Learn the Vocabulary of a Mortgage Specialist

When it comes to buying a house you may discover a whole new world of terminology. Applying for a mortgage can be an exciting and nerve-wracking experience, so the smart buyer is armed with knowledge about what all those terms mean.   The following are some top terms buyers will likely encounter when it comes time to choose a mortgage and begin the application process.

• Adjustable Rate Mortgage (ARM)

When the lender can change a mortgage’s interest rate, after a period of time.

• Annual Percentage Rate (APR)

The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that includes the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term.

• Application

A request for a loan that includes the information about the potential borrower, the property and the requested loan that the lender needs to make a decision.

• Appraisal

A written estimate of a property’s current market value prepared by  a professional with knowledge of real estate markets and skilled in the practice of appraisal. The borrower usually pays an appraisal fee.

• Conventional mortgage

A residential home mortgage that is neither Federal Housing Administration-insured nor Veterans Affairs-guaranteed.

• Credit report

A report from a credit bureau or multiple bureaus with detailed information on the credit-worthiness; including the individual’s credit history. A credit score is issued based on the credit history measuring the borrower’s credit worthiness.

• Down payment

The difference between the value of the property and the loan amount, expressed in dollars, or as a percentage of the price. So if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%.

• Escrow

Funds kept aside by a third party to be used to pay annual premiums for homeowners insurance and property taxes. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account (a savings account with added restrictions) out of which the lender pays the taxes and insurance when they come due.

• Fannie Mae/Freddie Mac

Two Federal agencies that purchase home loans from lenders.

• FHA mortgage

A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying for mortgage insurance.

• Fixed rate mortgage (FRM)

A mortgage with an interest rate and monthly mortgage payment that remain unchanged for the life of the mortgage.

• Good faith estimate

The form that lists the charges the borrower must pay at closing, which a mortgage lender has to provide the borrower within three business days of receiving the loan application.

• Loan-to-value ratio

The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV.

• Mortgage insurance

Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premium.

• Origination fee

An upfront fee charged by some lenders, usually expressed as a percent of the loan amount.

• Truth in Lending (TIL)

The Federal law that specifies the information that must be provided to borrowers on different types of loans.

• Veterans Affairs (VA) Loan

A loan that is backed by the Department of Veterans Affairs for veterans who qualify for loans of reasonable value. They are often afforded a larger option than conventional loans.

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