*As of April 20, 2020, Quicken Loans® isn’t offering conventional adjustable rate mortgages (ARMs).
*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
Once you’re approved for your mortgage, you need to find a home, research comparables, get a home inspection, ask the seller to agree to seller concessions, figure out how much money you’ll need to have in escrow and how much of your monthly payment may go toward PMI, and then you’ll be ready for title work so you can get to closing.
Did any of that make sense?
If not, it will by the end of this article.
So, you want to buy a house, but you think the mortgage process is intimidating or maybe you’re not familiar with how a mortgage works. Either way, there’s plenty of jargon you’ll encounter along the way, so here’s a beginner’s guide to some terms that will help you before and during closing.
30 Top Mortgage Terms
1. Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is one in which for the first several years of the loan, the rate is fixed at a low rate. At the end of the fixed period, the rate adjusts once per year – up or down – based on an index added to a constant margin number. For example, a 7/1 ARM is an adjustable rate mortgage that carries a fixed interest rate for the first 7 years of the loan term, along with fixed principal and interest payments.
2. Amortization Schedule
Your amortization schedule simply refers to the amount of principal and interest paid every month over the course of your loan.
Assuming you make the normal payment every month and do nothing differently, most of your mortgage payment goes toward interest, rather than toward the balance, at the beginning of your loan. As you continue to make payments, this shifts over time. As you near the end of your loan term, most of your payment will go toward the principal rather than to interest.
In a home appraisal, someone independent of the lender, buyer or seller, evaluates the property to determine the fair market value of the home. The determination is based on its characteristics as well as recent sales of comparable properties in the area.
The appraisal is important because the lender cannot lend you an amount greater than what the property is worth. If the appraisal comes in lower than your offer amount, you can pay the difference between the appraised value and the purchase price at the closing table. Or, you can try to renegotiate the sales price with the seller.
4. APR (Annual Percentage Rate)
When you’re shopping for a mortgage, you’re going to see two different rates. You’ll see one rate highlighted and then another rate labeled APR. The interest rate is the cost for the lender to give you the money based upon current market interest rates.
APR is the higher of the two rates and includes the base rate as well as closing costs associated with your loan, including any fees for points, the appraisal or pulling your credit. We’ll have more on points and appraisals in a minute.
When you compare interest rates, it’s important to look at the APR rather than just the base rate to get a more complete picture of overall loan cost.
Closing on your house is the last step of the real estate process, where ownership is legally transferred from the seller to the buyer. This is when you pay your down payment and/or any closing costs associated with your loan. If you’re buying a new property, you also get the deed. Closing day typically involves signing a lot of paperwork.
6. Closing Costs
Closing costs, also known as settlement costs, are fees charged for services that must be performed to process and close your loan application. These are the fees that were estimated in the loan estimate and include the title fees, appraisal fee, credit report fee, pest inspection, attorney’s fees, taxes and surveying fees, among others.
7. Closing Disclosure
Before you close on your loan, you’ll get a closing disclosure. It’s a five-page form that includes the final details of your mortgage terms and costs. It’s a very important document, so be sure to read it carefully.
Real estate comps (short for comparables) are properties that are similar to the house under consideration, with reasonably the same size, location and amenities, and that have recently been sold. Knowing a fair market value will help you decide on a price that you’re comfortable to offer.
9. DTI (Debt-To-Income)
Your debt-to-income ratio is the comparison of your gross monthly income (before taxes) to your monthly expenses showing on your credit report (i.e., installment and revolving debts). The ratio is used to determine how easily you’ll be able to afford your new home.
A deed is the actual document you get when you close that says the home or piece of property is yours. It includes the property description and must be signed by both the seller and the buyer.
11. Earnest Money
Earnest money is a check you write when a seller accepts your offer and you draw up a purchase agreement. Your deposit shows good faith to the seller that you’re serious about the transaction.
If you ultimately close on the house, this money goes toward your down payment and closing costs.
An escrow account holds funds for future required payments. In the context of your mortgage, most people have an escrow account so they don’t have to pay the full cost of property taxes or homeowners insurance at once. Instead, a year’s worth of payments for both are spread out over 12 months and collected with your monthly mortgage payment.
Your escrow amount is analyzed once a year by your lender to ensure the correct amount is being collected to pay for taxes and homeowners insurance.
13. FICO® Score
The FICO® score was created by the Fair Isaac Corporation as a way for lenders and creditors to judge the creditworthiness of a borrower based on an objective metric. Clients are judged on payment history, age of credit, the mix of revolving versus installment loans and how recently they applied for new credit.
The scoring range is between 300 – 850. Credit score is one of the main factors in determining your mortgage eligibility.
14. Fixed-Rate Mortgage
A fixed-rate mortgage is one in which the rate doesn’t change. You always have the same payment for principal and interest. The only thing about your payment that would fluctuate would be taxes, homeowners insurance and association dues. It’s good for consistency in your budgeting.
A home inspection is an optional (though highly recommended) step in your purchase process. You can hire an inspector to go through the home and identify any potential problems that might need to be addressed – either now or in the future. If you find things that need to be fixed or repaired, you can negotiate with the seller to have them fix the issues or discount the sales price of the home.
16. Loan Estimate
A loan estimate assesses the expenses associated with a home loan, including inspections, title insurance, taxes and more. Additional costs may apply, depending on your state, loan type and down payment amount.
Pay close attention to the costs listed in this document. Many of the costs and fees can’t change very much between application and closing. For instance, if the costs of your actual loan change by more than a minimal amount, your loan estimate has to be reprinted.
Fees charged by third parties, however, such as those for title insurance, the inspection and survey phase, may change by as much as 10% before closing. Make sure to ask your lender about anything you don’t understand.
17. Loan Term
The loan term is simply the amount of time it would take to pay your loan off if you made the minimum principal and interest payment every month. You can get a fixed-rate conventional loan with a term of anywhere between 8 – 30 years.
FHA and VA fixed loans come in terms between 10 – 30 years. Adjustable rate mortgages (ARMs) through Quicken Loans® are based on 30-year terms.
18. LTV (Loan-To-Value)
LTV is one of the metrics your lender uses to determine whether you can qualify for a loan. All loan programs have a maximum LTV. It’s calculated as the amount you’re borrowing divided by your home’s value.
You can think of it as the inverse of your down payment or equity. For example, if you have a 10% down payment, you have a 90% LTV.
19. Mortgage Approval
If you’re buying a house, there’s an intermediate step here where you will have to find the house before you can officially complete your application and get financing terms. In that case, lenders will give you a mortgage approval stating how much you can afford based on looking at your existing debt, income and assets.
20. Mortgage Note
A mortgage note is a document that you sign at the end of your home closing that specifies all the terms of the agreement and how you’ll repay your loan. It includes details like the interest rate and term of the loan as well as when payments are to be made.
21. Mortgage Points
You may also see mortgage points referred to as prepaid interest points or mortgage discount points. Points are a way to prepay some interest upfront to get a lower interest rate. One point is equal to 1% of the loan amount, but you can buy them in increments all the way down to 0.125 points.
Loan origination is the multistep process of obtaining a mortgage which covers everything from the point when you initially apply through your time at the closing table. This is a work intensive process, so lenders typically charge a small origination fee as compensation.
PITI refers to the components of your mortgage payment:
Principal: Your principal is the unpaid balance on your loan at any given time.
Interest: Interest refers to the money your lender or mortgage investor is charging you above and beyond the principal, in exchange for giving you the loan. This is expressed as a percentage.
Taxes: In real estate, this means property taxes, which are set aside as part of your mortgage payment. More on that later when we talk about escrow.
Insurance: The second I in PITI refers to homeowners insurance. When you get a mortgage, you’re required to get homeowners insurance because the lender or mortgage investor wants to make sure your house can be rebuilt if there’s a natural disaster. Policies also often include personal property protection in case there’s a burglary or common theft.
If you make a down payment of less than 20%, mortgage investors enforce a mortgage insurance requirement. In some cases, it can increase your monthly payment of your loan, but the flipside is that you can pay less on your down payment.
Conventional loans have private mortgage insurance. FHA loans have MIP, which includes both an upfront mortgage insurance premium (can be paid at closing or rolled into the loan) and a monthly premium that lasts for the life of the loan if you only make the minimum down payment at closing.
25. Prequalified Approval
Getting prequalified is the first step in the mortgage approval process. It gives you an idea of how much you will likely get approved for based on basic information you provide. But, since income and assets aren’t verified, it only serves as an estimate.
26. Seller Concessions
Seller concessions involve a clause in your purchase agreement in which the seller agrees to help with certain closing costs. Sellers could agree to pay for things like property taxes, attorney fees, the origination fee, title insurance and appraisal.
Servicing is the process of holding a loan — collecting your mortgage payment and distributing it to investors, as well as collecting monthly for mortgage insurance, homeowners insurance and property taxes if you have those items in escrow. Payments are made on these bills when they come due.
It used to be that banks would hold on to loans for the entire term of the loan, but that’s increasingly less common today, and now the majority of mortgage loans are sold to one of the major mortgage investors – think Fannie Mae, Freddie Mac, FHA, etc. – before being packaged up and traded. Quicken Loans services most loans.
A house title is proof of ownership that also has a physical description of the home and land you’re buying. The title will also have any liens that give others a right to the property in specific situations.
The chain of title will show the ownership history of a specific house. It’s the job of the title insurer when you buy your home to make sure that no one other than the seller has rights to the property and could cause problems once you’ve taken possession.
Mortgage underwriting is a stage of the origination process where the lender works to verify your income and asset information, debt, as well as any property details to issue final approval of the loan. It’s essentially a process to assess the amount of risk that is associated with giving you a loan.
30. Verified Approval
Verified approval is the final stage of mortgage approval and lets you know exactly what you can afford. With verified approval, your offer will have equal strength to that of a cash buyer. The process starts with the same credit pull as other approval stages, but you’ll also have to provide documentation including W-2s or other income verification and bank statements.
The Bottom Line On Mortgage Terms
Buying a house is a big decision and one that can feel overwhelming if you’re not familiar with all the lingo that goes along with it. Now that you have this post in your back pocket, you should be able to smoothly sail through the stages with a better understanding of the terminology and the process in general.
If you’re ready to start the mortgage process, speak with a mortgage expert today.