Whether you are buying your first home, refinancing or looking to purchase another property, the mortgage world can feel like people are speaking a completely different language. From the acronyms to the specific documentation needed for your mortgage. Not to worry.
We have compiled a list of common terminology, so you can familiarize yourself with the vocabulary used when discussing your mortgage.
Preapproval is the process of receiving a letter from a lender, to approve the amount they will let you borrow for a home. Many times, this is the first step in the home buying journey. To learn more about the process and what is required visit our blog on Why you Should get Preapproved.
This is the form used to apply for a loan as a borrower. The lender will review details about your finances to determine whether they can accept the request to grant funds for credit.
The credit report is a statement that provides the history of all credit activity and current credit status. This is used to determine the credit standing for a borrower based on the history of loans, payments, debts, balances and length of time lines of credit have been open.
Fixed Rate Mortgage
The interest rate for the mortgage will remain fixed throughout the life of the loan, it will not fluctuate with the market.
Adjustable Rate Mortgage
The rate of your mortgage will fluctuate as the market rate changes. There is usually a short-fixed period of interest as an introductory period. After this is over, the rate will flow based on the market rate rising and falling over the full duration of your loan.
Debt to Income Ratio
This is a key calculation in the mortgage process. It is your total monthly debt divided by your total monthly income. This determines what percent of your income is used to pay debt off. Lenders like to see lower debt to income ratios, as assurance you will have enough money coming in to make payments. The lower your ratio the better your chances are to qualify.
A down payment is the cash you’ll pay toward the purchase of your new home. The down payment is your contribution towards the initial ownership in the home and the lender provides the rest to purchase the property. Check out or post on Acceptable Sources for a Down Payment to learn more.
Assets are cash or investments that you own and have cash value. Common assets include checking and savings accounts, 401k and IRA accounts, certificates of deposit, stocks, bonds and mutual funds.
Money given to the seller to show you are committed to buying the home. This is a good faith gesture that is then applied towards your down payment.
Amortization is making a fixed payment over time, with a portion of your payment going towards the loan principal and the other remaining portion towards interest, based upon a predetermined schedule. To learn more about amortization visit our post on the Amortization Schedule Breakdown.
The estimated value of a property is determined by a professional known as the appraiser. The lender or broker will assist with scheduling an appraisal done by an independent third party.
This is when your lender verifies your income, assets, debt and property details, before final approval. As a borrower you will submit these documents. The lender will then assess how much risk and liability they are willing to take on to approve your loan.
This is the final step in the mortgage process also referred to as settlement, when all legal documents are signed, fees are paid and funds are disbursed. The mortgage is then legally the borrower's obligation to repay.