At Cardinal Financial, we know that buying a home is a big decision and one that comes with many questions and unfamiliar terms. We want to make sure that you feel comfortable throughout the entire buying process so we have put together a list of popular mortgage terms to assist you during this experience. If you have additional questions, please don’t hesitate to ask one of our Mortgage Specialists.
Acceptance
A verbal or written acceptance of an offer to buy a home, made from the seller to the buyer.
Adjustable rate mortgage (ARM)
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 not exceed the ARM loan cap.
Amortization
The process of a loan’s value over a period of time. Often amortization is laid out on an amortization schedule or measured by an amortization calculator.
Annual Percentage Rate (APR)
The measure of the cost of credit stated as a yearly rate; includes such items as the stated interest rate, plus certain charges. APR may include fees such as documentation fees, private mortgage insurance and more.
Assumable Mortgage
A type of mortgage that may be transferred, interest rate and all, from seller to buyer.
Balloon mortgage
A mortgage in which the borrower’s monthly payments are amortized over a longer period than the actual term of the mortgage. As a result, at the end of the loan term, the borrower must pay off the remaining balance with a single lump sum payment or refinance the loan.
Borrower
The individual or individuals extended a loan and mortgage for the purchase of a house and/or property. Borrower is responsible for making all payments and fees associated with the loan over the life of the loan. Legal Mortgagor.
Buy-Down
A situation in which a seller or lender kicks in a sum of money in order to lower the initial interest rate on a home loan to make a sale more appealing for the buyer.
Cap
For an Adjustable-Rate Mortgage (ARM), a limitation on the amount the interest rate or mortgage payments may increase or decrease.
Certificate of Title
The attorney’s written opinion establishing the status of title for a property as reflected on the public records. The certificate does not address issues not on record and offers no protection unless the writer of the certificate was negligent.
Closing
The formal documented sale of a home and/or property that includes signing all documents associated with the exchange and payment of required closing fees. A closing agent usually oversees this process.
Closing costs
Real estate transaction related fees payable by the buyer and seller during a closing. A wide variety of fees may be included, such as title search, attorney’s fees, origination fees, documentation fees and more.
Commitment Letter
A document from a lender to a borrower that officially lays out the terms of a loan.
Conforming Loan
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.
Contingency
Any one of a number of common clauses added to real estate agreements that provide buyer or seller rights during various stages of a transaction.
Credit Report
A report with documentation of the borrower’s credit history and current status of credit.
Debt-to-Income Ratio (or DTI)
The relationship between a borrower’s total monthly debt payments (including proposed housing expenses) and his or her gross monthly income; this calculation is used in determining the mortgage amount that a borrower qualifies for.
Deed
An official and public document that establishes property ownership.
Default
Inability of borrower to make regular and consecutive payments on a loan.
Depreciation
The measure of loss in value of a home or property. Depreciation could be driven by poor economic factors or property damage.
Discount Points (or POINT)
A measure of interest; 1 point = 1% of the home loan value. Homebuyers may pay points at time of closing in order to lower or “buy down” their overall interest rate and mortgage payment.
Earnest Money
A sum of money usually put up by the buyer when an offer on a home or property is made. The purpose of earnest money is as a token of good faith, a symbol that the buyer is seriously pursuing purchase.
Equity
The measurable value of a home or property above and beyond that owed on a loan. A value upon which many homeowners often borrow.
Escrow Account
A separate account held by a mortgage lender out of which required property bills, separate from the loan payment, are made. Property taxes and insurance are examples of costs paid out of escrow. Sometimes called an “impound account.”
Fannie Mae
A private mortgage corporation that began as a government subsidized entity in the late 30s. Today Fannie Mae, along with Freddie Mac, is a government sponsored enterprise (GSE) and together they are responsible for setting annual conforming loan limits and assuring that most Americans are able to finance a home. Fannie Mae is commonly known as a secondary mortgage market and lends to mortgage lenders which in turn extend mortgages to borrowers.
FHA
Federal Housing Administration.
FHA Loan
Loans extended by FHA-approved lenders and are typically designed to assist borrowers unable for various reasons to get the approval necessary for conventional home loans.
First-Time Buyer
A home loan borrower who has never taken out a mortgage before; often qualifies for various discounts and first-time buyer perks.
Fixed Rate Mortgage
A conventional mortgage that is outfitted with a fixed interest rate over the life of the loan. Monthly payments are the same from month to month.
Foreclosure
The repossession of a home and/or property by a lender in the event of borrower loan default or the inability to meet mortgage agreements.
Freddie Mac
In concert with Fannie Mae, Freddie Mac is a leading government sponsored enterprise (GSE) and is responsible for maintaining reasonable mortgage market stability, this assuring that Americans are able to purchase homes. Freddie Mac is a secondary mortgage market, meaning the corporation lends to lenders, which in turn extend mortgage products directly to borrowers.
Good Faith Estimate
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. This is a required step in the loan application process per the Real Estate Settlement Procedures Act.
Guaranty
The pledge of one party to pay a debt or fulfill a responsibility contracted by another if the original party neglects to pay or perform according to terms of the contract.
Hazard Insurance
Also known as homeowner’s insurance; extra insurance taken out on a home that protects the borrower and lender in the event of damage. Usually covers the value of the home.
Home Inspection
A comprehensive and exhaustive examination of a home by a licensed inspector. Often required as part of a mortgage and home loan process.
Home Inspection Contingency Clause
A clause added to an offer letter that gives the buyer certain rights pending home inspection. A buyer may ask the seller to repair defects discovered during the home inspection or even request release from the offer to buy in light of a home inspection.
Homeowner’s Insurance
Insurance that protects the value of the home for both lender and borrower. Homeowner’s insurance typically covers the cost of replacing the home and various parts of the same. Most mortgage lenders require borrowers to carry a term of insurance.
HUD Loan
The U. S. Department of Housing and Urban Development. One of the main missions of HUD is to create a suitable living environment for all Americans by developing and improving the country’s communities and enforcing fair housing laws. A type of loan available to HUD homebuyers that goes toward fixing up a home.
Investment Property
Real estate bought for investment purposes as opposed to private residential. Often the property will be used for rental purposes, such as rental home, apartments or other spaces that give owners the opportunity to create profit and income over the long term.
Jumbo Mortgage
A type of high-risk loan, or non-conforming loan, in which the loan limit is higher than that of a conventional loan.
Lender, Mortgage Lender
The bank or finance company that directly awards home loan or mortgage money to a borrower or homebuyer. Legal-mortgagee.
Lien
A formal, legal symbol of money owed on a major asset such as property. Also, mortgage.
Loan
Money lent from a financial institution to a creditworthy borrower(s) over a specified period of time and at a particular interest rate.
Loan Origination Fee
A fee, calculated as a small percentage of the value of the loan, charged by a mortgage lender for processing the loan. One of many fees often due at closing and one that must be disclosed on the Good Faith Estimate when a buyer first completes a loan application.
Loan-to-Value Ratio (LTV Ratio)
The relationship between the loan amount and the value of the property (the lower of appraised value or sales price), expressed as a percentage of the property’s value. For example, a $100,000 home with a $70,000 mortgage has an LTV of 70 percent.
Mortgage
A legal document between a mortgagor and a mortgagee that establishes a home and/or property as security for a home loan.
Mortgage Broker
The entity that acts as a go-between between a homebuyer and mortgage lender, handling paperwork and finally effecting a mortgage. A broker does not make direct loans to buyers, but works to find the best deal and finally collects fees as part of the mortgage process.
Mortgage Calculators
Online financial tools available on many sites that allow potential buyers to plug in various personal financial figures to arrive at a mortgage value they can afford.
Mortgage Insurance (MI)
When buyers take out a mortgage with less than a certain dollar percentage to put down on the loan, lenders require them to pay mortgage insurance, a monthly premium that is added to the mortgage. This protects the lender should a buyer default on the home loan.
Mortgage Insurance Premium (MIP)
A required 1.5% fee added into a FHA loan, paid at closing.
PITI
An acronym for the four primary components of a monthly mortgage payment: principal, interest, taxes, and insurance.
Pre-paid Costs
Fees associated with a mortgage and usually paid out of pocket at the time of closing; includes origination fees, underwriting fees, attorney fees, etc.
Pre-Qualification
The process in which a homebuyer may find out how much of a home loan he or she would be approved for with a lender; gives many buyers more flexibility when shopping for a home.
Principal
The amount borrowed on a home loan, excluding interest. Also, the part of the monthly payment that reduces the remaining balance of a mortgage.
Private mortgage insurance (PMI)
A type of insurance many homebuyers are required to purchase, particularly when they are unable to put down a certain dollar amount on the loan; protects the lender in the event of borrower default.
Processing fees
Lender fees associated with creating the loan or mortgage, usually part of closing costs.
Property Appraisal
A fair market value of property performed by a licensed appraiser; takes into account not only condition, but also the value of similar local properties or comparable sales.
Property taxes
Annual local taxes charged against the value of a homeowner’s property.
Rate lock
A short-term agreement by a lender to “hold” a certain interest rate on a home loan while the buyer negotiates a sale transaction.
Real Estate Settlement Procedures Act (RESPA)
Through this, lenders are obligated to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA requires lenders to fully inform borrowers about all closing costs, lender servicing, escrow account practices, and business relationships between closing service providers and other parties to the transaction.
Refinance
Process by which a borrower/homeowner may negotiate a lower interest rate on a mortgage, thereby lowering monthly payments.
Reverse mortgage
A type of mortgage designed for homeowners over 62 years of age; gives them access to a home’s equity in cash payments, frees up money they may use for other important costs or to make needed home repairs.
Second Mortgage
Also known as a home equity loan, a second mortgage gives a borrower flexibility to access the cash equity in their home, may also be used for other high-dollar expenses such as auto and college loans.
Short sale
Useful tool for lenders and homeowners when foreclosure could be a worst-case scenario. In a real estate short-sale lenders give homeowners permission to discount the home value (an outstanding loan balance) to effect a quick sale, thereby averting foreclosure.
Survey
A formal survey of property that establishes boundary lines and defines any types of limits on construction and other features that could affect the value of property; in many cases lenders require buyers to purchase a property survey.
Title
The official document used in the real estate industry that specifies at any one time who owns a piece of property.
Title Insurance
Insurance taken out on the property title that protects both borrower and lender in the event of a title dispute.
Title search
Research on a property title usually conducted by a title company to determine if there exist any outstanding liens against the property prior to a sales transaction.
Truth-in-Lending Act
A federal law intended to promote the informed use of consumer credit by requiring disclosure about its terms and costs. Creditors are required to disclose the cost of credit as a dollar amount (the finance charge) and as an annual percentage rate (APR).
Underwriter
The company or service that evaluates a borrower’s creditworthiness prior to loan and mortgage approval.
VA (U.S. Department of Veterans Affairs) Loans
Special, often discounted, home loans designed exclusively for military veterans.
