The mortgage process can be confusing at times, but at Pelican we strive to take the confusion out of buying a home.
When purchasing a home, your lender may use a lot of terms that seem unfamiliar to you. By understanding these terms, it will allow you to make sure the loan you have is right for you. You’ll also be able to stay involved throughout the loan process.
As a Mortgage Loan Originator, I find myself using industry terms and acronyms regularly, but I always try to make sure my homebuyers know what they mean. I wanted to help break down all of the different types of mortgage loans and terms you’ll encounter during the homebuying process:
Common Mortgage Loan Types
Federal Housing Administration Loan (FHA) – This is a mortgage insured by the Federal Housing Administration. FHA loans are designed for low to moderate income families. They have a minimum down payment of 3.5% and require mortgage insurance for the life of the loan.
Rural Development Loan (RD) – This is a mortgage insured by the United States Department of Agriculture (USDA). RD loans allow up to 100% financing for your mortgage. The property must be in an eligible area. The loan also has income limits based on your family size and the area the property is located in.
Balloon Mortgage – This is a type of mortgage loan where the entire principle balance is due at one time. A balloon payment typically offers a short term, and only a portion of the loans principal balance is amortized over the term. Once the term is over, the remaining balance is due.
Adjustable Rate Mortgage (ARM) – With an ARM, the interest rate on the mortgage loan can fluctuate. When looking at ARM loans, you may see terms such as 5/1 and 10/1. These loans have a fixed rate of interest for 5 or 10 years but will adjust after that time. The rates may adjust 1 time each year after the fixed rate period ends.
VA Loan – This is a mortgage loan guaranteed by the Department of Veteran Affairs. The intention of a VA loan is to provide financing to eligible veterans with no down payment.
Common Mortgage Terms
Appraisal – This is a report that evaluates the value of a home by a qualified third-party known as an appraiser. An appraisal is done to determine the fair market value, or selling price that a buyer and seller agree on, of the subject property. The appraised value is needed to help the lender determine how much to lend the homeowner or purchaser.
Escrow – These are the funds that the lender holds to pay items such as property taxes and homeowner’s insurance. If your monthly payment includes “escrow,” then a portion of your payment will go into an “escrow account.” When your property taxes or insurance payments are due, the lender will have the collected funds to pay the item for you for the next cycle.
Loan Estimate – This is a document that provides an estimate of closing costs and the terms of the loan. This must be provided to the borrower by their lender within three days of submitting a complete application.
Disclosure – This is a document that must be provided to the borrower three days before closing. The “closing disclosure” will have all of the final terms and costs of the loan. We recommend that you read through the disclosure thoroughly to ensure that everything is correct and there are no surprises.
Private Mortgage Insurance (PMI) – This insurance covers the lender in the case the borrower defaults on the loan. PMI is usually required on all loans where the borrower does not put down at least 20% of the sales price. However, there are certain loan types, such as FHA loans, that require PMI no matter how much money is put down.
Debt to Income Ratio (DTI) – This reflects the borrower’s monthly debt as a percentage of the borrower’s gross monthly income (before taxes). Other debt-related costs are also considered in the DTI such as homeowner’s insurance, property taxes and Home Owners Association (HOA) fees.
Loan to Value (LTV) – This reflects the loan amount as a percentage of the appraised value or sales price of the home. For example, if you borrow $75,000 and the home is sold for $100,000, then your LTV is 75%.
Discount Points – These are fees that a borrower can pay to the lender to lower the interest rate on the loan. For example, let’s say a borrower is applying for a $100,000 loan with a 5% interest rate. The lender offers a discounted rate at a fee of 1%, or 1 point, of the loan amount to lower the interest rate by .25%. The borrower will end up paying more money at closing but will pay less money over the life of the loan since the rate is lower.
Origination Fee – This is an upfront fee charged by the lender to process a loan application. Depending on the lender, the fee can either be a percentage of the loan amount or flat fee.
Closing – A closing is where the borrower finalizes the loan. This is typically done with either a title attorney or a notary. The parties attending the closing can differ depending on the transaction but will typically include the borrower/purchaser, sellers of the home, realtors, closing attorney and the lender. At the closing, the attorney or notary will walk the borrower through the entire process, answer any questions they may have and go over the documents to be signed. This will also be the time when funds are disbursed to the seller of the home.
Closing Costs – This is the money paid at closing for transaction. Closing costs can include origination fees, appraisal fees and third-party charges such as recording fees, the title attorney fee and property taxes.
Contingency – This provision in a purchase agreement that states the buyer cannot purchase the home until they meet certain obligations. An example of this would be that the buyer must sell their current residence to purchase a new one.
Earnest Money – This is a deposit made in good faith to the seller of a home to show. The earnest money may be held by the realtor or closing attorney. The reason for making a good faith deposit is to show the seller of the home that the buyer is serious about the purchase. Typically, the good faith deposit is written into the purchase contract. If the buyer backs off the purchase, then the deposit can be kept by the seller. If the transaction goes through, the deposit will go toward the borrower’s “cash to close,” which is a combination of their down payment and closing costs.
Foreclosure – This happens when a borrower does not fulfill their payment obligations and the lender seizes the property.
Pre-qualification – This is when a borrower is pre-approved based on credit and stated income. A pre-qualification is given to the borrower prior to them finding a property.
Short Sale – This is a sale of property where the net proceeds are not enough to pay off the liens on the property. The mortgagee (lender) must approve a short sale.
Survey – This is the process of measuring a property’s boundary lines to determine the amount of land a homeowner owns.
Underwriter – This person is responsible for approving or denying loans based on the information provided on the application.
Truth in Lending Disclosure – This document provides information about a loan such as interest rates, due dates, fees and other relevant information to help a borrower understand the total costs of a mortgage.
Title – This document describes who has legal ownership and rights to use property.
Title Insurance – This insurance protects lenders and owners against loss due to liens, judgements or defects in the title.
Knowing these terms will give you a better understanding of how a mortgage works. If you have any questions about mortgage loans you can always contact a team member at Pelican!
Are there any mortgage terms and phrases that you want us to add to this post? Let us know in the comments!
Chris Neal has helped plenty of Louisiana residents purchase a home to call their own.