Mortgage Terminology Glossary

Amortization

A loan is repaid in equal installments, calculated over the term or life of the loan. In the early years, most of the loan payment is applied to interest, while in the latter years, most of it is applied to the principal.

Debt-to-Income (DTI)

A debt-to-income ratio (DTI) is one way lenders measure an individual’s ability to manage monthly payments and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage. EXAMPLE: $3,000 monthly debt (including new housing payment) / $7,000 gross income 3,000/7,000 =.4285 = 42.85% DTI

Earnest Money

Money paid to confirm a contract. In the case of a Mortgage Contract, it is a good-faith amount of money given with the acceptance of a Purchase Agreement.

Escrow

The portion of a mortgage payment that is designated to pay for property taxes and hazard insurance. It is an amount “over and above” the principal and interest portion of a mortgage payment. Since this can fluctuate, the mortgage servicing company will make the insurance and tax payments on your behalf. What you owe is shared on your mortgage statement. FHA

The Federal Housing Administration (FHA) is a United States government agency created in part by the National Housing Act of 1934. It sets standards for construction, underwriting, and insures loans made by banks and other private lenders for home building.

Loan Payment = Principal + Interest + Taxes + Insurance (PITI). May also include PMI.

Loan-to-Value (LTV)

A term used to express the ratio of a loan to the value of an asset purchased. The term commonly represents the ratio of the first mortgage balance as a percentage of the total appraised value of a house and/or land. EXAMPLE: $350,000 loan amount / $400,000 home value = 350,000/400,000 = .875 = 87.5% LTV

Mortgage Insurance Premium (MIP)

for FHA loans Similar to Private Mortgage Insurance but specifically for FHA originated loans. MIP will include an upfront fee at closing & a premium on monthly payment.

Points / “paying points”

One point is equal to 1% of the loan amount, or $1,000 for every $100,000. Points are fees paid to the lender at closing in exchange for a reduced interest rate, which will lower your monthly payment.

Glossary

Private Mortgage Insurance (PMI)

Private mortgage insurance is a type of mortgage insurance used with conventional loans. Like other kinds of mortgage insurance, PMI protects the lender if you stop making payments on your loan. When you make a down payment of less than 20%, the lender requires private mortgage insurance or PMI. The policy protects the lender from losing money if you end up in foreclosure. PMI also is required if you refinance the mortgage with less than 20% equity.

PMI continued

Benefits for Buyers: PMI enables buyers who can afford monthly mortgage payments to purchase a home, even if they do not have a large down payment. According to the Center for American Progress Action Fund (CAPAF), “Among families earning between $20,000 and $50,000, those who own homes have 19 times the wealth of those who rent.”

Purchase Agreement

A purchase agreement (PA) is a legal contract that obligates a buyer to buy and a seller to sell the property. PAs are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal. Rate lock / “lock my rate”

A signed agreement between a borrower and a lender that allows the borrower to lock in the interest rate on a mortgage over a specified time period at the market interest rate and that the buyer is willing to pay.

Title Work, Title Insurance

Ownership transfer history for a property.

Underwriting

In the United States is the process a lender uses to determine if the risk of offering a mortgage loan to a particular borrower under certain parameters is acceptable. Most of the risks and terms that Mortgage underwriters consider fall under the three C’s of underwriting: credit, capacity, and collateral.

VA

Veteran’s Affairs (VA) loans offer up to 100% financing on the value of a home. To qualify for a VA loan, borrowers must present to the lender a certificate of eligibility, which establishes their record of military service.