The mortgage industry is full of complicated requirements and confusing terms. There are so many acronyms that you and your clients may think they’re lost in a bowl of alphabet soup when trying to understand all those legal documents.
The better YOU can understand some key terminology, the better equipped you’ll be to talk your clients through the process. So, welcome to your new handy dandy mortgage dictionary. We hope this helps!
Key mortgage terms
Adjustable-rate mortgage (ARM): This is a type of mortgage loan where interest rates automatically fluctuate depending on specific market indexes.
Amortization: This is the process of a loan’s value over some time. Amortization is laid out on a schedule or measured by an amortization calculator.
Annual percentage rate (APR): This is the actual cost of a home loan. According to the Truth in Lending Act, all mortgage lenders must reveal their APR. APR may include fees like documentation fees, private mortgage insurance, and others.
Appreciation: This is the value that increases on a home or property. Market improvements and home renovations can help drive appreciation value.
Cash-out refinance: A second mortgage where the borrower leverages home equity while a refinance deal is made.
Closing: This is the formally documented sale of a home property that includes signing all documents required for the exchange and payment of required closing fees.
Co-borrower: This is a borrower with good credit that agrees to share responsibility for a home loan so that another borrower may buy property.
Contingency: These are clauses added to real estate agreements that provide buyer or seller rights during a transaction.
Conventional mortgage: This is a mortgage offered by any government-sponsored entities, which is different from an FHA or VA loan.
Credit: This is money extended from a lender to a borrower based on their credit history.
Date of closing: This is the date when all mortgage paperwork is finalized.
Date of possession: This is the actual date the buyer will move into a home. It is usually the closing date.
Discount points: This is a measure of interest. For example, 1 point equals 1 percent of the home loan value. Homebuyers may pay points upfront to lower their interest rate and mortgage payment.
Earnest money: This is an amount of money the buyer would offer on a home or property. The purpose of this is to let the seller know that the buyer is serious about purchasing the home.
Equity: This is the measurable value of a home or property above what is owed on the loan. Homeowners can borrow against this equity.
Escrow account: This is a separate account a mortgage lender uses to pay required property bills. Property taxes and insurance are paid out of escrow accounts.
Fair-market-value: This is the price a piece of property is worth in the current market.
Fannie Mae: This is a private mortgage corporation that began as a government-subsidized organization in the 1930s. Today, Fannie Mae is a government-sponsored entity and is responsible for setting annual loan limits.
FHA loans: These are loans extended by FHA-approved lenders typically designed to assist borrowers who can’t get approved for conventional home loans.
Fixed-rate mortgage: A conventional mortgage has a fixed interest rate over the life of the loan. Monthly payments are the same each month.
Foreclosure: This is the repossession of a home and/or property by a lender when the borrower can’t meet the mortgage agreement.
Freddie Mac: Freddie Mac is a government-sponsored enterprise and is responsible for maintaining mortgage market stability.
Good Faith Estimate: This is a list of expected loan costs and fees that a potential borrower must pay. This estimate is given to a borrower within three days of their loan application for a home loan.
Home inspection contingency clause: This clause is added to an offer letter to give the buyer certain rights before a home inspection. A buyer may ask the seller to fix any issues found during the home inspection.
Origination fee: This is a fee calculated as a small percentage of the loan value. A mortgage lender charges it for processing the loan.
Pre-approval: A mortgage pre-approval means a lender has looked into an applicant’s income, debt, assets, and credit history and determined how much money they can borrow, how much they could pay per month, and what interest rate they could have.
Pre-paid costs or fees: These costs include expenses associated with a mortgage loan and are usually paid out of the borrower’s pocket at the time of closing. Some of these fees include origination fees, underwriting fees, and attorney fees.
Pre-qualification: The process during which a homebuyer may find out how much of a home loan they would be approved for with a lender. This gives buyers more flexibility when shopping for a home.
Private mortgage insurance (PMI): This is a type of insurance many homebuyers are required to buy, usually if they cannot put 20% down on their loan. This insurance protects the lender in case the borrower can’t pay off the loan.
Processing fees: These lender fees are part of creating the loan or mortgage and are usually part of the closing costs paid by the buyer.
Repayment schedule: Some mortgage calculators allow borrowers to see their loan repayment schedule based on the loan amount, the interest rate, and their monthly payments.
Title: This is the real estate industry’s official document to specify that someone owns a property.
Title company: This company handles tasks associated with the property title, including insurance and search.
Title insurance: Insurance taken out on the property title that protects both borrower and lender in the event of a title dispute.
Title search: This is research done on a property title to determine if there are any outstanding liens against the property.
Underwriter: This is the company or service that evaluates a borrower’s creditworthiness before loan and mortgage approval.