Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a loan that offers an initial period of fixed interest that then resets at a specified interval. Typically, you’ll see an ARM expressed as two numbers. For example, a 7/1 ARM has a fixed interest rate for the first 7 years that then adjusts based on market rates every year after that.
Amortization is the process of paying off the principal and interest on your loan.
Annual percentage rate (APR)
The annual percentage rate (APR) is your interest rate plus charges and fees—such as closing costs and discount points- expressed as a yearly rate. By law, a loan’s APR is always expressed as a percentage next to the interest rate. The APR gives the best indication of the total cost of your mortgage.
An appraisal is an independent, unbiased estimate of your property’s fair market value by a licensed professional. It’s something that is typically required by all lenders during the mortgage process to ensure that the loan amount does not exceed the value of the home.
Appreciation is the increase in the value of your home over time.
Basis points (pronounced “bips”) are a unit of measurement. They’re equal to one one-hundredth of one percentage point (0.01%).
Cash to Close
Cash to close is the total amount needed to bring to closing.
A cash-out refinance is when a mortgage is refinanced for more than the outstanding balance—converting home equity into cash. Cash-out refinancing can be a great way to free up money for outstanding debt or to make an investment in home improvements.
Close of Escrow / Closing
Close of escrow is the point in the homebuying process when everything is finalized. The funds held in escrow are transferred to the seller and the transaction is closed.
Closing costs are paid to various third parties to complete the sale of the property. Depending on the lender, these may include origination fees, credit report fees, and appraisal fees, as well as property taxes and recording fees.
A closing disclosure (CD) is a standardized document from the lender that provides final details about the mortgage loan. It includes the loan terms, projected monthly payments, fees, and other closing costs. The lender is required to give you the CD at least 3 business days before the date of close so you can compare it against the loan estimate.
A co-applicant is someone whose income and credit history are put on the loan application in addition to the primary borrower. Co-applicants are a common addition when the primary borrower may not qualify for the mortgage on their own.
A co-borrower is a spouse whose income and credit history are put on the loan application in addition to the primary borrower.
Collateral is an asset that a lender accepts as security for a loan. In a traditional mortgage, the collateral is the home itself.
Comparable Sales Comp
A comparable sales comp is a recently sold property in the area with similar features to the home you’re looking to buy. Appraisers use comparable sales to help estimate the fair market value of a home.
A condominium (also known as a condo) is a privately-owned home within a multi-unit development. Each owner has a shared interest in the common areas of the building—such as elevators, garages, gyms, etc.—which are typically maintained through monthly homeowners’ association (HOA) fees.
A conforming loan is any type of home loan that meets the mortgage limits set by the Federal Housing Finance Agency (FHFA). These limits are based on property size and location and change annually with home prices. Conforming loans also require you to meet Fannie Mae and Freddie Mac lending guidelines.
A contingency is a condition in a purchase contract that needs to be met by you or the seller before you’re obligated to buy the home. Contingencies protect both parties in a real estate transaction and often include clauses that allow you to back out of the sale if you’re unable to secure financing or if the home fails to pass inspections.
A conventional mortgage is a type of home loan that is not insured or guaranteed by the federal government. Conventional loans are the most common type of home loan, making up nearly three quarters of home loans.
A cooperative (also known as a co-op) is a multi-unit development where owners technically don’t “own” their units outright. Instead, owners are allotted shares in a corporation (the building), along with the right to live in one of the units. Shareholders periodically pay fees that cover everything from the door person’s salary to the maintenance of common areas in the building. These operations are handled by a governing board that is also in charge of setting all the building rules and requirements for moving in, as well as screening potential residents.
A credit check (also known as a credit inquiry) is when a lender examines your financial history with credit reporting agencies to determine your creditworthiness.
Your credit score (also known as a FICO score) is a number that reflects your financial history. Scores range from 300–850, with a high credit score indicating that you have consistently repaid debts and other loans on time.
A credit (also known as a lender credit) is money that the lender provides to lower your closing costs in exchange for a higher interest rate. Credits are opposite to points.
Your debt-to-income ratio (DTI) is a measure of your monthly debt compared to your monthly income, calculated by your monthly debt divided by your monthly gross (pre-tax) income. DTI is one of the factors used to determine how much you can afford in a monthly mortgage payment.
A default is when a borrower fails to pay their mortgage. At this point, the borrower risks foreclosure, whereby the lender has the option to repossess the home.
Depreciation refers to the loss of value on an asset over time.
A down payment is the amount of cash you pay upfront toward the purchase of a home. It’s often expressed as a percentage of the selling price of a home.
Earnest Money Deposit
Earnest money (also known as a good faith deposit) is money that the buyer gives the seller when a sales contract is signed to show intent to purchase. The money is deposited into a third-party account, known as escrow, and held until closing. Once contracts are signed, the earnest money becomes part of the down payment. If the contract falls through, the earnest money is either forfeited and the seller keeps it or the money must be returned to the buyer, dependent on the contract.
Equity is the difference between the amount you owe on a property and its current market value. In other words, your equity is the amount of ownership you have in your property.
An escrow (also known as an impound account) is a third-party account where money between two or more parties is managed. Escrow accounts may be used to hold a buyer’s deposits while a real estate transaction is being processed. Escrow accounts are also commonly used to hold property taxes and insurance premiums (collected as part of the monthly mortgage payment) until the payments are due.
Fannie Mae is the nickname for the Federal National Mortgage Association—the government sponsored entity that provides funding to mortgage lenders by buying mortgages and selling the debt to investors. The primary purpose of Fannie Mae is to ensure that there are affordable housing options and programs for homebuyers, sellers, and renters. They do this by setting lending guidelines to ensure that loans are originated fairly and that home loans are not given to those who cannot afford them.
Federal Housing Administration Loans
The Federal Housing Administration (FHA) is a government agency that promotes affordable, easy-to-qualify-for home loans. FHA loans are only available through approved lenders. If you’re a first-time homebuyer without a substantial credit history, an FHA loan could be an attractive option. You can qualify for an FHA loan with a minimum credit score of 500 and a 3.5% down payment. FHA loans require an upfront mortgage insurance premium and, if there’s less than a 10% down payment, require mortgage insurance for the life of the loan.
The Fair Isaac Corporation (FICO) generates credit scores based on information collected by three national credit reporting agencies: Experian, Equifax, and TransUnion. Typical FICO scores are in the 300–850 range. However, FICO has variations of scoring for different types of lenders. Credit scores are designed to give lenders an evaluation of your likelihood to pay your bills on time. A higher credit score indicates a more favorable borrower.
A fixed-rate mortgage is a home loan that has a constant interest rate for the lifetime of the loan.
Flood certification is a document issued to certify whether a property is in a flood zone based on FEMA (Federal Emergency Management Association) flood maps. A flood certification is required by your lender and determines whether special flood insurance is needed for your home.
Foreclosure is the process of repossessing a home after the borrower defaults on their mortgage.
Freddie Mac is the nickname for the Federal Home Loan Mortgage Corporation, a government-sponsored entity that provides funding to smaller mortgage banks and lenders by buying their loans. The primary purpose of Freddie Mac is to ensure that there are affordable housing options and programs for low-income homebuyers, sellers, and renters.
A gift letter documents money that has been given to you by a family member, spouse, or partner to support your down payment or closing costs.
A home inspection is an examination of a home’s physical condition in connection with its sale. It’s on the homebuyer to organize and pay for a home inspection after their offer has been accepted but before they sign on the dotted line. The purpose is to uncover any potential issues with the home before finalizing the purchase.
Homeowners Association (HOA)
A homeowner’s association (HOA) oversees the development and enforcement of rules, regulations, and day-to-day operations for a community. The HOA is also responsible for maintaining community spaces.
Homeowners insurance is a form of financial protection against loss or damage to your home in the event of burglary, fire, or natural disaster. Most lenders require proof of a homeowners insurance policy prior to closing.
When a lender offers you an interest rate for a mortgage, the interest rate is the cost of borrowing money, expressed as a percentage of the loan.
An investment property is a property that is purchased with the exclusive purpose of generating income.
A jumbo loan (also known as a non-conforming loan) is a home loan that exceeds the maximum conforming loan limits set by FHFA. Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, which means that the lender has no protection if the borrower defaults.
A lien is a legal claim to an item of property until an owed debt is paid off. When you take out a home loan, your lender has a lien on your home.
A loan commitment is a letter from a lender indicating your eligibility for a home loan. You receive a loan commitment letter once your application has been reviewed and the underwriting process is complete.
Loan Estimate (LE)
A loan estimate (also known as an LE) is a standardized 3-page form that details the interest rate, term, monthly payment, and closing costs associated with your loan. Lenders are required by law to provide you with a loan estimate within three days of your application.
A loan processor is the person responsible for preparing your mortgage application and documentation before it goes to the Underwriter. It’s their job to collect and review your income, credit, and asset documentation and ensure that everything aligns with what you stated on the application.
Loan term is the length of time over which the loan is to be repaid.
A loan-to-value (LTV) ratio is an equation that lenders use to assess the amount of risk associated with a home loan. LTV is calculated by dividing the total home loan amount by the appraised market value of the home.
Market value is the amount of money that a property would be sold for on the open market. This is determined by an appraiser based on its condition and comparable properties that have recently sold.
Mortgage Insurance Premium (MIP)
Mortgage insurance premium (MIP) is an upfront and annual insurance premium that’s required for any Federal Housing Administration (FHA) home loan. It protects the lender in case the borrower defaults on the loan. MIP differs from private mortgage insurance (PMI), which is reserved for conventional loans.
A mortgage note is a document signed at closing outlining the complete terms of your new home loan. A mortgage Note states how much you are borrowing from the lender, whether the loan has a fixed or adjustable interest rate, and when you are expected to pay it back.
Negative amortization describes the process that causes a loan balance to increase over time, despite regular payments being made. This occurs when your monthly payments do not cover all the interest you’ve been charged that month. The unpaid interest is added to the principal, and the following month you’ll be charged interest on the new, higher balance (the principal plus the previous month’s unpaid interest).
Non-conforming loans do not meet the mortgage limits set by Fannie Mae and Freddie Mac. The most popular type of non-conforming loan is the jumbo loan, which is for a property that is more expensive than the mortgage limits set by Fannie Mae and Freddie Mac.
Notice of Default
A notice of default is a public notice that a borrower is behind on their mortgage payments. It’s filed with a court and regarded as the first step in the foreclosure process.
Origination fees are the one-time costs you pay to a lender for processing your home loan.
Owner-occupied refers to the concept of living in the home that you own.
In the due diligence process, a pest inspection is performed by a certified pest inspector to determine whether a property has an active or previous infestation.
PITI is short for Principal, Interest, Taxes, and Insurance—the four aspects of a monthly home loan payment.
Planned Unit Development (PUD)
A planned unit development is a community that consists of townhouses, detached homes, or condos, as well as public spaces.
Points (also known as discount points and mortgage points) are a way to lower the interest rate on your home loan by agreeing to pay more at closing. Points are the opposite of lender credits.
A pre-approval letter is a document from a lender that states the exact amount you are approved to borrow once your loan application and financials are verified.
Prepaid costs are payments made at closing for upcoming line items of your new home loan. The most common kinds of prepaid costs are homeowners’ insurance, property taxes, and mortgage interest.
A prepayment penalty is a fee that’s charged when you pay off your mortgage early. This penalty is typically applied to investment properties.
A primary residence is a home in which you live for most of the year. Home loan rates tend to be lower for primary residences.
When referring to a home loan, the principal is the amount of money borrowed excluding taxes, interest, or homeowners’ insurance.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is insurance required by lenders when a borrower puts less than 20% down on a conventional loan. It’s meant to protect the lender if the borrower defaults. PMI can be cancelled once the borrower has at least 20% equity in the property. The PMI amount is determined by many different factors including FICO score, loan-to-value ratio, debt-to-income ratio, property type, and occupancy.
A purchase contract (also known as purchase agreement) is a legal written agreement between a buyer and seller. Purchase contracts vary state to state depending on local law. When both the buyer and seller finish negotiating terms and stipulations, they sign the purchase contract, and it becomes legally binding, contingent upon the terms in the contract being met.
A qualifying ratio is a measurement that mortgage lenders use to help decide if you qualify for the loans they offer. The qualifying ratio consists of 2 subcomponents; the housing expense ratio, which is made up of monthly principal, interest, property taxes, and insurance payments (PITI); and the debt-to-income ratio (DTI). Most lenders prefer you to spend no more than 28% of your gross monthly income on PITI payments (the housing expense ratio) and spend no more than 36% of your gross monthly income paying your total debt (the debt-to-income ratio). However, you may go as high as 49.99% DTI in some cases.
A rate lock is a guarantee from a lender that the offered interest rate with the associated points and credits for a mortgage is the rate that they will receive, so long as their financial information matches what was provided during the rate lock process. Rate locks are good for a pre-set length of time, such as 15, 30, 45, or 60 days.
A refinance is the process of applying for a new home loan to replace an existing home loan. Homeowners generally refinance to change the rate or term of their home loan (rate/term refinance) or to take cash out of the equity that they’ve built (cash-out refinance).
Reserves are the savings you’ve set aside for emergencies. Lenders typically require you to have at least 2 months of mortgage payments on hand in case of emergency.
A secondary home is, simply put, a vacation home. You must have sole control over the property, meaning that it cannot be a full-time rental, timeshare, or managed by a property management company. Secondary homes must be suitable for year-round occupancy.
Settlement costs (also known as closing costs) are the fees that the buyer and/or seller must pay to complete the sale of the property. Depending on the lender, these may include origination fees, credit report fees, and appraisal fees, as well as property taxes and recording fees.
A short sale is when a homeowner sells their home for a price less than the balance of their current mortgage. Lenders may agree to a short sale in lieu of foreclosure.
A survey is a drawing of your property that details the location of the lot, property lines, home, and any other structures within its bounds. The purpose of a survey is to confirm land boundaries in the event of a legal dispute.
A termite letter is a document issued by a professional inspector to certify that the property was inspected and found to have no termites or wood-boring insects such as powder-post beetles. Pest inspections are a part of closing costs but may be paid for by either the buyer or seller.
Third-party fees are paid to third-party vendors for services related to your loan application (not paid to the lender). Depending on the lender, these fees may cover your credit report, appraisal, land survey, recording fee for county, and transfer taxes.
Title is the legal concept of property ownership. States and counties require legal recording of property ownership for tax purposes. Having a record of ownership also ensures that the person holding the deed is the uncontested legal owner.
Title insurance protects borrowers and lenders against financial loss from past defects or problems with the ownership of a property typically back taxes, liens, and conflicting wills. Most lenders require title insurance to protect their interest in the property until the home loan is paid off.
Title vesting defines who owns a certain property and thus who is liable for property taxes and other legal matters, as well as how the property can be sold. There can be multiple owners of a single property.
A transfer tax is a real estate tax usually paid at closing to facilitate the transfer of the property deed from the seller to the buyer. Depending on where you live, you may have to pay transfer taxes at the city, county, and state level.
An Underwriter is a member of your loan team who assesses your loan application and the appraisal of the property you are trying to finance. It’s their job to determine whether or not you qualify for a home loan.
Underwriting is the process of evaluating a complete and verified home loan application as well as the appraisal of the property being financed. Underwriting is the assessment of risk in a home loan and a borrower’s ability to repay it. The process ends with an approval or denial of a home loan.
VA loans are home loans with lenient qualifying guidelines and favorable terms for active military service members, veterans, and eligible military spouses. Because VA loans are backed in part by the federal government, lenders and banks are able to offer reduced interest rates.
A wire transfer is an electronic transfer of money between two banks. It is often used when you need to complete a large transaction, such as making an earnest money deposit, a down payment, or to refinance a mortgage. Domestic wire transfers are typically processed on the same day they’re initiated. International wire transfers are usually delivered to the recipient within 2 days. Related terms: Earnest money deposit, down payment, refinance
Your year-end statement is the annual summary of your mortgage account. It encapsulates the previous 12 months of mortgage payments, taxes, and interest. Lenders are required to send out year-end statements by January 31. For taxation purposes, a year-end statement is also referred to as form 1098.