Mortgage Industry Glossary – Terms Everyone Should Know
By the CEShop Team
Common Mortgage Terms and Definitions
Whether you are a mortgage lender, borrower, or real estate agent, navigating your way through the mortgage loan process can be challenging. Having a list of mortgage terms handy helps everyone benefit during the process.
To help you enjoy smooth sailing during the mortgage loan process, we’ve put together a list of the most widely used mortgage term definitions in the industry.
- Adjustable-Rate Mortgage (ARM)
- Annual Percentage Rate (APR)
- Appraisal Fee
- Appraised Value
- Borrower Defaults
- Borrower’s Credit
- Borrower’s Closing Costs
- Closing Disclosure
- Conventional Loan
- Conventional Mortgage
- Credit Report
- Debt-to-Income Ratio
- Deed of Trust
- Down Payment
- Earnest Money
- Escrow Account
- Fannie Mae
- Federal Housing Administration (FHA)
- FHA Loans
- Fixed-Rate Mortgage
- Good Faith
- Gross Monthly Income
- Hazard Insurance
- Higher Interest Rate
- Home Equity
- Home Mortgage
- Home’s Value
- Homeowner’s Insurance
- Insurance Premium
- Interest Payments
- Interest Rate
- Jumbo Loan
- Life of the Loan
- Loan Programs
- Loan-to-Value Ratio
- Lower Interest Rate
- Lump Sum
- Market Value
- Monthly Mortgage Payment
- Mortgage Broker
- Mortgage Loan Officer
- Mortgage Loan Originator
- Mortgage Insurance Premium
- Origination Fee
- Period of Time
- Prepayment Penalty
- Principal Balance
- Property Taxes
- Purchase Price
- Title Company
- Title Insurance
- VA Loan
- Value of the Property
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has a variable interest rate that adjusts with the market so that your monthly, quarterly, or yearly mortgage payments change. These interest rate adjustments typically include rate caps. There are different types of ARMS, including option ARM loans and hybrid loans that include an initial fixed interest rate period followed by an adjustable-rate period. This combination can be a great way to save money upfront, but it’s riskier in the long run than fixed-rate loans.
Amortization is how your loan is paid off over time. For instance, during the beginning of a mortgage loan, more of your payment will go toward the interest, and the remainder applies to the principal balance. A mortgage bill will typically detail this “amortization schedule” each month so that you can track your progress.
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) combines the interest rate, plus other fees and payments such as closing costs, mortgage insurance, broker fees, discount points, and loan origination fees. While it’s shown as a percentage just like your interest rate, it’s considered a more accurate yearly cost of the loan because it encompasses these extra payments.
When you buy or sell your home or property, your lender generally contracts an appraiser to assess the fair market value of your real estate. The fee to perform this service is known as the appraisal fee.
Mortgage lenders require an assessment of how much a property is worth, known as an appraised value. The evaluation is typically performed by a licensed appraiser with knowledge of the industry.
There are different terms or clauses written into a loan agreement that explain the consequences of missing payments or failing to pay your loan on time. These clauses are known as borrower defaults, and they can include interest rate penalties, negative impacts to your credit score, and foreclosure on the loan.
A mortgage loan is a credit that a mortgage lender gives to a borrower with the expectation that it will be paid back in full. In order to determine whether or not a borrower is able to pay a loan back, lenders check their three-digit credit score. This figure helps lenders decide the creditworthiness of the borrower. Mortgage lenders require a minimum borrower credit score before proceeding with a loan contract.
Borrower’s Closing Costs
Appraisal/origination fees, title insurance, and government taxes are all examples of loan closing costs. The borrower’s closing costs are part of these fees owed by the person taking out the loan, and they may be paid upfront or figured into the cost of the mortgage. You can check out average closing costs by state here.
This is a form that is required by law to be given to the borrower no more than three days prior to closing on the loan. It provides information to the borrower about the loan terms and fees, including the monthly mortgage payment, principal balance, interest rate, and closing costs.
A conventional loan is one that is not backed by, insured, or guaranteed by the Federal government, including agencies such as the Housing and Urban Development (HUD), Bureau of Indian Affairs (BIA), or Veterans Affairs (VA). It is therefore not required to meet Government Sponsored Enterprise (GSE) guidelines, although some conventional loans do.
This is a type of loan given to a borrower by a private lender, such as a bank or credit union. It typically requires a higher credit score than government-backed loans. The mortgage terms must still follow certain guidelines set by Freddie Mac and Fannie Mae, even though the loan is not guaranteed by the government. These stipulations include a down payment of at least 3% (20% if not purchasing mortgage insurance) and limits on the loan amounts issued.
A credit report is a statement issued by a credit bureau with your creditors’ names, your credit history, the amount of debt you owe, and any financial issues you may have had, such as foreclosure or bankruptcy. It includes your credit score, which mortgage lenders use to determine your creditworthiness and qualifying interest rate for a loan.
Creditworthiness is an estimation of the likelihood that you’ll be able to pay back a loan given to you. It’s based on factors such as your credit score, debt-to-income ratio, length of time on the job, and any assets that could secure the loan.
The percentage of your gross monthly income that is used to pay your debts is known as your debt-to-income ratio. Typically, this number should be no more than 36% in order to qualify for a mortgage loan, though 15-20% is ideal.
Deed of Trust
This is a document that is available to replace a mortgage in some states, and like a mortgage document, it legally secures real estate transactions. Deeds of trust differ from mortgages in that they involve a third party, the trustee, who holds the title to the home. They are typically used if a traditional lender such as a bank isn’t issuing the loan, or if you live in a state where these documents are used instead of mortgages.
A down payment is the percentage of money that a borrower gives to their lender upfront for the purchase of a home or property. It is subtracted from the total cost of the loan balance, and you only pay interest on the remaining balance. Lenders may also lower your interest rate if you meet certain down payment requirements.
This is a deposit that’s paid to the seller or a third party, such as a title company, to show good faith that you will purchase a home or property. Once a sale is final, it can be used to cover your closing costs, down payment, or other mortgage costs. There are terms you must meet to back out of the sale and receive your deposit back. If these terms aren’t met, the deposit is given to the seller.
Lenders and government agencies have eligibility requirements that you must meet in order to qualify for a loan. These vary among loan types and include financial criteria, such as your debt-to-income ratio or credit history.
Your lender or a third-party trustee will open a dedicated bank account for the portion of each of your monthly mortgage payments that go toward expenses such as homeowner’s insurance and property taxes. This is called an escrow account, and mortgage lenders use it to pay the bill collector directly on your behalf when they come due.
Fannie Mae is short for The Federal National Mortgage Association, and it is a government-sponsored corporation founded during the Great Depression under the Green New Deal. It supports mortgage lenders by buying and guaranteeing mortgage loans in order to ensure affordable mortgage financing is available to the public.
Federal Housing Administration (FHA)
The Federal Housing Administration (FHA) provides mortgage insurance to approved lenders in the U.S. and its territories that meet their building, underwriting, and financing guidelines. The FHA falls under the umbrella of the U.S. Department of Housing and Urban Development (HUD), and it insures mortgages on single-family homes, multifamily properties, hospitals, and residential care facilities.
These are private lender mortgage loans that are government-insured and regulated by the Federal Housing Administration (FHA). They typically have lower down payment and credit score requirements than conventional loans, as well as maximum loan limits.
This is a mortgage loan interest rate that doesn’t change throughout the term of the loan.
Foreclosure occurs when a borrower fails to meet the loan agreement payment terms, so the lender begins the legal process of taking the home or property for resale in order to cover the original borrower’s loan.
In the mortgage industry, good faith funds are provided by a borrower to a Mortgage Broker or lender to demonstrate their intention to complete the purchase of a property. They will generally be applied to the total amount of the mortgage costs once the sale is final. If a potential borrower decides against the sale, it must be under the terms agreed upon, or the good faith deposit is forfeited to the seller.
Gross Monthly Income
This is your monthly income before any deductions for taxes or other fees are taken out of your paycheck. You calculate it by dividing your total yearly income by 12.
This is property insurance that financially reimburses owners if any hazardous event that is outlined in the insurance terms, such as a fire, flood, or hurricane, damages the structure.
Higher Interest Rate
This is an Annual Percentage Rate (APR) that’s higher than the Average Prime Offer Rate (APOR) by a certain number of points. Several considerations can factor into being offered a higher interest rate on a mortgage, such as a lower down payment or a history of foreclosure.
Your home’s current market value minus all money owed on it or other liens against it is the home equity. This number is used to help determine the amount lenders will give you for a home equity line of credit.
This is a loan that is used to purchase a home, and the property is considered the asset that secures the loan. It’s paid back over time using an agreed-upon monthly loan payment schedule. To qualify for a home mortgage, borrowers have to meet several conditions, such as income and credit standards.
A home’s value is a professional assessment of what a home is worth at a given point in time. It is typically determined by a real estate agent through a comparative market analysis (CMA) when listing a property for sale, followed by an appraiser conducting an appraisal during the loan closing process.
The person purchasing the home is the homebuyer, and they must undergo an underwriting process before being approved for a mortgage loan.
Homeowner’s insurance covers a wider set of damages than hazard insurance (although the names are sometimes used interchangeably). It includes protection for structural damage, loss of items in the home, and liability for accidents in the home.
The U.S. Department of Housing and Urban Development (HUD) runs affordable housing, rental, and fair lending programs, including overseeing Fannie Mae, Freddie Mac, and the FHA. Its trained counselors are available to assist homebuyers and real estate agents throughout the country.
The cost of your homeowner’s, mortgage, or other property-related insurance policy is known as your insurance premium. The insurance carrier may offer flexible payment terms, including monthly, quarterly, biannual, and annual options. This premium usually decreases as your insurance deductible increases.
The portion of your mortgage payment that covers the interest on the loan is your interest payment. Some loans are set up as interest-only for a period of time to keep your monthly payments low. However, this means all the funds go toward interest and none go toward paying off the principal balance.
The annual price you pay for your home loan, expressed as a percentage, is your interest rate. Unlike the APR, it does not include costs such as mortgage insurance, Broker fees, closing costs, discount points, and loan origination fees.
Each year, Fannie Mae and Freddie Mac set a limit on the loan amounts they will buy and guarantee. Any loan above this amount is called a nonconforming or jumbo loan. It comes with higher costs attached to it than a conforming loan. Different regions of the country have different limits that are considered to be conforming loans since the cost of living varies.
Life of the Loan
A loan can take different forms throughout its cycle of existence, starting with the application, underwriting process, and loan origination. The life of the loan also includes the repayment (amortization) schedule, any refinancing that takes place, and the maturation date, which indicates when the loan is due to be paid off.
There are special programs available to help certain groups of people obtain a mortgage loan if they don’t otherwise qualify, secure better financing terms, or both. These loan programs are available to key demographics, such as those who meet low-to-moderate income thresholds. Examples include rural development (USDA) loans and loans specifically for teachers, firefighters, and veterans.
The comparison of your loan amount to the appraised value of the property is the loan-to-value ratio. It’s expressed as a percentage, and it helps lenders determine if providing a loan is risky enough to require that a borrower take out private mortgage insurance (PMI).
Lower Interest Rate
This is an Annual Percentage Rate (APR) that’s lower than the Average Prime Offer Rate (APOR).
A sizable payment that is larger than your regular monthly mortgage payment is called a lump sum. It’s typically used when borrowers want to lower their monthly mortgage payments without refinancing the property.
A home’s value fluctuates over time, and its market value is ultimately determined by what buyers are willing to pay for the property.
Monthly Mortgage Payment
Your monthly mortgage payment includes the interest, principal balance, and sometimes private mortgage insurance charges that are used to cover the costs of your loan. Some borrowers also have their yearly property tax figured into this payment.
This is a loan used to finance the purchase of a house or other property, which is considered collateral against the loan. There are several common mortgage loan types from which borrowers can choose.
A Mortgage Broker acts as a middleman between the homebuyer and lender, and they must sell all originated loans on behalf of individuals or businesses. They sell mortgages through several investors or banks, typically operating on a commission and fee basis only. A Mortgage Broker will take a loan application and send it out to several possible financial institutions or mortgage companies before choosing the best offer for the borrower.
Mortgage Loan Officer
A Loan Officer, often referred to as a Mortgage Loan Officer or MLO, works as a representative of a credit union, bank, or other financial institution. They help borrowers through the mortgage application process and will also assist consumers and small business owners with a wide variety of secured and unsecured loans. The terms “Mortgage Loan Originator” and “Mortgage Loan Officer” are often used interchangeably.
Mortgage Loan Originator
A Mortgage Loan Originator, also referred to as an MLO, is a financial professional who helps homebuyers with a mortgage application to acquire loans when purchasing property, while also performing loan origination for their clients. MLOs work closely with real estate agents, helping borrowers field the financial side of a home purchase. While Mortgage Brokers work for a brokerage, Mortgage Loan Originators are often employed by a bank or mortgage company. The terms “Mortgage Loan Originator” and “Mortgage Loan Officer” are often used interchangeably.
Mortgage Insurance Premium
The monthly or annual cost of your mortgage insurance is called the mortgage insurance premium.
This is a processing fee that the Mortgage Loan Originator charges to help cover the administrative costs of underwriting the loan. It’s calculated as a percentage of the total loan amount.
Period of Time
The time frame for how long your series of payments to repay a mortgage loan will last is known as the loan’s period of time.
PMI is an acronym that stands for private mortgage insurance, and it is a type of insurance borrowers are required to purchase in certain circumstances. For instance, many conventional loan lenders require PMI if your down payment on the home is less than 20% of the loan cost. The insurance helps to protect lenders against losses if you default on the loan.
Lenders often require you to go through pre-approval steps to determine if you’ll qualify for a mortgage loan, and for how much. Although it’s not a guarantee of a loan, the process helps you understand which properties you can afford. The pre-approval steps may vary, but they usually involve a credit check and income verification.
This is a fee assessed by the lender for paying off your mortgage loan in full prior to a certain date, as outlined in your loan agreement. This prepayment date is typically within the first few years of your mortgage loan.
The amount you still owe on your loan (minus interest, PMI, and any closing costs or other fees) is the principal balance.
These are the city, municipality, or county taxes that property owners must pay. They are a percentage of your property value, and that percentage varies by region. Some opt to pay these directly to the relevant local agency, and others have them figured into their monthly mortgage payment.
This is the sale price of the home that you agree to pay.
Refinancing occurs when a borrower takes out a new loan on the same property and uses it to pay off the previous loan. Someone may refinance in order to get better financing terms, a lower interest rate, more favorable monthly payments, or other cost savings.
A title company is a third party that determines if a property’s title (aka, the deed of ownership) is free and clear of any claims during the sale process so that a buyer can legally purchase the property.
In the event that a title company missed or was misinformed about certain title issues, such as liens on the property that the seller didn’t disclose, title insurance protects buyers or lenders from claims of legal ownership.
Underwriting is the process of determining a potential borrower’s loan eligibility and, once qualified, outlining the amount, terms, and interest rate of the loan.
U.S. Department of Veterans Affairs loans are available to current service members, surviving spouses, and eligible veterans. Some benefits include low or no down payments, a VA-backed guarantee that replaces the need for PMI, and additional protections over conventional loans if repayment becomes an issue.
Value of the Property
The value of a property is what owning the property is worth right now based on a number of current and future factors. These factors might include the market value of similar properties in the same location and trends that affect supply and demand.