Like any field or industry, a boatload of terms goes hand-in-hand with the mortgage world. For home buyers, it can be an overwhelming process, with unfamiliar terms being flung at you left and right. But just because it can be a lot at once doesn’t mean it has to be. Here is a list of common words and terms used during the home buying process...
Mortgage Terminology
Borrower / Co-Borrower: This is a simple one to start out with. YOU are the borrower, the consumer! A borrower is the person applying for the loan in order to purchase their property. This is how your lending team will refer to you throughout the process.
Earnest Money: This is a good-faith deposit that you’ll send to the seller. It affirms your desire to purchase the property without backing out. The earnest money may also be applied to closing costs or the down payment once you reach closing.
Equity: Equity is the amount your property is currently worth minus the amount of any existing mortgage on your property.
Home Equity Line of Credit (HELOC): This is a line of credit secured by your home’s equity that gives you a revolving credit to use for large expenses (home renovations, high-interest debt, student loans, etc).
Annual Percentage Rate (APR): APR is the cost of credit articulated as a yearly rate and is NOT an interest rate. It’s a way to measure the total cost of credit.
Pre-approval vs. Prequalification: Obtaining a prequalification is a quick estimate based on very basic financial information. A pre-approval is a much more thorough, valuable process that checks your credit, income, assets, and debts. A pre-approval shows sellers and lenders that you’re serious about home buying.
Appraisal: An analysis performed by a qualified professional that estimates the value of a property by evaluating the quality and comparing it to similar homes.
Down Payment: This is the amount you pay toward the home upfront. Many assume they have to put down 20% of the purchase price, but it can be much lower (or waived entirely!) if you qualify for specific loan options and down payment assistance programs.
Closing Disclosure (CD): Your CD is a document that breaks down mortgage fees, final terms, and closing costs. You will receive an initial CD and a final CD. You must sign your CD three business days prior to closing.
Closing Costs: Expenses incurred by buyers and sellers when transferring ownership of a property; these typically include property taxes, origination fee, title fees, and escrow costs, but these costs will vary.
Debt-to-Income (DTI) Ratio: The ratio of how much you make versus how much you owe: your monthly debt payments divided by your gross monthly income.
Loan-to-Value (LTV) Ratio: This ratio is the measure comparing the amount you are financing with the appraised value of the property.
Private Mortgage Insurance (PMI): Most lenders generally require extra mortgage insurance for a Conventional Loan if your down payment is below 20%.
Fixed-Rate Mortgage vs. Adjustable Rate Mortgage (ARM): For fixed-rate loans, the interest rate is set and will NOT change during the term of the loan. For ARMs, the point is that the rate fluctuates with the market.
Conventional Loans: The most common mortgage loan, it is not insured or guaranteed by the government and often offers more flexibility. Terms range from 15 to 30 years.
Government Loans: Government-backed loans is an affordable housing loan that the federal government insures or guarantees. VA, FHA, and USDA Loans all fall under this umbrella.
Underwriting: This is the evaluation of a loan application’s risk for the lender, which involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
Homeowners Insurance: You’ll need insurance to pay for losses and damages to your property. The lender requires this to be set up before your loan closes. This is different from PMI. All mortgages require this insurance.
Homeowners Association (HOA): An HOA manages shared expenses like maintenance costs for planned subdivisions, condominiums, or other organized communities.
Refinance: A common action to restructure your current loan. If rates drop, you can refinance to a lower interest rate to reduce your monthly payment. Many also refinance to access their equity for various reasons, like remodeling projects.
Title Company: A third-party company that works with the borrower and lender to ensure that the house title is transferred smoothly and legally.
Clear to Close (CTC): The golden word in mortgage processing! It means that your loan has met all underwriting conditions and it’s cleared to close.
We hope this has been a helpful rundown of mortgage industry lingo. As a home buyer, you want to head into the loan processing with confidence and knowledge. Understanding basic terms of your home loan will not only help clear away any confusion, but it could potentially save you time and money down the road. Good luck on your homeownership adventure!
