I know it seems like sometimes we mortgage specialists are speaking in a different language! I’m here to tell ya, I feel your pain (I wasn’t born a mortgage specialist). Here’s a list of frequently used terms that will hopefully narrow your learning curve when you’re looking for a new home and securing a mortgage.
Amortization is the accounting of the pay-off of your mortgage over time though a fixed principal and interest payment.
Appraisals are written estimates of homes. A qualified appraiser will visit the home and conduct the appraisal within certain uniform guidelines. The purpose is to show the bank how much the property is worth.
APR (Annual Percentage Rate)
APR is the true cost of borrowing money. It calculates the interest paid over the life of the loan as well as the cost of securing the loan. Interest rate only shows the percentage of the principal a lender charges you. When comparing loan products, be sure to compare the APR (not just interest rate) as fees and closing costs can vary from lender to lender.
Clear to Close
A clear to close is when the underwriter has reviewed and signed off on the documentation required for you loan program. Once the clear to close is issued, the fun part begins – processing to fund and close the loan.
Closing Costs for buyers include hard costs associated in securing a mortgage. When you close on a loan, your closing costs will include the appraisal, origination points, and other fees. Closing costs are above and beyond your down payment and can run from 2-4% of the loan amount.
The closing disclosure is a document covering the final details of your home mortgage. It provides all of the accounting of your closing costs and your monthly payments. Federal law requires that your closing disclosure must be provided to you 3 days in advance of closing. This will give you time to compare it to your previous loan estimate and ask questions of your loan originator.
Debt to Income Ratio
Your debt to income ratio is one of the major qualifiers an underwriter uses to ascertain your eligibility for a loan program. Simply, it is your gross income divided into your monthly consumer debt. Consumer debt being your housing expense, car loans, student loans, minimum credit card payments etc…. Most loan programs will allow a 41-43$ debt to income ratio, but does vary quite a bit from loan program to loan program. Your debt to income ratio is one of the largest qualifiers of how much home you can buy or get a mortgage for.
Equity is how much of the house you own vs the bank. As the market value of your house rises and you pay down the principal, your equity stake in your home rises. The amount of equity you have in your home will effect the loan programs that are available to you as well as your interest rate.
Your lender, under most circumstances, are going to insist you fund and maintain an escrow account for your home insurance and property taxes. Your lender will actually be responsible for making the payment—using your money, of course. Setting up an pre-funded escrow accounts and collecting a small amount every month for insurance and taxes ensure the bank the payments will be made in a timely manner. When you pay off your mortgage, the money in the escrow account is yours.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government sponsored agencies created to provide affordable mortgages to low-middle income Americans. They set the guidelines for the conforming loan to be easily bought and sold on the secondary market as well as guaranteeing the loans. Over 90% of the home loans in the US are backed by either Fannie Mae or Freddie Mac.
Your FICO score is your credit score used when securing a mortgage. Specifically your FICO score is a score designed by Fair Issacson Corporation and is a set of scores from the three major credit bureaus. Your credit score impacts your interest rate more than any single criteria used in determining your eligibility for a loan.
A fixed rate mortgage is a mortgage rate that is fixed for the life of the loan, meaning your principal and interest payment never change over the life of the loan. The most common mortgage product is the 30-year fixed mortgage rate.
A jumbo loan or mortgage is a loan that is outside the lending limits of the Federal Housing Authority. A jumbo mortgage is not eligible to be purchased, securitized or backed by FannieMae or FreddieMac.
The loan estimate is a 3 page document that goes over the details of a loan. It covers your loan amount, interest rate and closing costs.
The loan originator, loan officer or mortgage originator is your first point of contact in the home loan process. They will facilitate your loan application and walk you to the closing table. They are your point of customer service with your lender.
Loan to Value Ratio
Loan to value ratio is the amount of money you have put into the deal and how much you are financing. If you are putting 20% that you have an 80% loan to value ratio. Another big qualifying factor to fit you into a loan program.
The amount of payment that is put towards the balance of the loan when you make a mortgage payment. In the beginning your principal payment will be low and with each month that goes by a little more of your payment goes to principal.
Private Mortgage Insurance
Private Mortgage Insurance is an insurance premium you typically pay on loans that have less than a 20% down payment. The private mortgage insurance covers any losses the bank should have if you default on your loan.
Once you meet with your loan officer and fill out the application and provide the necessary documentation, your loan will be turned over to a processor. The processors job is to package the loan and double check all necessary documentation is provided before it is submitted to underwriting.
A rate lock is an agreement between you and your lender guaranteeing an interest rate on a specific loan product. Interest rates on loans can fluctuate on a daily basis and until you lock your interest rate, your interest rate is whatever the market rate is for that day.
Title insurance is an insurance policy that you purchase for your bank to cover any losses due to a title defect. It is a one time up front fee when you secure a mortgage.
Variable rate or adjustable rate mortgages are a mortgage product that is fixed for a certain period and than adjusts yearly based on a specific financial index. Usually homeowners will go with an adjustable rate mortgage if the interest rate is lower than the 30-year fixed rate at that time.
Underwriting is one of the most critical pieces of the lending process. An underwriter assesses a borrower’s credit worthiness through reviewing credit, income, and assets.