At Direct Mortgage Loans, we know that the terminology of the mortgage industry can be confusing for many people. That’s why we have developed a comprehensive glossary of mortgage terms. Our goal is to help simplify industry jargon and provide borrowers with the knowledge they need to make informed decisions about their mortgage options.
If you have any unanswered questions, then please don’t hesitate to contact your local Direct Mortgage Loans loan officer, who will be happy to assist you!
A type of mortgage loan characterized by interest rates that automatically adjust or fluctuate in concert with certain market indexes. Generally, an ARM begins with an introductory or initial interest rate, which then may rise or fall, but monthly payments may or may not exceed the arm loan cap.
Amortization refers to the process of paying off a mortgage over time, typically through regular payments that cover both principal and interest.
This refers to the annualized interest rate charged on a loan, including certain fees and costs associated with the loan. The APR represents the total cost of borrowing, expressed as a percentage of the loan amount. It is designed to help consumers compare the costs of different loan products and make informed decisions about borrowing.
An appraisal is an evaluation of a property’s value conducted by a licensed appraiser to determine the market value of the property. The appraiser considers factors such as the property’s location, size, condition, and comparable sales in the area to arrive at an estimated value. An appraisal is typically required by lenders when a borrower is seeking a mortgage, and the value determined by the appraisal is used to determine the maximum loan amount that the lender is willing to offer.
An asset is any item of value that a borrower owns, such as a house, car, or investment portfolio. Assets can be used to secure a mortgage loan and can also be considered in the loan approval process.
An assumable mortgage is a type of mortgage loan that can be transferred from the original borrower to a new borrower. This type of mortgage can be useful in situations where a buyer wants to assume the remaining balance on a mortgage loan instead of taking out a new loan.
Before-tax income is the total income a borrower earns before taxes are deducted. This income is used to determine a borrower’s debt-to-income ratio, which is an important factor in the loan approval process.
A bridge loan is a type of short-term loan that is used to bridge the gap between the purchase of a new property and the sale of an existing property. This type of loan is often used by homebuyers who need to move quickly and can’t afford to wait for their current home to sell.
A financing technique in which the buyer pays additional points up front to lower the interest rate over the life of the loan.
A cap is a limit on the amount that an interest rate can increase or decrease over a certain period of time. Caps are often used in adjustable-rate mortgages (ARMs) to protect borrowers from large rate increases.
A document issued by the government certifying that a veteran is eligible for a VA home loan.
Change frequency refers to how often the interest rate on an adjustable-rate mortgage (ARM) can be adjusted. Change frequency is typically stated in the loan agreement.
Closing is the final step in the mortgage process, where the borrower signs all of the necessary documents and pays any closing costs. Once closing is complete, the borrower takes ownership of the property.
Closing costs are the fees associated with finalizing a mortgage, such as title insurance, appraisal, and attorney fees.
A five-page document provided by the Lender or Settlement/Escrow Agent delivered to the home buyer 3 days before Closing.
A conventional loan characterized by loan limits that fall within those guidelines laid out by the Government Sponsored Enterprises (GSEs) such as Freddie Mac and Fannie Mae.
A short-term loan for new home construction is supplemented with a conventional long-term home loan. See combination loan.
A transaction consisting of two separate loans for the same borrower by the same lender. The initial loan is used to finance the construction of a new home; upon completion of construction, the loan is repaid by a second loan, which is a permanent mortgage on the home.
A consumer reporting agency, also known as a credit bureau, is a company that collects and maintains information about consumers’ credit histories. This information is used by lenders to evaluate borrowers’ creditworthiness.
A mortgage offered by any one of the Government Sponsored Enterprises, different from an FHA and VA loan.
A person who signs a loan with the borrower and agrees to be responsible for the debt if the borrower defaults.
A credit report is a document that contains information about a borrower’s credit history, including their payment history, outstanding debts, and any collections or bankruptcies.
A credit score is a three-digit number that is calculated based on a borrower’s credit history. It is used by lenders to assess a borrower’s creditworthiness and to determine the interest rate and other terms of a loan.
The DTI is a measure of a borrower’s debt in relation to their income. It is calculated by dividing the borrower’s monthly debt payments by their gross monthly income.
A legal document used in some states as an alternative to a mortgage, which conveys the legal title of a property to a trustee until the borrower repays the debt in full. The trustee also has the power to sell the property in the event of default by the borrower and use the proceeds to pay off the outstanding debt.
Occurs when a borrower fails to make a payment on a loan as scheduled, which can trigger a range of consequences depending on the terms of the loan agreement. In the case of a mortgage, default can lead to foreclosure, where the lender takes possession of the property and sells it to pay off the outstanding debt.
Occurs when a borrower is late on a payment but has not yet reached the point of default. Delinquent payments can lead to penalties, fees, and damage to the borrower’s credit score.
The down payment is the upfront payment that a borrower makes toward the purchase of a home. It is typically expressed as a percentage of the total purchase price and can range from 3% to 20% or more, depending on the lender’s requirements and the borrower’s financial situation.
An EMD is a payment made by a buyer to a seller to demonstrate their commitment to purchasing a property. This payment is typically made after the purchase offer is accepted by the seller and is held in an escrow account until the sale is finalized.
A borrower’s gross income from all sources, minus certain deductions, such as taxes and retirement contributions.
Equity refers to the difference between the value of a property and the amount owed on any outstanding mortgages or other liens.
An Escrow account is a third-party account that is used to hold funds for a transaction. In the context of real estate, an escrow account is typically used to hold the buyer’s Earnest Money Deposit, as well as other funds related to the transaction, such as closing costs and property taxes. The purpose of an escrow account is to provide a neutral party to hold the funds and ensure that they are disbursed appropriately.
Mortgages extended by FHA-approved lenders and insured by the Federal Housing Administration (FHA)- designed to assist borrowers unable (for various reasons) to get the approval necessary for conventional home loans.
A FICO Score is a credit score that is used by lenders to determine a borrower’s creditworthiness. FICO Scores range from 300 to 850 and are based on several factors, including payment history, credit utilization, and length of credit history.
A mortgage that has an interest rate that never changes over the life of the loan.
A document provided by the lender that estimates the closing costs associated with the mortgage loan.
The difference between the market value of a property and the outstanding mortgage balance.
Fees that are charged by homeowners associations to maintain common areas and amenities in a community. HOA fees can vary depending on the size and amenities of the community.
Protects the value of the home for both lender and borrower. Homeowner’s insurance typically covers damage incurred to the home. Most mortgage lenders require borrowers to carry a form of insurance.
The U.S. Department of Housing and Urban Development, which regulates the federal housing agencies and enforces fair housing laws.
A mortgage that is insured against default by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
Interest is the amount of money that a lender charges a borrower for the use of borrowed funds.
The percentage charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage rate (APR). It is the cost of borrowing money and is typically influenced by factors such as the borrower’s credit score, the amount borrowed, and the length of the loan term.
Liabilities are debts or obligations that a borrower owes to others. This can include things like credit card balances, car loans, and student loans. Lenders will take a borrower’s liabilities into account when determining their ability to repay a mortgage.
A line of credit is a type of loan that allows a borrower to access funds as needed, up to a predetermined credit limit. Unlike a traditional loan, a line of credit does not require the borrower to take out the full amount of the loan upfront. Instead, the borrower can draw on the line of credit as needed and only pay interest on the amount that is borrowed.
A liquid asset is an asset that can be easily converted into cash without significant loss in value. Examples of liquid assets include stocks, bonds, and savings accounts. Lenders may consider a borrower’s liquid assets when determining their ability to repay a mortgage.
A loan is an amount of money that is borrowed and must be repaid, typically with interest. In the context of a mortgage, a borrower takes out a loan to purchase a home and then repays the loan over time, typically with monthly payments.
Document issued by the lender once the loan has been approved.
An itemized list of anticipated loan costs and closing fees passed from a lender to a potential borrower within three days of an application for a home loan.
The LTV is a measure of the amount of a property’s value that is financed through a mortgage. It is calculated by dividing the amount of the mortgage by the appraised value of the property.
The time period during which the lender guarantees a specific interest rate for the mortgage loan.
The maturity of a loan is the date when the loan must be fully repaid. In the context of a mortgage, the maturity date is typically 15 or 30 years from the date the loan was originated.
The minimum amount due on a mortgage loan each month, which includes principal and interest.
A mortgage is a loan that is used to purchase a property. The property itself serves as collateral for the loan. Mortgages typically have fixed or adjustable interest rates and are repaid over a period of years.
Mortgage insurance is a type of insurance that protects lenders in the event that a borrower defaults on their mortgage. It is typically required for borrowers who put down less than 20% of the purchase price of a home.
A fee charged by the government for FHA loans which is added to the monthly mortgage payment and used to insure the loan against default.
The mortgagor is the borrower in a mortgage loan agreement. The mortgagor is typically the person or entity that is purchasing the property.
The value of an individual’s assets minus their liabilities.
Non-liquid assets are assets that cannot be easily converted into cash, such as real estate, art, or antiques. These assets are not typically used to determine a borrower’s ability to repay a mortgage loan.
A fee, calculated as a small percentage of the loan amount, charged by a mortgage lender for processing the work associated with your loan. This fee is like the fee a realtor charges for selling your home.
The total amount required to pay off a mortgage loan in full, including principal, interest, and any other fees.
Points are fees that are paid to a lender at closing in exchange for a lower interest rate on the mortgage.
The process in which a home buyer works with a lender to determine how much home he or she can afford.
An initial evaluation of a borrower’s creditworthiness, income, and other factors to determine if they are eligible for a mortgage loan.
The prime rate is the interest rate that banks charge their most creditworthy customers. The prime rate is often used as a benchmark for other interest rates, including those for mortgage loans.
The principal is the amount of money that a borrower borrows to purchase a home. It does not include interest or other fees.
A principal payment is a payment made toward the original amount borrowed, not including interest or other fees. Making additional principal payments can help borrowers pay off their mortgage loans faster.
PITI is a term used to describe the components of a monthly mortgage payment. The principal is the amount borrowed, interest is the cost of borrowing the money, taxes are property taxes paid to local governments, and insurance is typically homeowners insurance.
Private mortgage insurance is a type of mortgage insurance that is required for borrowers who put down less than 20% of the purchase price of a home.
Taxes that are levied on the value of your home. Property taxes are typically paid annually to the local government.
A short-term agreement by a lender to “hold” a certain interest rate on a mortgage while the buyer negotiates a sale transaction during the mortgage process.
A real estate agent is a licensed professional who assists buyers and sellers in real estate transactions. Real estate agents can provide valuable insights into local housing markets and can help buyers find the right home for their needs and budget.
RESPA is a federal law that regulates the real estate settlement process, including mortgage loan disclosures and the handling of escrow accounts. RESPA requires that lenders provide borrowers with certain disclosures, including a Good Faith Estimate of loan costs and a HUD-1 Settlement Statement.
The standard payment calculation is the formula used to calculate the monthly payment on a mortgage loan. The calculation takes into account the loan amount, interest rate, and term of the loan, as well as any escrow amounts for taxes and insurance.
The length of time over which a mortgage loan is repaid.
A temporary buydown is a type of mortgage loan where the borrower pays a reduced interest rate for the first few years of the loan. The reduced rate is typically subsidized by the seller or another third party.
Insurance that protects you and the lender in case there are any problems with the title to the property. Title insurance is typically required by lenders as a condition of getting a mortgage.
The total expense ratio is a calculation that considers all of a borrower’s monthly debt payments, including the mortgage payment, and compares it to their monthly income. This ratio is used to determine whether a borrower is eligible for a mortgage loan.
The Treasury index is a benchmark used to calculate adjustable-rate mortgage (ARM) interest rates. The index is based on the yield of Treasury securities with various maturities.
The Truth-In-Lending Act is a federal law that requires lenders to disclose the true cost of credit to borrowers. Lenders must provide borrowers with a Truth-In-Lending disclosure statement that includes information on the annual percentage rate (APR), finance charges, and other loan terms.
Underwriting is the process of evaluating a borrower’s creditworthiness and determining whether or not to approve their mortgage application.
A government-backed mortgage loan that is available to eligible borrowers in rural areas who meet certain income and credit requirements.
A VA loan is a mortgage loan guaranteed by the US Department of Veteran Affairs (VA). The VA Loan was designed to offer long-term financing to eligible American veterans or their surviving spouses.