Key Terms To Know When Getting A Home Loan

Learn How To “Speak Mortgage”

“Freddie who?” – “PITI what?” – “Escrow where?”

Let’s be honest, the mortgage business has a language of its own – and if you’re not well-versed in the lingo, the home-buying process can make you feel like a fish out of water.

We don’t want that for you! We want your mortgage process to be easy and stress-free.

That’s why we’ve created a mortgage glossary for you.

We'll define the key terms you should know.

Mortgage products
Credit health
Basic mortgage documents
Upfront mortgage costs
Monthly mortgage costs
Miscellaneous mortgage terms

Let’s start with a simple definition.

Mortgage: An agreement between you and a lender that allows you to borrow money to purchase, refinance, or make improvements to a home or real estate property.

Easy enough, right? Let’s move onto the products.

Mortgage Products

Adjustable Rate Mortgage (ARM): An ARM is a mortgage with an interest rate that may change throughout the loan. The rate and monthly payment may start out low and adjust upward or downward based on economic conditions.
Construction Loans: A loan used to finance the construction of a residential home – it can cover the cost of the land and house itself. (There are different types construction loans. Check out this blog for more information.)
Federal Housing Administration (FHA) Loans: FHA loans allow for lower down payments and lower minimum credit scores, making them a great option for first-time homebuyers. These loans are from private lenders that are regulated and insured by the FHA.
First-Time Homebuyers (FTHB) Loan Programs: First-time homebuyers may be eligible to use a number of different types of loan programs to purchase their first home.
Fixed Rate Mortgage: This is the most common type of home loan. With a fixed-rate mortgage, the monthly principal and interest payments remain the same for the life of the loan, offering simplicity and predictability.
Home Equity Lines of Credit (HELOC) or Home Equity Loans: While not technically a mortgage, HELOCs or home equity loans allow homeowners to use the equity in their home to finance things like home renovation, vehicles, and other purchases.
Non-Qualified Mortgages (Non-QM): This type of mortgage allows individuals to qualify for a loan through non-traditional means (e.g., individuals who are self-employed or have a short credit history and may not qualify for a conventional or government-issued mortgage).
United States Department of Agriculture’s (USDA) Guaranteed Rural Housing Program: USDA loans are designed to help low-to-moderate income rural home buyers achieve home ownership with loans, loan guarantees, and grants.
Veterans Affairs (VA) Loans: VA loans are designed to help Veterans, Service members, and eligible surviving spouses become homeowners.
Wisconsin Housing and Economic Development Authority (WHEDA): WHEDA loans help those with low-to-moderate incomes get affordable financing for their first home (available only to Wisconsin residents).

Your credit health is important for obtaining a home loan.

Credit Health

Credit History: A record of your credit accounts and your history of paying on time.
Credit Report: A statement that has information about your credit activity and current credit situation, such as loan paying history.
Credit Score: Using a mathematical formula, a credit score predicts your likelihood of paying a loan back on time.
Debt-to-Income (DTI) Ratio: All your monthly debt payments divided by your gross monthly income.

Now, how do you get a mortgage? It's going to take some paperwork – but don't worry, we have you covered.

Basic Mortgage Documents

Closing Disclosure: A form that provides the final details about your mortgage loan. It includes the terms, monthly payments, and how much you’ll pay in fees and other costs.
Loan Estimate: A form you receive after application for a mortgage that lays out important information, such as the estimated interest rate, monthly payment, closing costs, taxes, and insurance.
Mortgage Application: A document you submit to a lender when you apply for a mortgage to purchase, refinance, or make improvements to a home or real estate property.
Pre-Approval Letter: This document estimates the amount of money you may be able to borrow, up to a certain amount based on credit, debt, employment history, and income. Getting pre-approved is when things start to get serious and helps in the negotiating process when searching for your home.
Pre-Qualification Letter: This indicates that a lender is willing to lend up to a certain amount of money to you. A pre-qualification isn’t fully underwritten or validated but will give you a good idea of what you may be approved for.
Promissory Note: The legal document you sign to agree to repay your mortgage.

What costs come before you make your first monthly mortgage payment?

Upfront Mortgage Costs

Closing Costs: All costs you pay at closing – origination charges, appraisal fees, credit report costs, title insurance fees, prepaid interest, and any other fees required by your lender.
Down Payment: An initial payment made upfront when purchasing a home, usually as a percentage of the total purchase price.
Earnest Money: A deposit you pay to show good faith on a signed contract agreement to buy a home.
Homeowner's Insurance: A fee you pay to help cover losses and damage to your property if something unexpected happens, like a fire or vandalism. This is required on every property that is financed.

Next, let’s take a look at some terms associated with your monthly mortgage cost.

Monthly Mortgage Costs

Annual Percentage Rate (APR): Reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan.
Escrow: A portion of your monthly payment goes into this account. It’s set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance.
Interest Rate: Expressed as a percentage rate, this is the cost you will pay to borrow the funds. It does not reflect fees and other charges.
Principal: The amount you borrowed.
Principal, Interest, Taxes, and Insurance (PITI): The four basic elements of your monthly mortgage payment.

There are several important terms you should know that don’t necessarily fall under one of the above categories.

Miscellaneous Mortgage Terms

Co-Signer or Co-Borrower: Someone who agrees to take full responsibility to pay back a mortgage loan with you.
Delinquent: Another term for being late on your payments.
Equity: The amount your property is currently worth minus the amount of any existing mortgage on your property.
Foreclosure: When the lender or servicer takes back property after the homeowner fails to make mortgage payments.
Fannie Mae: The Federal National Mortgage Association (Fannie Mae) purchases and guarantees mortgages from lending institutions in an effort to increase affordable lending.
Freddie Mac: The Federal Home Loan Mortgage Corporation (Freddie Mac) is a private corporation founded by Congress. Its mission is to promote stability and affordability in the housing market by purchasing mortgages from banks and other loan makers.
HUD: The Department of Housing and Urban Development (HUD) is a government agency that helps people get and maintain quality affordable housing.
Loan-to-Value Ratio (LTV): The LTV ratio is a measure of comparing the amount of your mortgage with the appraised value of the property.
Mortgage Refinance: When you take out a new loan to pay off and replace your old mortgage loan.
Mortgage Term: How long you have to repay your mortgage loan.
Mortgage Loan Originator (MLO): An individual or institution that takes a residential mortgage application or offers or negotiates terms of a mortgage loan.
Nationwide Mortgage Licensing System (NMLS): A centralized database that registers licensed information for MLOs.
Payoff Amount: How much you will actually have to pay to satisfy the terms of your mortgage loan.
Underwriting: The process by which the lender decides whether an applicant is creditworthy and should receive a loan.