage, and it is a good way to compare the true cost of different mortgage lenders.

Lender Credit

                This is money coming from the lender to cover closing costs and other fees. If you are willing to accept a higher interest rate, the lender can offer more credit to pay for costs at closing. How much you want in lender credits is dependent on your situation, and how long you plan to stay in the home.

Lien (pronounced lean)

                This represents the tie to the property which the lender has. The lender has legal claim of the property until the borrower’s mortgage is paid off.

Loan Term

                The length of time a mortgage will exist on the property if regular payments are made. The most typical terms are 15 & 30 years.

Loan to Value Ratio (LTV)

                Loan amount / value of the property. The loan to value ratio determines whether or not mortgage insurance is required, and will also effect the interest rate for a mortgage. For a purchase, the larger the down payment, the lower the loan to value ratio will be.

Manufactured Housing

                This refers to mobile homes. Typically manufactured in a factory, then set up on a property. Getting a mortgage for a manufactured home can be more difficult, and your interest rate will be higher.

Mortgage Insurance

                Mortgage insurance is a payment which must be made each month, until the owner has 78% equity, to protect the investment of the lender. Aside from VA loans, if your LTV is less than 80%, mortgage insurance is required. If you’re purchasing a home without putting much money into the home, the lender is taking a greater risk by lending you a lot of money; to help cover this risk, mortgage insurance is required.

Multi-family Residence

                Duplex, Tri-Plex, or a building where multiple residences exist.

No Fee / No Closing Cost Loan

                In certain situations, and quite often with refinances, you can get a mortgage without paying any money upfront. This is done by increasing the interest rate on the mortgage so the lender has money to pay for the closing costs for you.

Owner Financing

                When selling a property, the owner of the property offers to finance the house themselves for the buyer. Instead of getting a mortgage from a bank, the seller will lend the buyer money, and establish a legal repayment schedule.

P&L (Profit & Loss) Statement

                For self-employed borrowers, a year-to-date profit and loss statement is often requested along with other income information.

PITI (Principal, Interest, Taxes, Insurance)

                This acronym makes up the monthly payment of owning a home with a mortgage. Principal loan balance, interest charges on the balance, real estate taxes, and homeowner’s insurance & mortgage insurance (if required).

Points

                If you plan on owning the home for a long time, and would like to have a lower interest rate, you can spend money at closing to buy “points” which are used to lower your rate. One point costs 1% of the loan value. (You can buy points for any situation, but it makes more sense to buy points if you plan to live in a home for a long time).

Pre-qualified / pre-qualification

                If you need financing to buy a home, you will need to be pre-qualified before making an offer on a home. The lender will analyze your income, credit, and debts to determine what loan amount you qualify for, and will then write a letter for which you can use as proof to show a seller.

Prepaid Expenses

                These are costs which will be paid at closing to help insure the lender that the expenses are paid for at least that period of time. These include: 14/15 months of homeowner’s insurance, 8/9 months of property taxes, and daily interest rate charges dependent on the closing date.

Principal

                When applying for a mortgage, the principal is the same as the loan amount. After making payments, the principal is the mortgage balance remaining.      

Qualifying Ratios

                Each loan product has qualifying ratios dependent on the borrower’s income and debt. If these ratios are too high, the borrower cannot qualify for that particular loan product.

Rate Lock

                Interest rates change with the market, in order to secure an interest rate for your mortgage while applying, the lender will lock in a rate for a set number of days. Once the rate is locked in, the interest rate for your mortgage can be closed upon during that set amount of time without changing.

Reserves

                Money accessible in your bank account, retirement fund, or other account which could be used to pay your mortgage payment if you stopped receiving income. Having a lot in reserves can help your mortgage application if you are lacking in credit, income, or other fields.

Second Mortgage

                If a mortgage already exists on a home, the home can be leveraged again for monetary gain by having a second mortgage add a lien to the home. If a default were to occur, the first mortgage would be paid off first, and any remaining funds would be used to pay off the second mortgage.

Title

                A title report identifies all parties with legal claim to the property, including any liens, encumbrances, and easements.

Title Company

                During the mortgage application process, a title company will be hired to research the title of the subject property to find all the existing liens and several other documents included in a title. The title company will also insure their findings to the lender and the new owner. Title companies will also have escrow/closing agents.

               

Title Insurance - Lender’s

                This is required by the lender to ensure that if any liens that were not found on the title of the property when purchasing, but happen to come up in the future, the title company will cover any costs to keep the property free and clear.

Title Insurance – Owner’s

                This is also required by the lender, and in the event that in the future, a prior lien is found on the property, the owner will not be held responsible for the costs or dealings of that lien.

Underwriting

                An underwriter has years of mortgage experience (typically over 5 years), and is tasked with thoroughly looking over the entire loan application for approval. If something is needed to approve the application, the underwriter will assign conditions. Once the conditions have been received and met, the loan can be approved for funding!

Maverick Johnston
509-230-0768
NMLS ID #1668965