Helpful Loan Terminology

Adjustable Rate Mortgage (ARM) – a mortgage that permits the lender to periodically adjust the interest rate on the basis of changes in a specified index

Annual Percentage Rate (APR) – a percentage rate that reflects the amount of interest earned or charged

Appraised Value – the dollar value assigned to a single-family residence by an appraiser approved by the Office of Loan Programs

Balloon Payment – an installment payment on a promissory note – usually the final one for discharging the debt – which is significantly larger than the other installment payments provided under the terms of the promissory note

Closing – also called settlement – a meeting between the buyer, seller and lender and/or their agents during which the property and funds legally transfer

Closing Costs – expenses that fall above the price of the property which are incurred by buyers and sellers in the process of transferring ownership of a property. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. Closing costs will vary according to the area of the country.

Debt-To-Income Ratio (DTI) – the relationship between a borrower’s total monthly debt payments (including proposed housing expenses) and his or her gross monthly income. This calculation is used in determining the mortgage amount for which a borrower qualifies. Each loan has a Different DTI ratio.

Down Payment – the difference between the purchase price of real estate and the loan amount. The borrower is responsible for providing the funds for the down payment.

Earnest Money – money paid by a buyer to a seller to cement a transaction or ensure payment. The amount becomes a part of the down payment if the offer is accepted. The money is returned to the borrower if the offer is rejected. If the borrower cancels the transaction, the entire amount may be forfeited.

Equity – the difference between the fair market value of a property and the current indebtedness secured on the property

Escrow – a situation in which a third party, acting as the agent for the buyer and the seller, carries out the instructions of both and assumes the responsibilities of handling all the paperwork and disbursement of funds at settlement or at closing. After purchase of a home, the lender will hold monthly deposits made for taxes and insurance in escrow in order to make the annual payment.

Fixed Rate Mortgage – a mortgage interest rate that will remain the same throughout the term of the loan

Foreclosure – also known as a repossession of property – the process that occurs when the lender or the seller legally forces a sale of a property because the borrower has not met the terms of the mortgage

Lien – a financial claim against property. Property is said to be encumbered by a lien and the lien must be removed to clear title.

Loan Origination Fee – a fee that pays the administrative costs of processing the loan. It is usually expressed in points with one point being 1 percent of the mortgage amount.

Loan to Value (LTV) Ratio – the ratio of the principal balance of a mortgage loan to the value of the securing property, as determined by the purchase price or Appraised Value, whichever is less

Mortgage – a voluntary lien filed against a property to secure a debt, usually a loan

Mortgage Insurance (MI) Or (PMI) – insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan

PITI – an acronym for the four primary components of a monthly mortgage payment: principal, interest, taxes, and insurance (PITI)

Pre-Payment Penalty – a fee that a borrower may be required to pay to the lender, for pre-paying the loan in full or pre-paying a substantial amount to reduce the unpaid principle balance

Pre-approval – a Certificate of Pre-Approval issued by the Office of Loan Programs that states a borrower’s credit, assets and income have been verified and the applicant qualifies for a Program loan at a specified amount and interest rate. At the time of pre-approval, the specified initial interest rate is not “locked-in” and is therefore subject to change prior to the issuance of a loan commitment letter. The initial interest rate will be the Program rate in effect at the time a loan commitment is issued.

Principal – the amount of money owed on a loan, excluding interest; the part of the monthly payment that reduces the remaining balance of a mortgage

Refinancing – the process of paying off an existing loan and establishing a new loan

Second Mortgage – a mortgage that has a lien position subordinate to the first mortgage

Title Insurance – a policy, usually issued by a Title Insurance company, which insures a homebuyer and lender against errors in the title search. The cost of the owner’s policy is usually a percentage of the sales price and the lender’s policy is a percentage of the loan amount.

Underwriting – a step in the loan process where it is decided if a loan will be provided to a potential home buyer. This decision is based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Verification of Employment (VOE) – a document signed by the borrower’s employer to verify his/her position and salary