Mortgage Glossary: The terms You Need to Know to Get Your Dream Home

Published October 23, 2023

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We know the home buying process can be confusing—especially for first-time home buyers. That’s why we are doing our best to make the whole thing as easy as possible. Take, for instance, our mortgage mobile app, The Home Loan App by Maps CU. This app (which is available via Google Play and the Apple Store) is designed to streamline the process by connecting our Maps Mortgage Team with borrowers, real estate agents, and settlement agents in a single location for easy communication throughout the entire home buying and selling cycle.

Here's what you can do with the app: 
  • Determine spending limits and run loan scenarios through a convenient and easy-to-use mortgage loan calculator.
  • Start your mortgage process remotely or get your application completed in a safe and secure way. You can save and return whenever it’s convenient for you.
  • Receive push notifications when documents are needed during the loan process or when major milestones are reached. 
  • Scan in required documents on your phone and upload them quickly and easily to expedite your approval.
  • Track your loan progress through the entire process from application to closing.
  • Use the Chat Now feature to connect with your loan officer or realtor and help will be just a click away.
  • Enjoy the option to experience the new Hybrid e-close and sign most of your documents ahead of time (notarized documents excluded).

A Glossary of Mortgage Terms

Do all those homebuying and mortgage loan terms sound like a foreign language to you? You are not alone. Whether you are a first-time buyer or a regular house flipper, you are likely to encounter some unfamiliar terms in the home buying process. But don't worry, we've put together this glossary of common terms to help you get a better grasp. It’s just one of the tools at your fingertips with The Home Loan App by Maps CU.

Adjustable-Rate Mortgage (ARM) – A mortgage that has a fixed rate of interest for only a set period of time, usually one, three, or five years. During the initial period, the interest rate is generally lower, and after that period it will adjust based on an index.

Amortization Schedule – A schedule of how the loan is intended to be repaid. For example, a typical amortization schedule will include the amount borrowed, the interest rate, and the term. The result will be a month-by-month breakdown of how much every month is paid in interest versus how much is paid on the principal.

Annual Percentage Rate (APR) – A measure of the cost of credit expressed as a yearly rate. It includes interest as well as other charges. APR can be a helpful metric for borrowers to use in comparing the costs of different mortgage loans and products offered by different mortgage lenders.

Appraisal – Appraisals are conducted to give an estimate of the value of a property. They are conducted by certified professionals who evaluate a piece of property based on a physical inspection and the selling price of comparable houses that have recently been sold.

Appreciation – An increase in property value.

Balloon Loan or Mortgage – For mortgages, a balloon loan means that the loan has a larger-than-usual, lump sum payment, typically at the end of the loan term. If you are unable to pay the balloon amount, you may have to refinance, sell your home, or face foreclosure. On installment loans without a balloon option, a series of payments are made to pay down the loan’s balance.

Bi-Weekly Mortgage – Compared to typical mortgages that are paid once a month, bi-weekly mortgages are paid twice a month. More frequent payments reduce interest costs and decrease the length of the mortgage.

Clear Title – A clean title is a property title that has no defects (such as liens, boundary disputes, or easements). Properties with clear titles are marketable for sale.

Closing – Closing is the final step in purchasing a property. During closing, the title is transferred from the seller to the buyer and the seller receives payment for the property (also known as settlement).

Closing Costs – Closing costs are the costs involved with buying a house, typically including attorney fees, recording fees, and other associated costs.

Collateral – Collateral is security in the form of money or property that is pledged for payment of a loan. For example, on a home loan, the home is collateral and can be taken away from the borrower if mortgage payments are not made.

Conventional Loan – A conventional loan is any mortgage that is not guaranteed or insured by the government (such as a VA loan, FHA loan, or USDA loan).

Contingency Period – A period in the home sale contract process when specified conditions must be satisfied before the home sale can occur. When buying a home, the 2 most common contingencies are that the house must pass inspection and that the borrower must be approved for a loan.

Construction Mortgage – These are used when a borrower is having a house built. The lender will advance cash based on the construction schedule of the builder.

Co-Signer or Co-Borrower – A co-signer or co-borrower is someone who agrees to take full responsibility to pay back a mortgage loan along with you. The co-signer is obligated to pay any missed payments (or even the full amount of the loan) if you don’t pay.

Credit Score – Your credit score is calculated by evaluating your credit history to determine the likelihood of a loan being repaid on time. Scores range from 300 to 850. A lower score means a person poses a higher risk while a higher score indicates that there is less of a risk.

Debt-to-Income Ratio – Your debt-to-income ratio (a.k.a., debt ratio) is one of many ratios used to estimate whether a borrower will be able to repay a loan. In this calculation, a lender compares the monthly debt payments of the borrower (including the new mortgage) to the borrower’s monthly income. The income figure is divided into the expense figure and the result is displayed as a percentage. The higher the percentage, the riskier the loan is for the lender.

Default – Default is the inability to make timely mortgage payments or otherwise comply with the mortgage terms.

Down Payment – Your down payment is the amount of the purchase price that the buyer pays at the time of closing. Generally, lenders require a specific percent of the overall cost down for borrowers to qualify for a mortgage. In most cases, the larger the down payment, the lower the interest rate you will receive and the more likely you are to be approved for the loan.

Earnest Money – Earnest money is money put down by a potential buyer to show that they are serious about purchasing a home. If accepted, it becomes part of the down payment. If rejected, the earnest money is returned. If the buyer pulls out, the earnest money is forfeited. During the contingency period, the money may be returned to the buyer if the contingencies are not met to the buyer’s satisfaction.

Encumbrance – Anything that affects title to a property—such as loans, leases, easements, or restrictions.

Equity – Equity is the difference between the value of your home and the borrowed principal that you owe. As you make payments and the value of your home increases, the equity of your home generally increases.

Escrow – Escrow refers to funds that are held in an account to be used by the lender to pay for home insurance and property taxes. The funds may also be held by a third party until contractual conditions are met and then paid out.

FHA Loan – FHA loans are funded by private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans are often a helpful tool for first-time home buyers because they allow for lower credit scores and down payments as low as 3.5 percent of the total loan amount. They differ from conventional loans in a number of ways and often come with more restrictions. Also, maximum loan amounts vary by county.

Fair Housing Act – A Law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familiar status, or disability.

Finance Charge – A finance charge is the total amount of interest and loan charges you will pay over the life of your mortgage loan (assuming you keep the loan through the full term).

Fixed Rate Mortgage – A fixed-rate mortgage is a home loan with an agreed-upon interest rate that will not increase or decrease over the life of the loan.

Forbearance – Mortgage forbearance allows borrowers to temporarily pause or reduce their mortgage payments when they are struggling financially. If approved by the lender or loan servicer, they provide borrowers with relief in a time of crisis—such as a job loss, major illness, or natural disaster.

Foreclosure – Foreclosure is when the lender or servicer takes back property after the homeowner fails to make mortgage payments.

Funding Fee – The Department of Veteran’s Affairs (VA) charges a Funding Fee to most veterans who obtain a VA mortgage loan to help sustain the VA home loan program. The VA Funding Fee is a percentage of the principal loan amount.

Good Faith Estimate –A GFE is an itemized, detailed list of certain estimated costs associated with a home loan that the lender is required to provide to the borrower within 3 business days of the application. The Good Faith Estimate (GFE) was replaced by the Loan Estimate (LE) in 2015.

Home Equity Loan – A loan backed by the value of a home. If the borrower defaults or does not pay the loan, the lender has some rights to the property.

Homeowner’s Insurance – Homeowner’s insurance is different from mortgage insurance and lenders generally require proof of homeowner’s insurance prior to closing. Homeowner’s insurance is property insurance on the new home that pays for losses and damages to the property if something unexpected happens (like a fire, theft, or vandalism).

HOA (Homeowners’ Association) Fees – If you are considering purchasing a condo, apartment, or home in a planned subdivision, it is important to consider the added cost of HOA fees. HOA fees typically cover maintenance of shared spaces (like fitness centers, pools, parks, etc.), insurance, utilities, or overall property management.  They can vary widely depending on the region and amenities but are usually paid separately from the regular mortgage payments. If you fail to make your HOA dues payments, you could face debt collection, legal action, or even foreclosure.

Inspection – An inspection (or Home Inspection) is part of the homebuying process. In most cases, you have the right to hire a home inspector to examine a property and check for strengths and weaknesses. This inspection is a good way to assess a home’s structural integrity and mechanical systems (including heating, electrical, ventilation, and air conditioning).  

Interest – An amount charged to a borrower for the use of the borrowed money.

Lien – A legal claim against property that must be satisfied when the property is sold. A lien is a defect on the title and needs to be settled before the transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.

Loan Estimate – The initial estimate of prepaid and closing costs provided to borrowers by the lenders within 3 days of applying for a mortgage. While not exact, it informs buyers of what funds are needed to close the loan. This form replaced the Good Faith Estimate (GFE) in 2015.

Loan-to-Value Ratio – A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased.

Mortgage – A mortgage is a lien on a property that generally allows the lender to collect payments on the loan and to foreclose if the loan obligations are not met. The property acts as collateral for the loan. In some states, the same function is completed by a deed of trust.

Mortgage Insurance – Mortgage insurance is different from homeowner’s insurance and is typically required if your down payment is less than 20 percent of the property value. It also is typically required on FHA and USDA loans. This type of insurance protects the lender if you fall behind on your payments.

Origination Fee – When applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work, and other associated costs.

PITI – Principal, Interest, Taxes, and Insurance- the four elements of a monthly mortgage payment. Payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowners and mortgage if applicable) goes into an escrow account to cover the fees when they are due.

Points – A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $95,000, one point means you pay $950 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller (or may be split between them).

Pre-Qualification – In the pre-qualification process, you provide financial and other information (such as employment history and proposed collateral) to the lender so they can preliminarily estimate how much you can reasonably borrow for the purchase of a home. A prequalification is not a commitment to lend.

Principal – The amount of money borrowed that has not yet been paid back to the lender. This does not include the interest paid to borrow that money. In other words, principal is the original loan amount minus the total repayments of principal made.

Private Mortgage Insurance (PMI) – Insurance to protect the lender in the event of default. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance may be available through a government agency, such as the Federal Housing Administration (FHA), the Veterans Administration (VA), or through private mortgage insurance companies (PMI).

Property Tax – A tax charged by the local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of the assessed value of the property.

Reverse Mortgage – A reverse mortgage is a way to turn a portion of the equity in your home into cash. The proceeds from a reverse mortgage can be used to pay for unexpected expenses, such as nursing home costs or long-term care. It could also provide you with additional cash flow for all the expenses you have. As long as all loan terms are met, the loan does not require repayment until the last surviving borrower permanently moves out of the home or passes away.

Title – Written evidence of ownership in a property.

Title Company – An agency that investigates a property’s title for discrepancies or undiscovered liens. The title company will issue insurance to the lender after the title is deemed clear.

Title Insurance – Insurance that protects the lender against any claims that arise from arguments about ownership of the property (also available for homebuyers). Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs.

UFMIP (Up Front Mortgage Insurance Premium) – Anyone who takes out an FHA loan is required to pay the UFMIP. This lump sum can be financed into the loan (so you don’t have to actually write a check for it at closing).  

Underwriting – The process of analyzing a loan application to determine the amount of risk involved in making the loan. It includes a review of the potential borrower’s credit history and a judgment of the property value.

USDA (U.S. Department of Agriculture) Loan – There are two types of USDA programs (the Section 502 Direct Loan Program and the 504), that help low-income and very low-income people who live in rural areas to obtain safe and decent homes. There are restrictions on the type of home that can be purchased (a.k.a., no fixer-uppers) and they and can only be used in “rural” areas (meaning cities like Salem, Albany, and most of the Portland Metro area do not typically qualify). 

VA Loan –  A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders. The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry).

 

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