If you don’t speak mortgage-ese, don’t worry. You’re not alone. Use this mortgage dictionary to decode some of the terms you might hear during your home loan process.
80/10/10, 80/15/5 – See “Piggyback Loan.”
100% Loan – A loan for which no down payment is required. VA and USDA loans are examples of 100% loans.
Amortization – The way in which a loan is slowly but surely paid off one month at a time. With a mortgage, the principal paid each month increases, while the interest paid decreases. In other words, at the beginning of the loan, most of your payment is interest. At the end, the payment is mostly principle.
Annual Percentage Rate (APR) – This is the rate that shows the true cost of borrowing. It factors in the interest rate of your loan, plus all the costs associated with obtaining the loan. If you’re shopping for mortgages, comparing APRs from various lenders is a useful way to see whose offer is best.
Closing Costs – All the fees associated with the loan and with purchasing the property. For instance, loan origination, title, escrow, appraisal, recording, and upfront mortgage insurance are all closing costs. Most closing costs have to be paid for out-of-pocket at closing unless the seller has agreed to pay them for you.
Conforming Loan – a mortgage that conforms to the standards set by Fannie Mae and Freddie Mac, sometimes referred to as a conventional loan.
Contingency – This is basically an “out” that is written into your purchase contract. If conditions of the contingency are not met, you can back out of the transaction and keep your earnest money.
- Example: You have an inspection contingency, and the inspection is not to your standards, you can cancel your offer with no penalty.
Credit Report – A summary of all your debts. Your creditors, balances, available credit, any late payments, and a number of other factors are listed on your credit report.
Credit Score – Your credit history and risk assessment expressed by a number. The three major credit bureaus, Experian, Equifax, and Transunion, have proprietary algorithms to determine your number. The lenders uses your middle score for qualification.
- Example: Your scores are 680, 690, and 700. The lender will use 690.
Debt to Income ratio (DTI) – The percentage of your expenses compared to your gross income. The front end ratio or front ratio is your proposed housing payment compared to your income. Your back end ratio or back ratio is all your monthly debt payments plus proposed housing payment compared to your income.
- Example: Your income before taxes is $5,000 per month, and your future house payment is $1600 per month. You have a student loan payment of $100, a car payment of $200, and a credit card payment of $50. Your DTI is 39%. Your front end ratio is 32% ($1,600 / $5,000) and your back end ratio is 39% ($1,950 / $5,000). Another way of expressing your DTI is 32/39.
Discount Point – This is similar to an origination point, but it is only allowed to be charged if it’s used to lower your interest rate.
Down Payment – The amount you pay toward the purchase price of your home.
- Example: If you buy a $200,000 home and get a $190,000 loan, your down payment is 5%.
Earnest Money – This is the money you pay up front to show the seller you are serious, or “earnest,” about buying the home. The money is held by the escrow company and is applied toward down payment and/or closing costs when the transaction closes. Usually earnest money is between 1% and 3% of the purchase price. You can lose your earnest money, but only by backing out of the purchase contract without the appropriate contingency (see “Contingency”).
Escrow – The company that holds and accepts money from all parties involved in the transaction, then distributes it appropriately at closing. You often sign final loan paperwork at the escrow office.
First Mortgage – The primary mortgage on a home. Usually this term is only used when a borrower also has a second mortgage.
Float – What happens before you lock your interest rate. When you float your interest rate, you actively watch interest rate fluctuations and wait for a time to lock. If you float your rate, your future monthly mortgage payment could go up if rates go up. See also “Lock.”
Gift – The money you receive from an eligible source (family, non-profit, etc.) You can use gift money on any type of loan, but each loan has its own restrictions.
Good Faith Estimate (GFE) – This is a document you should receive within 3 days of applying for a loan. It details the fees associated with the mortgage. You should take this document with you at loan closing to make sure the fees didn’t change dramatically. For a sample GFE, see our downloadable mortgage forms page.
Hazard Insurance – See “Homeowner’s Insurance.”
Homeowner’s Association (HOA) – The organization that creates and maintains bylaws and rules regarding a certain housing development, such as a PUD (planned unit development) or condominium project. Homeowners within the project must pay dues to the HOA, usually monthly or yearly.
Homeowner’s Insurance – The insurance policy that insures the home being purchased in the case of fire or other hazards.
HOA/HOA Dues – See “Homeowner’s Association.”
HUD/HUD1 – You receive this document when you sign final loan paperwork at escrow. It breaks down all the fees associated with the loan and tells you the final dollar amount you need to pay to close the loan.
Index – Rate averages that determine the interest rate of an ARM after the initial fixed period. See also “ARM” and “Margin.”
Loan to Value (LTV) – The percentage of your loan amount compared to the home’s value and/or purchase price.
- Example: If you put 5% down on a $200,000 home, your loan amount is $190,000 and your LTV is 95%.
Margin – The amount of extra interest the lender charges when an ARM starts adjusting. The margin and the index are added to determine the rate you pay when the ARM’s fixed period ends.
Mortgage – A loan on a property for which the payments will retire the debt at the end of the loan term.
Mortgage Banker/Mortgage Lender– Unlike a mortgage broker, this company actually lends the money for a mortgage loan, as well as takes the borrower’s application and processes the loan. See “Mortgage Broker.”
Mortgage Broker – A company or individual that takes a loan application then selects a bank to fund the loan. The broker sends the loan to a bank, and the bank lends the money. The bank pays the mortgage broker for sending the loan.
Origination Point – The fee you pay the lender for doing the loan. A point is equal to 1% of the loan amount and is paid at closing with your other closing costs, or paid by the seller if it’s negotiated into the purchase contract.
P&I – The principle and interest payment on a home loan, not including taxes, insurance, or HOA dues.
Piggyback Loan– When a borrower opens a first and second mortgage simultaneously when buying a home, usually to avoid private mortgage insurance.
- Example: You buy a home for $200,000. You open a first mortgage for $160,000 and a second mortgage for $20,000, and put $20,000 down. Since your first mortgage is at 80% loan-to-value, you don’t need mortgage insurance.
PITI – Stands for Principle, Interest, Taxes, Insurance, and includes all these costs plus any HOA dues. PITI represents the buyer’s full housing payment.
Prepayment Penalty – The penalty the borrower must pay if the loan is paid off within a short period of time. FHA, VA, USDA and conventional mortgages typically do not have a prepayment penalty.
Private Mortgage Insurance (PMI) – The insurance policy that covers your mortgage lender in case you default on the loan. You pay for this policy monthly whenever you put less than 20% down on a conventional mortgage.
Processing – The responsibility of the loan processor who works under a loan officer. The loan processor puts the file together so that it is a complete file prior to the underwriting process. See “Underwriting.”
Second Mortgage – A lien that is 2nd in priority compared to a first mortgage on a home. Second mortgages usually have higher interest rates, since they are higher-risk loans. Second mortgages are often opened when someone buys a home and helps the borrower avoid private mortgage insurance. See “Piggyback Loan.”
Term – The length of the loan, expressed in years or months.
Title & Title Insurance – The title is the document that shows ownership history, the outstanding debts that are tied to the property, and current ownership. Title insurance protects you and the lender against any previous owner who claims rights to the property.
Truth in Lending (TIL) – You should receive this document within 3 days of applying for the loan. It tells you the loan’s APR, whether it has a prepayment penalty, the loan terms, as well as other vital information. For a sample TIL, see our downloadable mortgage forms page.
Underwriting – The process of verifying that the borrower’s documentation and adheres to a specific loan program’s guidelines.
Contact a Professional
Confused about any of these terms? Contact our mortgage professionals who can clarify any questions you may have.
Tim Lucas (NMLS #118763), Contributor/Editor
Tim Lucas is a mortgage writer with over 11 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.