Common Mortgage Terms to Know

Addendum: Used when a purchase agreement has additional terms and conditions for selling or buying a home.

Application (1003): A standard form that collects information about the property being mortgaged and the borrower, including their legal name, date of birth, social security number, assets, liabilities, and a 2-year history of where the borrower has lived and worked. The loan application is used for the application to be run through automated underwriting for loan approval. 

Appraisal: The unbiased estimation of a home’s current market value. A licensed appraiser completes this estimation; the final amount assigned to the home is calculated based on its details, including its size, condition, and floor plan, and compared with recent sales of similar homes in the area.

ARM: Adjustable-Rate Mortgage: A home loan with an interest rate that varies over time. The rate is fixed for a specific period and then adjusts periodically based on a benchmark interest rate. This feature can result in fluctuating monthly mortgage payments. 

Assets: Items the borrower owns that have a monetary value. They are usually grouped into three categories: cash, cash equivalents, and property.

Automated Underwriting System: Allows lenders to have an automatic system that analyzes a borrower’s information to confirm that it is acceptable to the guidelines for the mortgage loan product that the borrower wishes to obtain. Fannie Mae’s system is called an Automated Underwriting System; it can be used to underwrite conforming loans they guarantee, such as FHA and VA loans. Freddie Mac’s system is called Loan Prospector Advisor and is used to underwrite conforming loans guaranteed by them and VA loans.

Bank Statement Loan: Non-qualified mortgage where the borrower’s income is calculated using their deposits into their bank account instead of using tax returns and paystubs to calculate income. This loan is an alternative documentation loan that was designed to help self-employed borrowers to qualify for a mortgage.

Buyer’s Agent: A real estate professional who works with a home buyer through the home buying process. A buyer’s agent is the representative of the buyer who has the legal obligation to protect the buyer in the transaction and be sure that the buyer is getting the best possible deal. Buyer’s agents help buyers find homes that fit their needs, write offers, do home inspections, negotiate for the buyer, and guide them through the closing process. A buyer’s agent is essential in a real estate transaction as they are the buyer’s advocate to be sure that they are represented in the transaction, that they buy a home for a fair amount, and that the home is in a condition acceptable to the buyer.

Buyer’s Agent Commission: A fee paid to the buyer’s real estate agent in a transaction. This commission is typically a percentage of the home’s sale price and is usually covered by the seller. The buyer’s agent commission compensates the agent for their work in finding a property, negotiating the sale, and guiding the buyer through the purchasing process.

Certificate of Eligibility: A document required for veterans to apply for a VA loan. This certificate verifies the veteran’s service history and confirms their entitlement to VA home loan benefits. The Department of Veterans Affairs issues it, and lenders must determine the borrower’s eligibility for a VA-backed mortgage.

Conditional Loan Approval: A preliminary approval from a lender indicating that the borrower’s loan application meets the initial criteria. However, final approval is contingent upon fulfilling certain conditions, such as providing additional documentation, undergoing a satisfactory appraisal, or resolving any outstanding issues. This stage signifies that the lender is likely to approve the loan once all conditions are met.

Condo: Short for condominium, it is a type of housing where individuals own individual units within a larger complex. Common areas, such as hallways, pools, and gyms, are jointly owned by all unit owners. Condos offer a low-maintenance lifestyle with shared responsibilities for property upkeep and amenities, making them an attractive option for many home buyers.

Closing Costs: These are the costs associated with buying a home. These fees include third-party fees for verifying information about the borrower, the buyer, and the home being bought. Title and escrow companies charge fees for their services. The lender could also charge fees for processing, underwriting, and points for the rate. If the borrower works with a mortgage broker like Mindful Money, they will not have lender junk fees like processing and underwriting.

Closing Disclosure: A standardized form that describes the critical aspects of a mortgage loan, including purchase price, loan fees, interest rate, real estate taxes, homeowner’s insurance, closing costs, and more. 

Contingency: Conditions or actions that parties must meet for a real estate contract to be binding. A contingency is integrated with a binding sales contract when the buyer and seller agree to the terms and sign a contract.

Conventional Mortgage: Conventional or conforming mortgages are bought or guaranteed by Fannie Mae and Freddie Mac. They are underwritten according to the guidelines set by Fannie Mae or Freddie Mac.

Credit: A person’s ability to borrow money or access goods or services with the understanding that they will pay later.

Credit Report: A detailed breakdown of a person’s credit history that a credit bureau prepares. The three major credit bureaus are Equifax, Experian, and TransUnion. 

Credit Score: Also known as a FICO score, this score represents the consumer’s creditworthiness and is used by lenders to help them decide how likely it is that a person will be repaid on time if they give a loan. 

Debt-To-Income (DTI): The percentage of a borrower’s gross monthly income used to pay their monthly debt and helps determine borrowing risk.

Down Payment: The amount of money the buyer contributes to purchasing a home. These funds help build equity in a home. Down payments are a percentage of the purchase price, starting from as little as 3%. There is no limit to how much a buyer can put down.

DSCR Mortgage: A non-qualified mortgage in which the rental income from the subject property is used to qualify the borrower to purchase a rental property. It is an alternative income loan for business purposes only and usually has a pre-payment penalty.

Dual Agency: This is when a home buyer chooses to work with the listing agent of a home for sale to buy a home.  Dual agency is discouraged as it can lead to a conflict of interest as the listing agent represents the seller first and might not negotiate on the home buyer’s behalf as strongly as if the buyer had their own agent.

Earnest Money Deposit (Good Faith Deposit): A sum of money a buyer provides when making an offer to show they are serious about buying the home. The earnest money deposit is typically held by the title company until closing and is used toward the amount needed to pay at closing.

Escrow Account: A portion of the monthly mortgage payment held by the buyer’s mortgage servicer in an account to pay recurring bills such as homeowner’s insurance and property taxes.

Escrow Analysis: An escrow account analysis is performed at least once a year to be sure the correct amount of money is being collected for taxes and insurance. These amounts will change over the life of the loan.

Escrow Company: Third party, which is the neutral party in a purchase transaction. They collect everyone’s documents and money and disburse them according to the purchase agreement and lender instructions.

Equity: Equity represents the portion of a property that the owner truly owns, calculated as the difference between the property’s market value and any outstanding mortgage or liens. As mortgage payments are made and property values increase, equity grows. Home equity can be leveraged for loans or lines of credit and is a significant asset in financial planning, reflecting the owner’s investment in the property.

Fed Funds Rate: The Fed Funds Rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. Set by the Federal Reserve, it influences overall economic activity, impacting interest rates for mortgages, loans, and savings. Changes in the Fed Funds Rate control inflation and stabilize the economy, making it a critical tool in monetary policy.

Fixed-Rate Mortgage: A fixed-rate mortgage is a home loan with an interest rate that remains constant throughout the loan term. This stability allows borrowers to have predictable monthly payments, making budgeting easier. Fixed-rate mortgages are popular for their reliability, protecting homeowners from interest rate fluctuations and providing financial security over the life of the loan.

FHA Mortgage: An FHA mortgage is a home loan insured by the Federal Housing Administration, designed to make homeownership more accessible. These loans are popular among first-time home buyers and those with less-than-perfect credit due to their lower down payment requirements and more lenient credit criteria. FHA mortgages help expand homeownership opportunities by reducing barriers to obtaining a mortgage.

Flood Insurance: Flood insurance covers losses directly caused by flooding. In simple terms, a flood is an excess of water on land that is usually dry, affecting two or more acres of land or two or more properties. For example, damage caused by a sewer backup is covered if the backup directly results from flooding. When a buyer is under contract to buy a home, the lender will run the property address through a nationwide database to see if it is in a flood zone.  If it is in a flood zone, the buyer will need flood insurance to qualify for a mortgage on the home.

Forbearance: An agreement between the borrower and the lender to temporarily pause or reduce the borrower’s mortgage payment. 

Foreclosure: The legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by selling the mortgaged property. 

Gift Funds: Funds given to a borrower from a family member or close friend to assist them in buying a home. The funds would be used to help with a borrower’s down payment and closing costs.

Government Monitoring Information (GMI): Demographic information that banks are required to collect. The information collected concerns ethnicity, race, sex, marital status, and age. It is used to monitor who obtains a mortgage and ensure that no discriminatory lending practices exist.

HELOC: A Home Equity Line of Credit (HELOC) is a revolving credit line secured by a home’s equity. Homeowners borrow funds up to a specific limit, repay, and borrow again as needed during the draw period. HELOCs typically have variable interest rates and are used for various expenses such as home improvements, education costs, or debt consolidation, offering flexibility and access to cash proportional to the home’s equity.

Home Equity Line of Credit: A Home Equity Line of Credit (HELOC) allows homeowners to borrow against their home’s equity, providing a flexible funding source for various needs. Funds can be accessed as needed, repaid, and borrowed again during the draw period. HELOCs typically feature variable interest rates, making them a versatile option for managing expenses like home renovations, medical bills, or educational costs, leveraging the home’s value.

Homeowners Association: A Homeowners Association (HOA) is an organization in a residential community that enforces rules and regulations, maintaining property values and community standards. Members pay dues to cover communal amenities and services such as landscaping, security, and recreational facilities. The HOA oversees maintenance, dispute resolution, and enforcement of community guidelines, ensuring a cohesive and well-maintained living environment for all residents.

Homeowners Insurance: Homeowners insurance covers losses and damages to a house and the individual’s assets within the home. These policies usually cover interior damage, exterior damage, loss or damage of personal assets, and injury that arises while on the property.

Inspection: An objective and unbiased examination of a property’s physical condition, structure, and various systems from the foundation to the roof. A home buyer inspects once they have an accepted purchase contract.  These are done within the first few weeks of getting an accepted offer.  

Intent to Proceed: A form the borrower signs when they have decided on a lender and agree to move forward with the loan.

Interest: A fee paid to the lender for borrowing money.

Interest Rate: The percentage of the loan amount that is paid monthly to the lender for borrowing money. 

Jumbo Mortgage: For any amount over the conforming loan limits set by the Federal Housing Finance Agency (FHFA). They are non-qualified mortgages, so the interest rates, terms, and underwriting guidelines are different than a conforming mortgage loan.

Liability: Liability is something owed, often a debt that needs repaying or a financial obligation.

Listing Agent: The listing agent is a real estate professional representing a home’s seller. The listing agent is tasked with getting the home seller the highest price for their home with the least cost and hassle for the sellers.

Loan Estimate: A standardized form that gives a borrower essential details about the mortgage for which they are applying. The Loan Estimate includes the estimated interest rate, monthly payment, closing costs, and more.

Loan Modification: A change made to the terms of an existing loan because the borrower is unable to meet the payments under the original terms.

Loan Originator (Mortgage Broker or Mortgage Originator): A person or institution that helps a borrower get a mortgage for a real estate transaction. They work with the borrower from application and approval through the closing process. An MLO can be a lending company, mortgage broker, or loan officer.

Loan to Value (LTV): A financial term used by lenders to assess the risk of a loan by comparing the loan amount to the appraised value of the property. A lower LTV ratio indicates less risk, as the borrower has more equity in the property. LTV is crucial in determining loan terms, interest rates, and whether private mortgage insurance (PMI) is required.

Master Insurance Policy: A Master Insurance Policy is comprehensive insurance coverage purchased by a homeowners association (HOA) or condominium association. It typically covers common areas, buildings, and shared amenities within the community. This policy protects against property damage, liability claims, and other risks, ensuring that the entire community is adequately insured. Individual homeowners may still need separate insurance for their units and personal belongings.

Mortgage-Backed Securities (MBS): Financial instruments that pool together a collection of mortgage loans and sell shares to investors. These securities provide a way for lenders to free up capital and reduce risk while offering investors a stream of income from the mortgage payments. MBS can be attractive investments due to their relatively stable returns and diversification benefits in a portfolio.

Mortgage: A type of loan used to purchase or maintain a home, land, or other type of real estate.

Mortgage Loan Limits: Loan limits are set annually by the Federal Housing Finance Agency. These limits are the maximum amount of a mortgage that Fannie Mae and Freddie Mac are willing to buy or guarantee.

Notary Public: Public official who serves as a witness of the signing of important documents.

Non-Qualified Mortgage (Non-QM): Home loans that do not meet the standard requirements set by the Consumer Financial Protection Bureau (CFPB) for Qualified Mortgages. These loans are designed for borrowers with unique financial situations, such as self-employed individuals, non-traditional income sources, or lower credit scores. Non-QM loans offer more flexible underwriting guidelines but often have higher interest rates to compensate for the increased risk to lenders.

Pre-Payment Penalty: A fee charged by lenders when a borrower pays off their mortgage loan early, either through refinancing, selling the property, or making extra payments. This penalty compensates the lender for the interest income they would have earned if the loan had been paid off over the original term. Pre-payment penalties can vary in amount and duration, so reviewing loan terms carefully before agreeing to them is important.

Principal: The money a borrower initially agreed to repay when taking out a loan.

Property Taxes: Money paid by property owners helps cover costs for community services, such as public schools, emergency services, the police department, and road maintenance.

Purchase Agreement: A legally binding agreement between a buyer and seller that governs the purchase and sale of a property. It defines the terms of the transaction and the conditions under which a sale will occur.

Qualified Mortgage (QM): A Qualified Mortgage is a home loan that meets specific criteria set by the Consumer Financial Protection Bureau (CFPB) to be sure borrowers can repay the loan. These criteria include limits on debt-to-income ratios, prohibitions on risky features like interest-only payments, and caps on points and fees. QMs provide legal protection to lenders against borrower lawsuits while offering borrowers safer loan options with standardized terms designed to prevent the risks associated with high-cost or high-risk lending practices.

Refinance (Refi): A refinance occurs when a borrower pays off their current loan by taking out a new loan, effectively changing the terms of the loan. Revised terms may include, but are not limited to, the interest rates, payment schedules, and payment amounts. Often, people refinance to take equity out of their homes, lower their interest rate, or change their mortgage terms.

Retail Lender: A retail lender only offers products available from its own institution. It handles the loan in-house and works directly with prospective home buyers to complete the transaction. These lenders typically have higher rates, costs, and stricter underwriting guidelines than mortgage brokers who work with wholesale lenders.

Second Mortgage: A subordinate mortgage is often taken out when a person has owned their home for a while and wants to access equity in their home without refinancing their first mortgage. Second mortgages are available in varying loan terms and generally have higher interest rates than the first mortgage.

Seller Credit (Seller Concessions): Percentage of the sales price that the seller agrees to credit to the buyer at closing to help pay for their closing costs. These funds can only be used for closing costs and cannot be used for the buyer’s down payment.

Servicer: The mortgage servicing company services a mortgage after closing and is responsible for collecting the borrowers’ monthly payments, including their mortgage insurance, property taxes, and homeowners’ insurance. The servicer tracks the mortgage payments and pays the mortgage insurance, homeowners’ insurance, and property taxes on the borrower’s behalf when they are due.

Servicing Transfer: When a lender transfers servicing, they hand over the management of a loan to a new mortgage or servicing company. The new institution will collect the payments, handle escrow accounts, deal with insurance or tax matters, and answer borrowers’ questions. It does not change any of the terms of the loan, only who the borrower makes their payments to.

Title Company: Verifies that the seller has the legal right to sell the property to a buyer. A title company also that the buyer does not have any issues that could hinder the ownership of the home. The title company will issue a policy, called title insurance, that protects homeowners and lenders from conflicts (like title claims) that may arise from the property’s previous owners.

Title Fees: Fees associated with closing costs that are paid to help financially protect the buyer and lender if the title received needs to be verified or corrected. These fees can include title insurance, endorsements, and recording, to name a few.  

Wholesale lender: Wholesale lenders do not work directly with borrowers. Instead, they offer their loans through mortgage brokers. Mortgage brokers work with many wholesale lenders, allowing them to shop for the best mortgage for borrowers and their needs. The mortgage broker will originate the mortgage with the wholesale lender, who will underwrite, fund the loan, and either service the mortgage or sell the servicing of the mortgage.

Underwriting: The process of reviewing a loan application to determine how much risk a borrower poses to a lender. All applicable rules, regulations, and guidelines must be followed during the review process. 

Real Estate Agent: A person who connects buyers and sellers for real estate transactions and represents them in legal negotiations. They help buyers find a home by helping them tour different properties.