Mortgage Terms & Definitions

A 1099 independent contractor is a person who provides services to a company on a contractual basis and is paid through a 1099 form instead of a regular payroll. These individuals are responsible for managing their own taxes, benefits, and expenses.

An Adjustable Rate Mortgage (ARM) is a type of home loan where the interest rate can change periodically, usually in relation to an index. The loan typically starts with a lower fixed rate for an initial period, after which the rate adjusts at regular intervals, potentially increasing or decreasing your monthly payments.

Amortization is the process that breaks down your mortgage payments into interest and principal portions. In the early stages of your loan, a larger percentage of your payments goes toward interest, but over time, more will be applied to the principal as the loan balance decreases.

The Annual Percentage Rate (APR) is the yearly cost of borrowing, including both the interest rate and additional lender fees. It’s expressed as a percentage, and when comparing loan offers, the APR will usually be the larger number as it encompasses all costs associated with the loan.

An appraisal is a professional assessment of your home’s value, often required by lenders to ensure the loan amount doesn’t exceed the property’s worth. This evaluation is typically conducted by an independent third party arranged by your lender before finalizing the mortgage.

Appreciation is the increase in the value of a residential property over time. It's essentially the appreciation or growth in the market value of a home compared to its original purchase price, contributing to your overall financial wealth.

Assets include everything you own that holds monetary value, such as savings accounts, stocks, bonds, and physical cash. These play an important role in qualifying for a mortgage.

A bi-weekly payment plan allows you to pay half of your mortgage every two weeks instead of once a month. This setup results in an extra payment each year, helping you pay off your mortgage faster and reducing the total interest paid over time.

A buydown lets you reduce your mortgage interest rate by purchasing discount points. These points are one-time fees paid at closing to lower your rate, making your monthly payments more manageable.

Cash to close refers to the total amount of money you need to bring to closing, including your down payment and closing costs. This figure will be provided in advance, so you can be prepared for the final settlement.

Closing is the settlement process between the buyer and seller, where all paperwork is signed, funds disbursed, and ownership officially transferred.

Closing Costs are the fees and expenses associated with finalizing the home purchase and mortgage.

The Closing Disclosure is a detailed document outlining all the terms of your mortgage, including the interest rate, loan principal, and closing costs. Lenders are required to provide this to you at least three days before closing, giving you time to review and address any questions or errors.

A co-borrower is someone who shares the responsibility of the mortgage with you. Both parties are equally responsible for the loan and typically share ownership of the property.

Collateral is an asset, like your home, pledged to secure a loan. If the borrower fails to make payments, the lender has the right to take possession of the collateral to recover the loan amount.

A condominium is a type of homeownership where individuals own their living space (unit) within a larger building or community, but share ownership of common areas like hallways, pools, and amenities. Owners pay association fees for the maintenance of shared spaces.

A contingency is a condition in a home purchase contract that must be met for the sale to proceed. For instance, a common inspection contingency allows the buyer to back out if the inspection reveals significant issues with the property.

A conventional loan is a mortgage that isn’t insured or backed by a government entity. These loans typically have stricter qualifications, but they offer flexibility and competitive interest rates.

A co-signer is someone who agrees to take on the responsibility of the mortgage if the primary borrower defaults. Unlike a co-borrower, a co-signer does not have ownership rights to the property.

Your credit report details your credit history, including loans, payment records, and credit usage. Lenders use this report to evaluate your financial responsibility and determine your loan eligibility.

Your credit score is a numerical representation of your creditworthiness, based on your credit report. A higher score typically indicates responsible borrowing habits and increases your chances of getting approved for a mortgage at a lower interest rate.

The debt-to-income ratio (DTI) compares your monthly debt payments to your gross monthly income. Lenders use this ratio to assess whether you have enough income to handle a new mortgage payment. Generally, a DTI of 50% or lower is required to qualify for most loans.

A deed is a legal document that officially confirms your ownership of a property.

A deed of trust is an agreement between a borrower and a lender that gives the lender a security interest in the property until the mortgage is paid off.

Disclosures are documents provided to the borrower that detail important information about the mortgage terms, including interest rates, fees, and potential risks. Lenders are required to provide these disclosures by law to ensure transparency in the lending process.

A down payment is the initial amount of money you pay upfront when purchasing a home, usually expressed as a percentage of the home’s value. While many believe 20% is required, many loans allow for much lower down payments.

An earnest money deposit is a payment made to show the seller that you’re serious about purchasing their property. If your offer is accepted, the deposit is applied toward your down payment or closing costs.

Equity is the portion of your home’s value that you own outright, calculated by subtracting your remaining mortgage balance from the current market value of your home.

An escrow account is used by your lender to hold funds for property taxes and homeowners insurance. A portion of your monthly mortgage payment is set aside in this account to cover these expenses when they are due.

Fannie Mae is a government-sponsored enterprise that purchases mortgage loans from lenders, providing liquidity to the mortgage market. This helps create more opportunities for homebuyers by making mortgages more affordable and accessible.

The Federal Housing Administration (FHA) is a government agency that insures FHA loans, which are designed to make homeownership more accessible. FHA loans allow for lower down payments and more flexible borrower qualifications.

A fixed-rate mortgage offers a stable interest rate for the entire loan term, ensuring that your monthly payments remain consistent. This predictability can make it easier to plan your finances over the long term.

Freddie Mac is another government-sponsored enterprise that buys mortgage loans, primarily from smaller banks and credit unions. Like Fannie Mae, it helps provide liquidity to the mortgage market by packaging loans and selling them to investors.

The Good Faith Estimate (now replaced by the Loan Estimate) outlines the key details of your mortgage, including interest rates, loan terms, and estimated closing costs, helping you understand what you’ll owe.

Gross income refers to the total earnings before taxes and other deductions are taken out. It includes wages, bonuses, interest, and other sources of income. Lenders use gross income to determine how much you can afford to borrow for a mortgage.

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the equity in your home. Borrowers can draw funds as needed, typically with a variable interest rate. Lenders evaluate your creditworthiness and the amount of equity in your home to establish the credit limit and terms.

A home inspection is a thorough examination of a property’s condition, performed by a professional inspector before closing. This ensures there are no significant issues that could affect the value or safety of the home.

A homeowners association (HOA) is an organization that manages a residential community, enforcing rules and regulations that homeowners must follow. HOAs typically charge annual or monthly fees to maintain community amenities and common areas.

Homeowners insurance provides financial protection against damage or loss to your property due to covered events, such as fires, theft, or natural disasters. While not legally required, lenders usually mandate it for the life of your loan.

The interest rate is the percentage you pay to borrow money through a mortgage. It can be fixed or variable and is separate from the APR, which includes additional loan costs.

A Loan Estimate is a standardized form that provides a detailed breakdown of your mortgage terms, including your estimated monthly payment, interest rate, and closing costs. This document helps you compare loan offers and make an informed decision.

Loan Officers are licensed professionals who provide guidance, expertise, and financing options to individuals seeking to buy a home.

Loan origination is the process of creating a mortgage loan, from submitting your application to underwriting and approval. The loan originator oversees this process, ensuring your mortgage is set up according to your needs and qualifications.

The loan term is the total time you have to repay your mortgage, typically 15 or 30 years. A longer term results in lower monthly payments, while a shorter term reduces the total interest paid over time.

The loan-to-value (LTV) ratio compares the amount of your mortgage to the appraised value of the home. A lower LTV, achieved by making a larger down payment, reduces the lender’s risk and may help you avoid private mortgage insurance (PMI).

A manufactured home is built in a factory and then transported to a designated site for assembly. These homes must meet specific building codes and offer a more affordable housing option compared to traditional construction.

A modular home is a factory-built residence constructed in sections, which are then transported and assembled on-site. While modular homes must meet the same building codes as traditional homes, they are built in a controlled environment, potentially reducing construction time and cost.

A mortgage is a loan used to purchase a home or refinance an existing property. The home itself serves as collateral for the loan, which the borrower repays over time with interest.

Mortgage insurance protects the lender if the borrower defaults on the loan. It’s typically required when the borrower makes a down payment of less than 20%, and it can be canceled once enough equity is built in the home.

A mortgage lender is a financial institution that offers loans for purchasing or refinancing homes.

Mortgage points, also known as discount points, are fees paid upfront at closing to reduce your mortgage’s interest rate. One point costs 1% of the loan amount and can lower your monthly payments over the life of the loan.

Net income is the amount of earnings left after taxes, deductions, and expenses have been subtracted from your gross income. This figure represents the actual amount available to cover living expenses, debt payments, and other financial obligations.

A non-owner-occupied property is one that the owner does not live in, such as a rental or investment property. Mortgages for these properties usually come with higher interest rates due to the increased risk to lenders.

An offer is a formal proposal made by a potential buyer to purchase a home from the seller.

An owner-occupied property is a home where the owner resides as their primary residence. These properties typically have lower interest rates and more favorable loan terms compared to non-owner-occupied homes.

The payoff amount is the total sum needed to pay off your mortgage in full, including the outstanding principal balance, interest, and any additional fees that may apply.

A pre-approval is a document from a lender indicating how much they may be willing to lend you for a mortgage. This step involves a detailed review of your financial information and gives you a clearer idea of your budget before shopping for a home.

A pre-qualification provides an estimate of how much you may be able to borrow based on basic financial details, like your income and debt. It’s less rigorous than preapproval, and while it gives a rough idea of your potential loan amount, it’s not a guarantee.

A primary residence is the home where you live most of the time and is typically the address you use for tax filings and official purposes. Lenders often offer more favorable mortgage terms for primary residences compared to second homes or investment properties.

The principal is the original amount of money you borrow in a loan. Each mortgage payment reduces your principal, along with paying interest.

PITI stands for principal, interest, taxes, and insurance, the four major components of your monthly mortgage payment. Lenders use PITI to assess your ability to afford the loan and determine your overall mortgage costs.

Private mortgage insurance (PMI) protects the lender if the borrower defaults on the loan. It’s generally required for conventional loans when the down payment is less than 20%. You can usually remove PMI once you’ve built up 20% equity in the home.

Property taxes are assessed by your local government and based on the value of your home. These taxes help fund local services like schools, roads, and emergency services and are typically paid through your escrow account as part of your monthly mortgage payment.

A purchase agreement is a legally binding contract between the buyer and seller that outlines the terms and conditions of the home sale, including the purchase price, contingencies, and closing date.

Purchasing power is an individual or household's financial capacity or ability to afford a home. It's determined by factors such as income, savings, creditworthiness, and prevailing mortgage interest rates.

A rate lock is an agreement between you and your lender to secure a specific interest rate for your mortgage. This protects you from fluctuations in interest rates while you complete the loan process, ensuring you get the agreed-upon rate.

A real estate agent is a licensed professional who helps guide you through the home buying or selling process. Buyer’s agents help homebuyers find properties and negotiate offers, while listing agents assist sellers with marketing and selling their homes.

A REALTOR is a licensed real estate professional who is a member of the National Association of REALTORS (NAR). They adhere to a strict Code of Ethics and standards of practice, representing buyers, sellers, or both in real estate transactions. While all REALTORS are real estate agents, not all real estate agents are REALTORS.

Refinancing involves replacing your existing mortgage with a new one, often to take advantage of lower interest rates or change the loan term. Refinancing can reduce your monthly payments, shorten your loan term, or allow you to tap into your home’s equity.

A second mortgage is an additional loan taken out on a property that already has a primary mortgage. This loan is subordinate to the first mortgage.

Self-employed individuals earn income by operating their own business or working as independent contractors rather than as employees of a company. When applying for a mortgage, self-employed borrowers need to provide detailed financial documentation to verify their income.

Seller concessions, also known as seller contributions or seller credits, is an agreement negotiated between a buyer and a seller in a real estate transaction. It involves the seller agreeing to contribute financially towards the buyer's closing costs or other expenses related to the purchase of the property.

A settlement statement (also known as the Closing Disclosure) is a document provided at closing that details all the financial aspects of your home purchase, including loan terms, fees, and the total amount due.

A single-family home is a standalone, detached property designed for occupancy by one household. It typically includes a private yard and does not share any walls with neighboring properties, offering privacy and ownership of the land it sits on.

Taxable income is the portion of an individual’s income that is subject to taxation by the government.

The title is the legal documentation that establishes the ownership of a property. When you purchase a home, the title is transferred to you, and your name is recorded as the owner in the public records.

Title insurance protects both the lender and the buyer from potential legal disputes or claims against the property’s title, such as unpaid taxes, liens, or ownership conflicts. There are two types of title insurance: lender’s title insurance and owner’s title insurance.

A townhome is a multi-story residence that shares walls with adjacent homes but has its own entrance. Unlike a condominium, townhome owners typically own both the interior and exterior of their unit, including the land directly underneath it.

Underwriting is the process by which a lender assesses the risk of granting you a mortgage. The underwriter reviews your financial information, credit history, and the property’s appraisal to determine whether to approve your loan and under what terms.

A VA loan is a mortgage program backed by the U.S. Department of Veterans Affairs. It’s available to eligible veterans, active-duty service members, and some surviving spouses; offering benefits such as no down payment, lower interest rates, and no private mortgage insurance (PMI) requirement.

A variable-rate mortgage (VRM), also known as an adjustable-rate mortgage (ARM), has an interest rate that fluctuates over time based on market conditions. It usually starts with a lower fixed rate for a set period, then adjusts periodically after that.

A walk-through is the final inspection of the home by the buyer before closing. During the walk-through, the buyer ensures that the property is in the agreed-upon condition and that any negotiated repairs or changes have been made.