Lending plays a significant role in both home-buying and home ownership. If you're planning on buying a new home, refinancing your current home, or applying for a reverse mortgage loan; it's important to familiarize yourself with common mortgage terms. Finding the right loan program for you is instrumental in the homebuying process.
This knowledge will help you better understand your current situation, as well as the options that are available to you both now and in the future when it comes to buying and owning a home. Here are some of the most common terms related to the types and mechanics of home mortgages and the buying process.
Adjustable Rate Mortgage
An adjustable rate mortgage loan is a type of home loan where the interest rate changes at various times throughout the loan term, based on a specified market rate or index.
To amortize a loan means you pay down the principal throughout the life of the loan. In the beginning, most of your payments go to interest. As the principal decreases, so does your interest and eventually, most of the payment goes to principal.
An appraisal is an estimate of the value of the real property you're buying or using as collateral for the loan. This estimate is determined by comparing it to sale prices for similar properties.
Caps protect you by imposing limits on changes in monthly mortgage payments and interest rates in adjustable rate mortgages.
A loan that does not exceed the loan limits set by Fannie Mae or Freddie Mac for purchase or securitization.
At a closing, the deed, promissory note, mortgage, deed of trust and other loan documents are signed and finalized. Once the parties sign the documents, the closing agent — such as an attorney — ensures proper distribution of funds to the seller, brokers, and other appropriate parties.
A landowner takes out this loan to construct a new home or building. This is usually a short-term loan in which funds are paid to contractors as work progresses.
This three-digit number is the grade you get for your payment history and handling of credit. Lenders use it to determine risk and decide whether (and on what terms) to loan you money.
Debt-to-Income (DTI) Ratio
This ratio is the total of your debt payments, such as - mortgages, car loans, minimum credit card payments, and student loans - divided by your gross, or pre-tax, income. Sometimes referred to as a back-end ratio, this is expressed as a percentage.
Deed of Trust
Some states employ this document, rather than a mortgage, for lenders to secure loans. The borrower conveys the property to a trustee, who holds it as security for the lender’s benefit. When the loan is paid, the trustee or lender cancels the deed of trust.
The initial payment by the borrower, this is the difference between the price of the home and the mortgage amount. You must bring this amount to the closing.
When you sell, or transfer the property before you pay off the loan, this clause declares the entire unpaid balance of the loan due. If you have sufficient funds from the sale, the loan will typically be satisfied at closing.
A third-party account that holds funds until a transaction is completed. Part of your mortgage payment goes into an escrow account to be held by the lender for paying property taxes, homeowner’s insurance, and private mortgage insurance, if you’re required to have it.
The Federal National Home Mortgage Association (FNMA) is a Government-Sponsored Enterprise (GSE) that buys and sells conventional mortgages and those backed by FHA or the Veterans’ Administration. Fannie Mae loans must meet underwriting standards, such as loan limits.
An FHA mortgage loan is a loan by a private lender which is backed by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development. In an FHA loan, your down payment can go as low as 3.5 percent of the purchase price.
The interest rate on a fixed-rate mortgage loan remains the same throughout the life of the loan.
This certification stipulates that the property serving as collateral is not located in a flood zone. If the home is in such a zone, your lender will require separate flood insurance before making the loan.
When you default, or don't meet the terms of the loan, the lender can seek a court order to sell the property to recoup what you owe. Where there is a deed of trust, the trustee institutes the foreclosure proceedings.
The Federal Home Mortgage Loan Corporation (FHLMC) purchases loans originally made by private lenders and mortgage lenders approved by the U.S. Department of Housing and Urban Development (HUD). Freddie Mac is a Government-Sponsored Enterprise.
Used to indicate what portion of a person's income will go toward housing costs. Also known as the “housing expense ratio,” you divide the monthly principal, interest, tax, and insurance payment by your monthly gross income. Generally, the ratio should not exceed 28 percent.
These include subprime loans. Borrowers with poor credit or who fail to meet the credit or loan standards of conventional lenders or Freddie Mac or Fannie Mae must resort to high-risk loans.
Home Equity Loan
With a home equity loan you borrow against the equity of the home. Equity refers to the amount by which the value exceeds any loans, judgments, or other liens on the home. Generally limited to a single lump-sum amount.
Homeowner’s insurance affords you coverage for damages or loss to your home from events such as fires or storms, as well as, for liability you face for injuries to people due to activities in your home.
This refers to the date by which you must pay off a loan and tells you the length of your loan.
In a mortgage, you put up the home as collateral to secure repayment of the loan. Certain states use a deed of trust in place of a mortgage document for this purpose.
A company or individual serving as a mortgage broker brings a lender and borrower together for a fee.
No Closing-Cost Mortgage
A lender in a no closing-cost mortgage pays your closing costs. Typically, you’ll face a higher interest rate.
The lender charges you this fee for processing your loan application and sets it typically as a percentage of the loan amount.
These loans also go by 80/20 and 80/10/10. In these arrangements, the first loan funds 80 percent of the purchase price. A second mortgage secures the minimum down payment of 20 percent (or 10 percent). Borrowers use the piggyback to avoid having to pay for private mortgage insurance.
Your lender may charge you points for a lower interest rate or up front items, such as inspection fees, a notary fee, and preparing the loan documents. One point represents one percent of the loan amount.
The lender pre-approves you using a comprehensive review of your income, credit, ability to make a down payment, and employment, to determine your eligibility for a particular type of loan.
Prepaying a mortgage means paying off the principal balance before maturity, or end of the loan. Your loan documents will state whether you must pay a penalty for paying off the mortgage early.
A lender pre-qualifies you in order to determine on a preliminary basis the amount for which you’re eligible to borrow. Pre-qualification typically doesn’t involve verification of your credit score, ability to make a down payment, employment, and income.
Principal represents the unpaid amount of what you borrowed. It does not include interest, taxes, or insurance premiums owed or accumulated.
Private Mortgage Insurance (PMI)
Unless your down payment is at least 20 percent of the purchase price, the lender will require PMI. This insurance covers the lender's losses in case you default on the loan. The lender must drop PMI once the balance of the loan goes below 80 percent of the value.
Local governments impose this annual tax based on the value of your property.
This transaction involves the replacement of a current mortgage with a new one. Usually, you’ll refinance to get a better interest rate or other loan terms.
Your lender typically requires title insurance to cover losses the lender may incur because of unknown liens, claims on the property, rights-of-way, and other problems with title to, or ownership of, the property. This insurance protects both the lender and the borrower.
If you are currently searching for a mortgage company, it's important to understand the different aspects associated with home loans. An experienced mortgage broker can help you determine what solution is best for your specific needs, help you find the best deals possible, and offer a better understanding of how the above concepts impact your mortgage choices.
If you are in need of a reputable, experienced Las Vegas or Henderson mortgage company, contact us today to see how we can help find the best loan option specific to your financing needs.
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-T.J. / The Royalty One Mortgage Team