Understanding the Process: Mortgage Terms 101
"...brush up on your Mortgage term vocabulary BEFORE you take that first step..."
Everyday people are inquiring about a mortgage loan, whether it is for their first home or a subsequent financing, but rarely are they properly prepared. By taking these few minutes to acquaint yourself with the " Mortgage Terms 101", you can better prepare yourself for this process and possibly save yourself thousands on your mortgage.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLMC, a.k.a. Freddie Mac), is a shareholder-owned corporation that was established by Congress in 1970 to support home ownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. Freddie Mac guarantees these securities, so mortgage lenders can sell their loans to Freddie Mac and use the proceeds to fund new mortgages, which in turn increases the money supply to homebuyers. The Company does not make loans directly to homebuyers, but puts private investor capital to work for homebuyers in general.
HUD: The "Department of Housing and Urban Development" is an office of the Federal Government that helps make affordable housing more available. They also monitor and regulate the legal process of housing transactions.
Interest: The charge for using the lender’s money.
Non-Conforming Mortgages: Loans that do not meet Fannie Mae or Freddie Mac guidelines (for Fannie Mae and Freddie Mac see above).
Note Rate: The actual interest rate charged by the lender on the principle of your loan.
LTV: "Loan to Value" is a ratio of the loan amount to the value of the property expressed as a percentage. It is the inverse of your equity.
PMI: "Private Mortgage Insurance" is insurance to protect the lender from financial loss in the event the lender defaults on the loan. You usually will pay this if you have less than 20% equity in the property. Rates vary with the risk of the loan. While you pay the premiums, there is no benefit to the borrower.
Pre Approval: A mortgage loan that is approved at a specified amount pending the satisfactory appraisal of the property.
Pre Qualifying: The process of determining how much a person can potentially borrow based on income, credit score, liabilities and assets, prior to actually having chosen a property to purchase.
Principle: The unpaid balance of your mortgage loan.
Underwriting: The assessment of a loans risk, which determines whether it gains approval.
VA Loans: "Veterans Administration" loans are available only to active and Honorably Discharged members of the military. These loans require little or no down payment, and they are insured by the Veterans Administration.
80/20 Mortgage: A 100% financing program, which uses a first mortgage to pay 80% of the purchase price and a second mortgage to pay the remaining 20%. This program requires a good credit score. It can also eliminate the need for PMI (for PMI see below).
Appraisal: The assessment of a property's value by a licensed professional.
APR: The "Annual Percentage Rate" is the total cost of the loan expressed as a percentage per year. It takes into account closing costs and the note rate.
Back Ratio: The term for your total monthly debt.
ARM: - "Adjustable Rate Mortgage". A mortgage loan that starts with a note rate lower than prevailing rates, but goes up at prescribed intervals with specified limits. Typically used to maximize pre-qualifying.
Balloon: A mortgage type, which has a large or "balloon" payment, due at the end of the loan to satisfy the total debt.
Closing: The process that finalizes the loan package and the sale of the property in the case of a purchase.
Conforming Mortgages: Loans that "conform" to Fannie Mae or Freddie Mac guidelines (for Fannie Mae and Freddie Mac see below).
Debt Ratio: The borrower’s total debt compared to their total income, expressed as a percentage. The debt ratio is one criteria used when qualifying for your mortgage loan.
DTI: "Debt to Income" is the total amount of debt a person has expressed as a percentage of their income. Also known as the "Back Ratio" (for Debt Ratio see above).
Down Payment: The portion of the properties purchase price that is paid at closing.
Escrow Accounts: In order to get most lenders best note rate, it is usually necessary to pay 1/12th of both the property taxes and hazard insurance. These funds are put into an "Escrow Account" (or "Escrow"). The lender then pays the taxes and insurance at the appropriate time(s) from this Escrow Account. Everyday people are inquiring about a mortgage loan, whether it is for their first home or a subsequent financing, but rarely are they properly prepared. By taking these few minutes to acquaint yourself with the " Mortgage Terms 101", you can better prepare yourself for this process and possibly save yourself thousands on your mortgage.
Fannie Mae: Federal National Mortgage Association (FNMA, a.k.a. Fannie Mae), is a private, shareholder-owned company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to make sure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market.
FHA: The "Federal Housing Authority" guarantees mortgage loans, making it easier for buyers to qualify. This is very useful for first time buyers, as they tend to benefit most from the qualifying criteria being relaxed.
FICO Scoring: The term for your credit score. Your credit score is a calculation derived from the timeliness of your payments, amount of available credit currently in use, number of credit inquiries, number of open accounts, history of bankruptcies, judgments and collections.
First Mortgage: A mortgage loan that has priority over all other financial interests in the property.