Popular Terms

Popular Mortgage Terms

Amortization – The process of paying off debt and interest over a set period of time.

Annual Percentage Rate (APR) – The Annual cost of a mortgage loan, stated as a percentage of the loan amount to compare the overall cost of loans.

Capacity – The Ability to earn enough income to afford mortgage payments and other living expenses.

Capital – The funds available for the upfront cost of Homeownership, such as the down payment and closing costs.

Commitment Letter – A Formal offer by a lender stating the approved terms for a mortgage loan.

Comparable Market Analysis – A written analysis of comparable homes currently for sale or recently sold in the surrounding area.

Contingency – A clause added to a purchase agreement that states specific conditions that must be met within a set amount of time, or the agreement may be canceled.

Debt-to-Income Ratio (back-end ratio) – The maximum percentage of a borrower’s gross monthly income that can be spent on the mortgage payment and all of the other debts.

Equity – The amount of ownership a homeowner has in their home.  It is estimated by subtracting the balance of the mortgage loan from the current market value.

Escrow Account – A special account managed by the loan servicer to collect and hold monthly payments toward annual property taxes, homeowner’s insurance and if applicable mortgage insurance.

Fixed Rate Loan – A mortgage loan with an interest rate that remains the same for the entire term of the loan. The principle and interest are fixed.

Good Faith Estimate – A document that discloses anticipated closing costs.

Gross Income – Income before taxes or deductions are taken out.

Housing Ratio (front-end ratio) – The maximum percentage of a borrower’s gross monthly income that can be spent on mortgage payments.

Loan-to-Value – Is the relationship between the loan amount and the property, used to determine.

Mortgage Insurance Premium – Mortgage Insurance required for FHA insured loans, paid by the borrowers are unable to pay the mortgage.

Origination Fee – Fees Charged by lenders for processing loans.

P.I.T.I. – A term used to describe a mortgage payment that includes principal, interest, property taxes and insurance.

Pre approval– The lender guarantees to loan a potential buyer a set amount of money, so long as, they meet certain conditions and the home meets the requirements of the lender.

Principal – The amount borrowed (loan amount) or the outstanding balance of a loan, not including interest and other charges.

Private mortgage insurance (PMI) – Provided by private insurance companies, paid by the borrower, it protects lenders against loss if borrowers are unable to pay their mortgage.

Purchase Agreement – A written contract signed by the buyer and the seller stating the terms and conditions under which a property will be sold.

Qualifying Ratios – Guidelines used by lenders to determine how much income can be used to pay for a mortgage.

Reserves – Money lenders require borrowers to set aside to pay for unexpected repairs and the mortgage payment.

Settlement Statement (HUD -1) – A document required by the Real estate Settlement Procedures Act that itemizes services and charges relating to loan closing and the transfer of property.

Title Insurance – Insurance that protects against loss, if any claim is made against the title of the property.

Truth-in-Lending Disclosure – A Document that discloses the terms and cost of a mortgage loan, including the Annual Percentage Rate.

Credit Terms and Definitions

Annual Percentage Rate – The interest rate which reflects all of the costs of financing. This rate will probably be higher than the original interest rate quote because it includes all of the other costs of getting credit, such as loan fees.

Bad Credit – A term used to describe a poor credit rating, usually a credit score below 650. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. “Bad Credit” can result in being denied credit.

Balance – The total amount of money owed. It includes any unpaid balance from the previous month, new purchases, cash advances, and any charges such as an annual fee, late fee or interest.

Collateral – Property that is offered to secure a loan or other credit and becomes subject to seizure on default. (Also called security.)

Credit History – A partial profile of your financial life, given within a particular timeframe (usually measured in years). Your credit history shows the extent to which you pay your bills on time and how much you owe.

Credit Report – A report that displays a person’s credit history. A lender orders this report from a credit bureau when you apply for credit and often make their decision on issuing credit based on the credit score.

Credit Score – A score ranging from 300 to 900 which reflects the credit worthiness of a borrower. The score is determined by payment history, credit ratio, length of credit history, types of credit and credit inquires.

Debt to Income Ratio – A ratio that is computed by dividing the amount of total debt by the total income. Lenders use a debt to income ratio to help them determine an applicant’s capacity to repay a loan.

Finance Charge – Interest and fees billed to you on your statement for using the credit.

Minimum Payment – The lowest amount of money that you are required to pay on your credit card statement each month. Usually this payment is 3% – 5% of your current balance.

Secured Credit – This type of credit requires that you provide something of value to guarantee repayment (i.e car loan, boat loan, mortgage loan).

Unsecured Credit Cards – Credit cards that are not secured by collateral. Customers qualify for such cards based on their credit history, their financial strength and their earnings.