Article | Homeownership
Your A-Z Guide of Mortgage Loan Terminology
Feel like you need a dictionary to understand mortgage terminology? We’ve got you covered with this helpful, friendly guide to common mortgage terms!
If it’s your first time buying a home, you may hear some terms you’re not familiar with. Words like “amortization” or “escrow” can sound strange or intimidating. That’s why we’ve made a list of common home loan terms with a general breakdown of what they mean. Check out our glossary below to help eliminate any guessing when it comes to understanding your home loan process.
This can be a great resource to refer back to as you hear new terminology that you’re not quite sure what it means. Or, if you’re feeling ambitious, you can grab a cup of coffee and tackle this list to better familiarize yourself with commonly used mortgage terms. After reviewing this list, if there are any terms you still do not understand, you should ask a licensed Loan Originator.
Ability to repay: This is the lender’s reasonable and good faith determination that you will financially be able to make payments on the home loan based on your income and debt information.
Amortization: When you make a payment on your home mortgage, part of the payment is applied to the principal amount of the loan and another part is applied to the interest. Amortization refers to the schedule of how those amounts will be applied. Typically, you will pay more interest than principal in the early years of repayment, but this will gradually change throughout the life of the loan, meaning that more of the payment will be applied the principal than interest as you get closer to the end of the repayment schedule.
Annual percentage rate: Often referred to as the “APR,” this is the complete cost of your loan per year, shown as a percentage. The APR includes fees owed to the lender, such as origination fees, in addition to other charges, such as private mortgage insurance . This is not the same as the interest rate, and is typically higher because it represents the full cost of credit.
Appraisal: The assessment of a home to determine its current market value, which is typically completed by a licensed third party appraiser.
Assumable loan: This type of loan, typically subject to lender approval, can allow for the transfer of the mortgage obligation from the original owner to a new qualifying owner without a change in the interest rate.
Balance sheet: A financial document that breaks down the assets and liabilities of a business. This document is typically requested for applicants who are self-employed or own a business.
Closing costs: All of the fees and costs that are associated with completing the mortgage transaction.
Closing Disclosure: For many types of loans, a required document from the lender that details the final terms of the home loan transaction. Among other things, this document discloses the amount of your total monthly payment, the interest rate and any closing costs or fees.
Co-borrower: A person who typically is an additional borrower sharing in the ownership of the home and responsibility to pay back the mortgage loan. A co-borrower jointly applies for a loan with the primary borrower.
Co-signer: A person who is added to the loan with the primary borrower and agrees to be fully responsible for repayment if the primary borrower can no longer do so. A co-signer is usually needed when the primary borrower does not meet the required credit thresholds in order to qualify for the loan by themselves. The co-signer typically does not live in the home nor share in the ownership.
Debt-to-income ratio: This is your monthly debt payments divided by your gross monthly income and is used to help measure your ability to repay the loan.
Deed: A legal document that is recorded in the land records of the jurisdiction where the property is located that shows proof of ownership in the land and home (if the home is attached to the land).
Delinquency: Another term for being late on a payment for a debt. This can occur when you miss a payment or you only make a partial payment by the due date.
Down payment: A percentage of the home’s value paid upfront or at closing.
Escrow: An account that is typically used by the lender to pay your homeowners insurance and property taxes on your behalf. Each month, a portion of your mortgage payment is placed into your escrow account.
Equal Credit Opportunity Act (ECOA): A federal law that prohibits lenders from unlawfully discriminating against consumers when applying for credit. Learn more about ECOA from the Consumer Financial Protection Bureau’s blog and how it protects borrowers.
Gross monthly income: The income you earn and receive each month before any tax or other deductions are accounted for.
Homeowners insurance: An insurance policy that is typically required by lenders and which pays for covered losses and damage to the home.
Insurance binder: Documentation from an insurance company that shows temporary proof of homeowners insurance until the permanent policy is issued.
Interest rate: The cost you will pay each year to borrow money, expressed as a percentage. It does not include any fees or charges like with the annual percentage rate.
Judgment: An official ruling issued by a court. In the mortgage context, if a borrower defaults on a loan, then the lender may seek a judgment against the borrower, which could entitle the lender to certain state law remedies in order to satisfy the debt.
Liabilities: Financial obligations, or debts, that are owed to others, such as to a lender or other company.
Lien: In the mortgage context, a type of security interest in property that secures the payment of the debt from the borrower until the loan is paid in full. Typically, if there is a lien on your home as a result of taking out a mortgage, that means you still owe money on the home loan.
Loan Estimate: For many mortgage types, a document detailing the estimated terms of the requested home loan. This will include information such as the estimated amount of your monthly payment, interest rate, loan features and any closing costs or fees. A lender must provide this document to the borrower within three business days of the lender receiving a complete application.
Loan origination: In general, this means the entire process that must be completed in order to secure a home loan, all the way from application to closing.
Principal balance: The principal is the amount of the loan that needs to be repaid. Your monthly payment includes a portion of that principal.
Profit and loss statement: A financial document that shows the earnings and expenses of a business for a certain period, usually an entire year. This document is typically requested during the verification of income process for someone that is self-employed or owns a business.
Property taxes: A local government tax on property that is based on the value of the property or home. In many cases, these taxes are collected as part of the monthly mortgage payment and are put into an escrow account, which will be used by the lender to pay the tax bill when it comes due. If the taxes are not escrowed, then the property owner pays the bill directly.
Survey: A drawing of the property that shows the location of the lot, the boundary lines and any structures or improvements.
Title: A document that shows the legal owner of a manufactured home and/or land.
Underwriting: A process the lender undertakes to evaluate the loan applicant, their ability to repay the loan and the property that will serve as collateral for the loan. This process usually includes verifying the applicant’s employment and income as well as evaluating other information, such as credit history, tax returns and bank statements.
U.S. Department of Housing and Urban Development (HUD): A federal Cabinet department of the Executive Branch that regulates certain housing policies and programs. Learn more on their website.
Now you have the most common vocabulary down! Don’t worry, there won’t be a pop quiz. It can still be a lot to wrap your head around though, so please remember our team of licensed loan specialists and representatives are here to help answer any questions you may have about the process.
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