While navigating the purchase of your new home, you’re going to come across a lot of terms you may not be familiar with. We want to simplify the homebuying process with a collection of home financing terms to help you feel confident.
A
Adjustable-Rate Mortgage (ARM): Home mortgage that has interest rates that change periodically based on market factors.
Amortization: Payment plan to repay mortgage loan by making regular payments or installments to cover principal or interest.
Amortization Term: Amount of time, expressed in months, required to completely pay off the mortgage loan. Example: A 30-year fixed-rate mortgage has an amortization term of 360 months.
Annual Percentage Rate (APR): Yearly interest rate paid on a loan. Federal law requires this rate to be disclosed as part of the truth-in-lending documents.
Appraisal: Estimated true (fair market) value of the property by a professional appraiser.
Assessment: Tax levied on a property or a value placed on the worth of a property.
B
Back-End Debt-to-Income (DTI) ratio: Calculates how much gross income goes towards other types of debt that requires a monthly payment excluding housing costs.
Binder: Receipt for the deposit provided by a buyer to purchase a home according to the terms of the contract.
Borrower: Person who takes a loan from a bank or other organization under an agreement to pay it back, typically with interest.
C
Capacity: Borrower’s ability to repay a loan. Used as part of the three C’s of underwriting approval.
Capped Rate: The Specified value that an adjustable-rate mortgage (ARM) won’t exceed for a specific period of time.
Character: Creditworthiness of the borrower. Used as part of the three C’s of underwriting approval.
Closing: The final step in purchasing a home. Also known as settlement, the closing day is when home ownership is officially transferred to the buyer. The mortgage loan is funded by the lender, closing costs have been paid and the mortgage documents have been signed.
Closing Fees: Fees charged by the settlement company for the processing of papers, examination of the title and review of the loan documents.
Collateral: Value of the property being purchased, which is pledged as collateral for the loan. Used as part of the three C’s of underwriting approval.
Consumer Reporting Agency/Bureau: Organization that prepares reports used by lenders to determine potential borrower’s credit history. These agencies get information from a credit repository and other sources.
Commission: Fees paid to the buyer’s agent from the proceeds of the sale of a home.
Comparable Sales (comps): Sales prices of similar homes and properties used to estimate the market value of a home/property by appraisers.
Conventional Mortgage: Type of mortgage loan not insured or guaranteed by the government but backed by private lenders. Insurance on the loan is usually paid by the borrower.
Credit Report: Statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts.
Credit Score: Number assigned by each of the three credit reporting agencies that reflects the credit history of a consumer based on multiple factors. Credit scores change based on the current financial situation of the consumer.
D
Debt-to-Income Ratio (DTI): Comparison of your housing expenses, monthly debt obligations and how much you earn. Lenders review two types of DTI ratios when you apply for a mortgage: Front-end ratio and back-end ratio.
Deed: Legal document used to convey ownership to the titleholders.
Default: Result of not paying a mortgage on time or paying less than the amount due.
Deposit: Sum of money due when a purchase contract is signed for a newly built home. The amount of the deposit can vary based on multiple factors.
E
Earnest Money Deposit: Deposit made by the buyer to show that he or she is serious about purchasing the home.
Equity: Amount of the property owned after all of the liabilities are removed from the market value of the property. Equity increases as the borrower makes payments against the mortgage balance, or as the property value appreciates.
Escrow: Account held by the lender that includes homeowner payments for taxes and home insurance until those bills are due.
F
Fair Market Value: Estimate of the market value of a property based on what a knowledgeable, and a willing buyer would pay for a property in the market.
Federal Housing Administration (FHA): Government agency that sets standards for construction and underwriting and insuring loans made by private lenders for home building.
Front-End Debt-to-Income (DTI) ratio: Calculates how much gross income goes towards housing costs. (Housing expenses / Gross Monthly Income)
H
Home Equity of Line of Credit: Amount of money that can be borrowed against the equity in a borrower’s home. The line of credit can be used incrementally and repaid over time.
Home Equity Loan: Fixed-rate loan that allows immediate access to equity in a home that is repaid over a fixed amount of time. Also known as a second mortgage.
Homeowners Insurance: Insurance that protects lenders and homeowners against financial loss from fire or other damages. Also known as hazard insurance.
I
Interest: Money charged for the privilege of borrowing money, typically expressed as an annual percentage rate (APR).
L
Lender: Person or organization that lends money under an agreement for repayment.
Lien: Legal obligation attached to a home or property that uses the home/property as collateral for a debt. Liens must be paid before a home can be sold unless the buyer is willing to pay the lien in order to buy the home.
Loan: Amount of money borrowed.
Loan Origination Fee: Fee charged by a lender for administrating and processing a loan. Sometimes called a “point” that’s equal to 1% of the total loan amount.
Loan to Value Ratio (LTV): Ratio of the loan amount to the appraised value of the home. Example: A $160,000 loan to purchase a home worth $200,000 has an LTV of 80%. LTV affects programs available to the borrower.
M
Mortgage: Debt secured by the collateral of a specific real estate property.
Mortgage Company: Company that borrows money from a bank then lends it to consumers to purchase homes. These loans are then sold to investors.
Mortgage Origination Fee: Charge to cover the work involved in preparing and servicing a mortgage application.
N
Note: Formal document showing the existence of a debt and stating the terms of repayment.
P
PITI: Principal, interest, taxes and insurance (Four major components of monthly home payments)
Points: Fee charged by the lender equal to 1% of the loan amount. Points can be paid at closing to lower the interest rate on a loan.
Preapproval: Mortgage qualification by a lender based on proof a buyer’s income, assets and credit score that gives the maximum loan that a buyer can qualify for. Final loan approval requires an appraisal on the home/property to verify that the value of the property is more than the loan amount.
Prequalification: Estimated amount of money a borrower can borrow based on stated income, assets and creditworthiness without complete verification.
Principal: Balance of a loan without interest.
Private Mortgage Insurance (PMI): Insurance that protects lenders against losses if a borrower defaults on the mortgage. Generally required for loans with a Loan-to-value (LTV) percentage greater than 80%.
Q
Qualifying Ratios: Ratios used to determine how much a borrower can afford to borrow. The ratio compares fixed monthly expenses to your gross monthly income. Lenders use this ratio to help decide on loan approval for a mortgage.
R
Real Estate Settlement Procedures Act (RESPA): Consumer protection act established by the U.S Department of Housing and Urban Development (HUD) that establishes rules for informing consumers about closing costs, settlement fees and mortgage loans.
Recording Fees: Fees paid to the county or state for recording property ownership in land records.
S
Sales Contract: Contract between buyer and seller that explains key details regarding the sale of a home or property. Details should explain what the purchase price includes, estimated settlement and move-in date, what happens if the buyer can’t get financing at closing, what happens if the builder can’t meet the settlement date or any other contractual obligations and what happens if the home appraises for less than the agreed-upon price.
Stamp Tax: Tax charged, in some states and counties, when the property is transferred from one owner to another. Also known as a transfer tax.
T
Title: Document proving ownership of property.
Title Insurance: Insurance that protects the lender against title defects. Homebuyers can also buy title insurance.
Transfer Tax: Also known as stamp tax, charged by state or county government when a property is transferred. The tax is part of the costs paid at closing.
Truth-in-Lending: Statement required by the federal government presented to the borrower at closing that discloses the estimated annual cost of the mortgage and the total cost of the loan over the loan’s full term.
U
Underwriting: A lender’s process for evaluating loan approval to a borrower. Most of the assessing falls under the three C’s of underwriting: character, capacity and collateral.
V
Valuation: Another term for an appraisal of the property value required by the borrower’s lender. The fee is paid by the buyers.
Veterans Administration (VA): Federal agency guarantees mortgage loans for veterans, members of the military and their families with lower interest rates and a low or zero down payment.
