You want buying a house to be simple. It is not. You might end up lucky and only need to view a handful of homes. More likely though, you’ll look at least ten houses. Some will have the right price. More than likely, you’ll settle on a home that comes close to the price and size you want while requiring little work. When the process of buying starts, knowing mortgage terms and definitions comes in handy.
Then begins your miasma of time with the bank or credit union. You’ll wallow in paperwork, beginning with your application and traipsing right on through to the closing documents. Within this pile of paperwork, you’ll read a plethora of business and financial terms. While your bank will not take the time to explain each mortgage term, we here at Loanry will. We’re here to help you with the mortgage terms and definitions you need to understand before you ever apply for your residential mortgage.
Common Home Mortgage Terms and Definitions To Know
To help you understand all these mortgage terms and definitions more easily, we divided them intro to several categories. We also recommend that you pay attention to each individual category since all these terms will be important during the process.
Mortgage Terms and Definitions: General Terminology
The mortgage terms and definitions that the real estate and financial industries consider general terms, you probably don’t.
This is a contractual clause in a mortgage that allows the lender to demand repayment of the entire loan balance if the borrower violates any clause in the note.
Earned interest that is not paid and adds to the owed amount. It is also called negative amortization.
The interval of time between interest rate or monthly payment changes in an adjustable-rate mortgage. This is typically displayed in x/y format with “x” representing the period of time before the first adjustment and “y” representing the following adjustment period.
A legal term referring to the fiduciary obligation one party has to the to the other.
Agreement of Sale
A legal and binding contract signed by both the buyer and seller describing the conditions and terms under which the described property will be sold.
A mortgage risk category also known as “A minus.” It describes the grey areas between prime and sub-prime credit risk.
A banking term that refers to an expedited method of verifying the applicant’s financial situation. Rather than verifying employment with the applicant’s employer, the bank accepts paycheck stubs and W-2s. Instead of verifying bank deposits with the applicant’s bank, the financial institution verifies using the borrower’s original bank statements. Although it provides an alternative, it still qualifies as “full documentation.”
An amortized loan need not be a mortgage. The term refers to any loan paid off in equal installments within the loan term.
Amortization is the process of scheduled payments of principal plus interest. The payments must exceed the interest due otherwise the balance rises, creating negative amortization.
The monthly schedule of interest and loan principal. It may also include tax and insurance payments if the lending institution made them.
This term refers to the loan amount once the prepaid finance charges, a closing fee, have been paid.
Annual percentage rate (APR)
The total effective cost of the extension of credit. This gross cost disclosure calculation includes the loan interest rate and the upfront costs.
A loan request form completed with potential borrower information as well as property information and requested loan amount. This is a standardized application form known as the “1003.”
The fee to submit the loan application. It may cover the property appraisal, credit report or other costs. Some lenders refund it if they decline the loan.
The written estimated current market value of a property as prepared by a professional appraiser.
A business meeting at which the involved parties sign the final loan documents including the deed, mortgage, note, statements, etc. The settlement agent – typically an attorney or title insurance company – collects the buyer’s funds from them or the lending institution, pays the transaction fees such as appraisal fees, realtor’s commission and document recording fees. They also pay the seller for the net proceeds of the sale. At the close of the closing meeting, the purchase paperwork is recorded at the county courthouse. This meeting is also referred to as the settlement or close of escrow.
A catchall term referring to the costs of servicing a loan. It includes the costs of processing, approving and closing a loan which may include appraisal and credit report fees, attorney fees, recording fees, survey fees, termite inspections and title insurance. Closing costs apply whether the home was financed or not.
Cost of funds index (COFI)
An interest rate index used to determine interest rate adjustments on an ARM.
This term refers to the cash amount paid at closing by the buyer which reflects the difference between the sales price of the home and the loan amount.
Good Faith Estimate
This estimate of closing costs, typically given to the borrower when they apply for the loan.
The fee, expressed as a percentage, charged by the lending institution on a loan amount. It is typically calculated on an annual basis and may be tax-deductible.
Loan-to-Value Ratio (LTV)
A ratio expressing the loan amount to the value/sales price of a property. If the LTV ratios exceeds 80 percent, the lender typically requires loan insurance and may charge a higher interest rate.
Mortgage Insurance Premiums (MIP)
The insurance premiums paid on an Federal Housing Administration (FHA) mortgage loan.
A lending institution charged one-time fee covering overhead costs of making a loan. It represents a fee of the closing costs. The lender may waive it for certain loan types.
An optional prepaid finance charge the borrower can pay to lower the loan’s interest rate. These affect the total cost of the loan. A single point equals one percent of the loan’s interest rate. A point is deductible interest for income tax calculation. The financial community also refers to these as discount points.
Private Mortgage Insurance (PMI)
Lending institutions require this insurance on conventional loans that represent 80 percent or greater of the property value. This insurance insures the lending institution against financial loss if the borrower defaults.
In mortgage lending, the process of approving or denying a loan based on an evaluation of the property as collateral and the ability and willingness of the borrower to repay the loan.
Mortgage Terms and Definitions: Mortgage Types
If this is your first time buying a home, you might go into it thinking “A mortgage is a mortgage.” That’s not so. Numerous types of loans exist within mortgages. Not all of them are offered by a bank or credit union either.
Beyond conventional loans offered through standard financial institutions, some federal agencies also offer mortgage loans.
The Federal Housing Administration (FHA) and Veteran’s Affairs (VA) Administration offer mortgages to special groups. The FHA specializes in those who are first-time homebuyers while the VA offers loans only to veterans of the US armed forces. You can find a lot of information about mortgages if you know where to look.
Within the range of conventional mortgage loans, you also will not likely qualify for each type. Adjustable rate and assumable mortgage loans are probably the toughest for which to qualify.
Adjustable Rate Mortgage (ARM)
A type of loan that varies the interest rate and payments according to a specific schedule and pre-set limits. An ARM typically begins with a below-market interest rate. In the US, these are indexed, but abroad they’re flexible with the interest rate set at the discretion of bank.
A loan contract that lets the seller transfer the loan to a creditworthy buyer thus potentially saving money on the interest rate and avoiding closing costs.
A type of mortgage with smaller principal and interest installments during the loan term that does not fully repay the loan, but requires a lump-sum payment, also known as a balloon payment, at the end of the loan term.
A mortgage loan offered by the private financial sector, typically using the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) guidelines.
Federal Housing Administration (FHA) Loan
A loan insured by the Federal Housing Administration with simple qualifying terms which provide first-time buyers a small down-payment requirement. It does require MIP.
A type of loan in which the interest rate remains unchanged for the loan term.
Home Equity Loan
A type of loan that leverages the borrower’s residence as collateral. The loan functions as line of credit against which funds can be drawn, up to a pre-arranged amount.
A type of loan that crowdfunds the loan amount from individuals.
A type of loan extended to a borrower whose credit score and history does not qualify them for the lowest interest rates. A subprime loan comes with a higher interest rate and may include greater fees.
Veteran’s Affairs (VA) Loan
A type of loan guaranteed by the Department of Veteran’s Affairs which only veterans may take out that requires no down payment.
Mortgage Terms and Definitions: Parties Involved
Going into the house-hunting process you might think that you and the home seller and bank are the only parties involved in the sale. In actual fact, a plethora of individuals and institutions take part in the process of a home loan.
The mortgage process begins when you look at the first home and meet the realtor. If you phone the real estate agency with questions, you’ll find a large staff provides administrative support. The following list of mortgage participants, while not comprehensive, does cover the most common individuals and institutions.
A professional individual selected by the lending institution who has extensive real estate market knowledge and skills in property appraisal.
The individual or group who takes out the loan. This can include a signer and a co-signer which refers to the main individual requesting the loan and the person who agrees to partner with them in applying for it, thereby offering their credit worthiness to bolster the signer’s credit worthiness.
The individual or group of individuals who purchase the home. Their names will appear on the deed.
An individual licensed as a lending professional and who works with several different lenders to offer more loan options than a credit union or bank.
The individual offering the home for sale. The current owner of the home.
An Underwriter is a position in both financial institutions and insurance companies. The underwriter analyzes risk, may modify the loan terms the borrower requested and can add conditions to meet before or at the loan closing.
Title Insurance Company
A representative of the title insurance company often acts as the settlement agent who collects the buyer’s funds from them or the lending institution, pays the transaction fees such as appraisal fees, realtor’s commission and document recording fees at the closing.
Mortgage Terms and Definitions: Credit Terms
One of the first steps to purchasing a home is the credit check that precedes your loan application approval. During the process of checking your credit, improving it, and then applying for your mortgage loan will expose you to numerous new mortgage terms and definitions. These definitions present the most commonly used terminology.
Consumers with the highest credit rating are referred to as A-credit or prime borrowers. Typically they have a FICO score above 720 on a scale of 300 to 900.
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A consumer’s capacity to afford to purchase a house. A lending institution typically expresses this in terms of the maximum home cost a consumer could pay. This amount is also the amount for which the consumer could obtain a mortgage.
A three-digit number that expresses a consumer’s credit worthiness and risk level. These scores range from 300 to 900.
Mortgage Loan Shopping: Use Loanry
If you think learning the terminology of mortgage terms and definitions seems exhausting, wait until you begin looking for a lending institution. Mortgage loan shopping can be a tiring process. Your best course of action is to start with Loanry.com to shop mortgage lenders.
Loanry does not offer loans nor does it represent any lending institutions. It offers no lending whatsoever.
Instead, Loanry runs a loan mall. It is like a shopping mall for loans. Rather than searching Charlotte Russe or Dillard’s for jeans, you shop for a loan among many lenders.
Loanry provides you with a way that may help you find a financial lender. The participating institutions offer a cornucopia of loan types. You may even find mortgage loans designed for those with bad credit or no credit. To use the services that Loanry provides, here’s what you need to do.
- Visit Loanry.com.
- Choose the kind of loan you need at the top of the screen.
- Complete the short form with your basic information.
- Loanry sorts through its database of financial institutions.
- Loanry may find a lender.
- You complete each lender’s long application.
- Each lender responds to you directly.
Keep in Mind: Loanry Does Not Make Loans
It just rents space to financial institutions just as a shopping mall rents retail space. Your loan, therefore, does not come from Loanry, but from a financial lender.
Loanry cannot promise you that a lender will give you a loan. We have no control over whether the financial institutions agree to loan you money. Our service simply might help you determine which lenders best suit you by organizing them all in one place. By putting your information below, you can see whether you qualify for any of the loans with selected lenders:
Why Use Loanry
Using the loan mall pre-application causes only a soft hit on your credit report and reduces the number of hard hits on your credit report. These hard hits happen every time you apply for credit, no matter what type. Each request lowers your credit score just a little, so rather than reduce your credit score, you can simplify your application process and salvage your credit score.
While Loanry is not a financial lending institution, it does offer free financial educational articles like this one on mortgage terms and definitions. We want to help you make better decisions about money.
Mortgage Terms and Definitions: Bolstering Credit Worthiness
Now that you know the difference between A+ and A- and what a FICO score describes, you are ready to get started improving your credit score before you apply for a loan. Put those mortgage terms and definitions to work. You need to strengthen your credit score as much as possible before applying for any type of loan so you can get the best interest rate and fees.
To you, bad credit probably means an individual with a score of 300. That’s the lowest score you can get and that exceeds the financial institution’s definition of bad credit.
What’s Considered Bad Credit
You also might consider your score of 540 pretty good, but banks still see that as poor credit. Financial institutions recognize that it means probably do not manage money really well. Many people of normal means have high credit scores, but they do not take out much credit or loans and they always make their payments on time. So, when a financial lending institution sees lower credit scores, they see a person who doesn’t manage money well. Change their perception by learning to manage money better using Creditry.
You simply need to implement common sense advice to raise your credit score. You’ve probably heard it all before, but you may not have put it into action yet. You can improve your credit by learning what lenders look for and doing that.
1. Obtain a Copy of Your Credit Report
Read your credit report once as yourself and once as a lender would. You can get a free copy of the report once each year from each of the three major credit reporting agencies.
Reading as yourself, check each credit report for errors and inconsistencies. Each agency has different data. Some of them collect more data. For instance, Experian lets individuals opt to allow the collection of data from their cell phone and utility payments. The credit reporting agency includes this additional data in the calculation of its score, but the other two credit agencies do not get the same data. That means your score will typically be higher with Experian, but there’s no guarantee that the lender you apply to will use Experian as the agency of request.
As soon as you spot errors or inconsistency, report this to the credit reporting agency and provide documentation that proves the correct information. This may include bank statements, credit card statements and payment receipts that show the payment dates and accounts. It will take a few weeks for the agency to correct the data, but once they do, your score gets recalculated.
2. Make Timely Payments
We realize how basic that sounds, but the key to having awesome credit is to pay your bills on time. Heck, make your payments early. Just six months of making your payments on time can increase your credit score. It works that quickly.
Consolidate your loans using a non-profit agency such as CareOne, or by taking out a consolidation loan. A consolidation agency will contact each creditor for you and negotiate a restructured debt. After the negotiations, the agency combines the many creditors’ payments into a single payment you’ll make to the non-profit each month.
The non-profit organization then distributes the newly negotiated payment to each creditor. This lets you quickly reduce your overall debt, plus unless you miss a payment to the non-profit, your payments are never late. That factor, plus the reduced debt, quickly raise your credit score.
A consolidation loan will ding your credit with a hard hit when the lending institution runs your credit, but otherwise, this option will help improve your credit quickly. It will enable you to pay off all of your credit cards and loans at once. At the point of taking out the consolidation loan, you’ll reduce your score slightly. It will quickly rebound as long as you do not close any of your credit cards.
What do you get
By paying off all of your loans, you make the ultimate timely payment. You have eradicated all outstanding debt. By leaving the credit cards open, you improve your debt to credit ratio. One of the items credit agencies look at is how much of your credit you’re using. If you have five lines of credit, but only use one and have the others open and available, you actually increase your credit score.
Like the consolidation agency, this lets you make only one payment per month. You’ll pay the lending institution who provided the consolidation loan.
3. Start a Side Hustle for More Income
Save money by hustling harder. No, that’s not one of the industry’s mortgage terms and definitions. But, hustling harder can help you get a better loan deal. Raising your income lets you sock away money for a down payment or to buy discount points. It can also help you qualify for a lower interest rate. You have a few options for how to add another stream of income.
Ask for a raise
Increase your existing income by asking for a raise if you have been with your current employer for a while. Do not try this if they just gave you a regularly scheduled performance raise after your annual performance reviews. This is if you have not had a raise for some time and you have performed your job well.
Find another job
Get a second job. It does not have to be a fancy or career-oriented job. You just need to quickly bump up your income and save the money. You can get a job in retail, grocery, fast food or waiting tables or bartending, typically in less than one week of job hunting. Forget glamourous gigs. You need money for a mortgage down payment. Most employers start you at $10 to $12 per hour. Work at the job at least six months before applying for a loan.
Start freelancing. You can drive for Uber or Lyft. Rent out a room in your apartment on Airbnb. If you write well or photography is a hobby, try blogging or freelancing as a photographer.
You can quickly add this money together in a savings account that lets you put down a larger down payment and/or buy discount points. Either way, you reduce the amount you’ll ultimately pay back to the bank. Saving it all gives you a larger down payment which means you’ll need to apply for a smaller loan. The less money you are asking for, the easier it is to get approved, generally.
4. Plan It Out With a Budget and Loan Calculator
There’s nothing simple about getting a loan or improving your credit. Buying a house requires serious budgeting along with knowing your mortgage terms and definitions. You have to make the budget and stick to it.
Make a budget if you do not already have one or study your current one. You should have at least 30 percent of your income available before taking out a loan. That is because your total loan repayments including the loan you are applying to financial lending institutions for should not exceed 30 percent of your monthly income.
Use a loan calculator to calculate what you can comfortably afford. Do not try to take out a loan for the absolute maximum for which you qualify. This is just a bad idea that can land you in a lot of trouble if anything happens that makes you late for a payment or two. Use the calculator to figure out your potential monthly payments using various options for loan term and interest rate, plus down payment, if that applies.
Now that you have a handle on the basic mortgage terms and definitions, you’re ready for part two. We’re just kidding. You now know the essential mortgage terms and definitions you need to apply for a mortgage loan. We won’t even pull a pop quiz on you. Do stop by Loanry though and use the request form to jump-start where to apply.
Carlie Lawson writes about business and finance, specializing in entertainment, cryptocurrency and FOREX coverage. She wrote weekly entertainment business and finance articles for JollyJo.tv, Keysian and Movitly for a combined seven years. A former newspaper journalist, she now owns Powell Lawson Creatives, a PR firm, and Powell Lawson Consulting, a business continuity and hazards planning consultancy. She earned BAs in Journalism and Film & Video Studies from the University of Oklahoma. She also earned her Master of Regional & City Planning at OU. Her passion lies in helping people make money while reducing risk.