Welcome to Mortgages 101! This will be a periodic series discussing different aspects of mortgages with the intention of educating buyers about home loans. We’ll talk about the mortgage process and other mortgage basics that every home buyer should know. Buying a home is already a hectic, overwhelming time. The more you understand what will happen and why, the less stressful the home buying and mortgage processes will be.
Before learning about anything, no matter what it is, it’s important to learn the terminology. Maybe not all of it though definitely the words you’ll hear and use the most. These are the 21 most common words you’ll hear when you’re going through the mortgage process.
Appraisal
An expert estimate of the value of the home, condo, or land. An appraisal is completed by a certified professional called an appraiser.
Closing Costs
Fees paid by buyers and sellers in a real estate transaction. Though typically between 2% and 7%, they vary from state to state and transaction to transaction. For instance, a cash transaction will have less closing costs than one in which you are obtaining financing to purchase the real estate.
Conventional Loan
A mortgage that is not insured by any government agency, such as FHA or VA. A conventional loan usually has a fixed rate and terms. Historically, this is the loan that required 20% down; however, there are now many programs that do not have that requirement and are not the low or no down payment loans of FHA or VA.
Debt-to-Income Ratio
A number that measures your monthly debt versus your monthly income. To calculate DTI, divide your monthly debt payments (rent, utilities, credit cards, etc) by your gross monthly income. The number affects the kind of loan you can get as well as your credit score.
Down Payment
A payment made in cash during the purchase of a home. Also called “escrow”, the down payment is typically refundable within a certain time period if certain criteria are met. Initial down payments are usually between 1% and 5%.
Equity
In simplest terms, equity is ownership. When asked, “Who owns this house?”, some people answer, “Me. And the bank.” Equity is the difference between what the house is worth and how much is still owed on the mortgage.
FHA Loan
A loan guaranteed, or insured, by the Federal Housing Administration. Buyers who qualify for FHA loans typically can use a smaller down payment and have some of the closing costs paid by the seller. This loan is designed to help low- to moderate-income borrowers become home owners.
Loan Commitment
A lender’s promise to lend a business or individual a specific amount of money.
Loan Originator
Broadly speaking, your lender. A loan originator is the salesperson or mortgage broker you first speak with. This is the person who takes your information, prequalifies or preapproves you for a loan, and is generally your first point of contact for all mortgage things throughout the buying process. A loan originator works with a team of other mortgage professionals, such as underwriters, loan processors, and coordinators.
Mortgage
A loan from a financial institution, such as a bank, credit union, or mortgage company, that enables you to buy a real estate. The real estate secures the loan.
Mortgage Insurance
Mortgage insurance is insurance which protects the lender if you default on your loan. It is often required on loans in which you put down less than 20%. When issued for a conventional loan, MI will drop off once you pay in 20% on the principle. With an FHA loan, however, MI remains for the life of the loan. An upfront fee of 1.75% of the loan is due up front (or rolled into your monthly payment) while a monthly premium of 0.4% to 1.05% is rolled into your monthly payment
Origination Fee
A fee charged by your lender to cover the costs of processing your loan application. This fee can be anywhere from 0.5% to 2%. Some lenders waive the origination fee, though look for other names such as processing fee, underwriting fee, and application fee.
PITI
An acronym which stands for Principle, Interest, Taxes, Insurance. These are the items which make up your monthly mortgage payment.
Points
Mortgage points or discount points. These are fees you can pay to your lender to “buy down” your interest rate. A lower interest rate usually results in a lower monthly mortgage payment. One point generally costs 1% of your mortgage amount. The amount it buys down your interest rate depends on your lender.
Preapproval
The pre-qualification for a loan. A preapproval is a lender’s offer to loan you a specific amount of money based on specific criteria. The preapproval usually expires after a certain period of time, such as 90 days. When a lender preapproves you, they have substantiated some or all of the information needed from you, such as income and debts.
Prequalification
A step below a preapproval. A prequalification is a lender’s offer to loan you a specific amount of money to buy a house. Unlike a preapproval, a prequalification is based solely on what you tell the lender. A prequalification can be done in a matter of minutes and does not include any verification of the information you give them.
Principal
The amount of your loan; the amount of money you borrowed and have to pay back.
Rate
Interest rate. The rate varies from person to person and is affected by things such as your credit score.
Rate Lock
An agreement between you and your lender to lock in your interest rate for a specific amount of time. You want to lock your rate when interest rates are on the rise, but not if they are trending downwards.
Underwriting
Part of the origination process. In underwriting, the lender determines whether the risk you pose is acceptable enough to loan money to you. In other words, the underwriter looks at your income, debts, payment history, the value of the home you wish to purchase, etc and makes a determination about whether or not they think you will default or not on your mortgage. There are five basic steps to the underwriting process: 1) Prequalification, 2)Income verification and documents, 3) Appraisal of the home, 4) Title search and insurance, and 5) Approved, approved with conditions, denied, or suspended.
VA Loan
A loan available through a program established by the United States Department of Veterans Affairs. VA loans help servicemembers and their surviving spouses purchase a home. The VA determines the terms of the loans and guarantees a portion of the loan.
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