Key Terms To Know When Getting A Home Loan

“Freddie who?” – “PITI what?” – “Escrow where?”  

Let’s be honest, the mortgage business has a language of its own – and if you’re not well-versed in the lingo, the home-buying process can make you feel like a fish out of water.

We don’t want that for you! We want your mortgage process to be easy and stress-free.

That’s why we’ve created a mortgage glossary for you.

We'll define the key terms you should know.

• Mortgage products
• Credit health
• Basic mortgage documents
• Upfront mortgage costs
• Monthly mortgage costs
• Miscellaneous mortgage terms

Let’s start with a simple definition.

Mortgage: An agreement between you and a lender that allows you to borrow money to purchase, refinance, or make improvements to a home or real estate property.

Easy enough, right? Let’s move onto the products.

Mortgage Products

• Adjustable Rate Mortgage (ARM): An ARM is a mortgage with an interest rate that may change throughout the loan. The rate and monthly payment may start out low and adjust upward or downward based on economic conditions.
• Construction Loans: A loan used to finance the construction of a residential home – it can cover the cost of the land and house itself. (There are different types construction loans. Check out this blog for more information.) 
• Federal Housing Administration (FHA) Loans: FHA loans allow for lower down payments and lower minimum credit scores, making them a great option for first-time homebuyers. These loans are from private lenders that are regulated and insured by the FHA.
• First-Time Homebuyers (FTHB) Loan Programs: First-time homebuyers may be eligible to use a number of different types of loan programs to purchase their first home.
• Fixed Rate Mortgage: This is the most common type of home loan. With a fixed-rate mortgage, the monthly principal and interest payments remain the same for the life of the loan, offering simplicity and predictability.
• Home Equity Lines of Credit (HELOC) or Home Equity Loans: While not technically a mortgage, HELOCs or home equity loans allow homeowners to use the equity in their home to finance things like home renovation, vehicles, and other purchases.
• Non-Qualified Mortgages (Non-QM): This type of mortgage allows individuals to qualify for a loan through non-traditional means (e.g., individuals who are self-employed or have a short credit history and may not qualify for a conventional or government-issued mortgage).
• United States Department of Agriculture’s (USDA) Guaranteed Rural Housing Program: USDA loans are designed to help low-to-moderate income rural home buyers achieve home ownership with loans, loan guarantees, and grants.
• Veterans Affairs (VA) Loans: VA loans are designed to help Veterans, Service members, and eligible surviving spouses become homeowners.
• Wisconsin Housing and Economic Development Authority (WHEDA): WHEDA loans help those with low-to-moderate incomes get affordable financing for their first home (available only to Wisconsin residents).

Your credit health is important for obtaining a home loan.

Credit Health

• Credit History: A record of your credit accounts and your history of paying on time.
• Credit Report: A statement that has information about your credit activity and current credit situation, such as loan paying history.
• Credit Score: Using a mathematical formula, a credit score predicts your likelihood of paying a loan back on time.
• Debt-to-Income (DTI) Ratio: All your monthly debt payments divided by your gross monthly income.

Now, how do you get a mortgage? It's going to take some paperwork – but don't worry, we have you covered.

Basic Mortgage Documents

• Closing Disclosure: A form that provides the final details about your mortgage loan. It includes the terms, monthly payments, and how much you’ll pay in fees and other costs.
• Loan Estimate: A form you receive after application for a mortgage that lays out important information, such as the estimated interest rate, monthly payment, closing costs, taxes, and insurance.
• Mortgage Application: A document you submit to a lender when you apply for a mortgage to purchase, refinance, or make improvements to a home or real estate property.
• Pre-Approval Letter: This document estimates the amount of money you may be able to borrow, up to a certain amount based on credit, debt, employment history, and income. Getting pre-approved is when things start to get serious and helps in the negotiating process when searching for your home.
• Pre-Qualification Letter: This indicates that a lender is willing to lend up to a certain amount of money to you. A pre-qualification isn’t fully underwritten or validated but will give you a good idea of what you may be approved for.
• Promissory Note: The legal document you sign to agree to repay your mortgage.

What costs come before you make your first monthly mortgage payment?

Upfront Mortgage Costs

• Closing Costs: All costs you pay at closing – origination charges, appraisal fees, credit report costs, title insurance fees, prepaid interest, and any other fees required by your lender.
• Down Payment: An initial payment made upfront when purchasing a home, usually as a percentage of the total purchase price.
• Earnest Money: A deposit you pay to show good faith on a signed contract agreement to buy a home.
• Homeowner's Insurance: A fee you pay to help cover losses and damage to your property if something unexpected happens, like a fire or vandalism. This is required on every property that is financed.

Next, let’s take a look at some terms associated with your monthly mortgage cost.

Monthly Mortgage Costs

• Annual Percentage Rate (APR): Reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan.
• Escrow: A portion of your monthly payment goes into this account. It’s set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance.
• Interest Rate: Expressed as a percentage rate, this is the cost you will pay to borrow the funds. It does not reflect fees and other charges.
• Principal: The amount you borrowed.
• Principal, Interest, Taxes, and Insurance (PITI): The four basic elements of your monthly mortgage payment.

There are several important terms you should know that don’t necessarily fall under one of the above categories.

Miscellaneous Mortgage Terms

• Co-Signer or Co-Borrower: Someone who agrees to take full responsibility to pay back a mortgage loan with you.
• Delinquent: Another term for being late on your payments.
• Equity: The amount your property is currently worth minus the amount of any existing mortgage on your property.
• Foreclosure: When the lender or servicer takes back property after the homeowner fails to make mortgage payments.
• Fannie Mae: The Federal National Mortgage Association (Fannie Mae) purchases and guarantees mortgages from lending institutions in an effort to increase affordable lending.
• Freddie Mac: The Federal Home Loan Mortgage Corporation (Freddie Mac) is a private corporation founded by Congress. Its mission is to promote stability and affordability in the housing market by purchasing mortgages from banks and other loan makers.
• HUD: The Department of Housing and Urban Development (HUD) is a government agency that helps people get and maintain quality affordable housing.
• Loan-to-Value Ratio (LTV): The LTV ratio is a measure of comparing the amount of your mortgage with the appraised value of the property.
• Mortgage Refinance: When you take out a new loan to pay off and replace your old mortgage loan.
• Mortgage Term: How long you have to repay your mortgage loan. 
• Mortgage Loan Originator (MLO): An individual or institution that takes a residential mortgage application or offers or negotiates terms of a mortgage loan.
• Nationwide Mortgage Licensing System (NMLS): A centralized database that registers licensed information for MLOs.
• Payoff Amount: How much you will actually have to pay to satisfy the terms of your mortgage loan.
• Underwriting: The process by which the lender decides whether an applicant is creditworthy and should receive a loan.

We hope this helps you “speak mortgage”!

To learn more, visit us at IncredibleMortgage.

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