Those of us that live and die by residential real estate everyday have a tendency to get lost in acronyms and industry specific terms. We often forget everyone doesn’t know that when we say ARM, we aren’t talking about a body part. Below is a list of terms and definitions that you are likely to hear thrown around during your quest to buy a home.
Adjustable rate mortgage (ARM): Mortgage loans under which the interest rate is periodically adjusted as agreed to at the inception of the loan.
Amortization: The systematic and continuous payment of an obligation through installments until the debt has been paid in full.
Annual percentage rate (APR): The total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on loan fees and costs. As a result the APR is invariably higher for the rate of interest that the lender quotes for the mortgage but gives a more accurate picture of the likely cost of the loan. Keep in mind, however, that most mortgages are not held for their full 15 or 30 year terms, so the effective annual percentage rate is higher than the quoted APR because the points and loan fees are spread out over fewer years.
Bridge loan: An equity loan secured to solve a short-term financing gap.
Conforming loan: A loan for up to and including $417,000 in the continental United States (Alaska and Hawaii limits are higher).
Debt-to-income ratio (DTI): The ratio of aggregate monthly debt to aggregate monthly income.
Fixed rate mortgage (FRM): A mortgage where the interest rate does not change for the life of the loan.
Gift letter: A letter or affidavit that indicates that part of a borrower’s down payment is supplied by relatives or friends in the form of a gift and that the gift does not have to be repaid.
Joint tenancy: A form of ownership or taking title to property in which each party owns the whole property and ownership is not separate. In the event of the death of one party, the survivor owns the property in its entirety.
Jumbo loan: A loan for $417,000 or more in the continental United States. These limits are set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Loan servicing: The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.
Loan-to-value (LTV) ratio: The relationship between the dollar amount of a borrower’s mortgage loan and the value of the property.
Negative amortization: Occurs when a borrower makes a minimum payment that may not cover the interest that is due. Loan balance then increases as a result.
Non-conforming: A mortgage amount that exceeds that which is eligible for purchase by FNMA or FHLMC. All loans above this amount are considered to be non-conforming or jumbo loans.
Origination process: Process in which a lender solicits business, gathers required information and commits to loan money, for the purchase of real estate.
Private mortgage insurance (PMI): Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the loan-to-value ratio is greater than 80%.
Pre-approval: A term used to mean that a borrower has completed a loan application and provided debt, income, and savings information that has been reviewed and pre-approved by an underwriter.
Pre-qualification: After a loan officer has made inquiries about a borrower’s debt, income, and savings, he or she can write a written statement about the borrower’s chances for qualifying for a home loan.
Qualifying ratios: Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The “top” or “front” ratio is a calculation of the borrower’s monthly housing costs (principal, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “back” or “bottom” ratio includes housing costs as well as all other monthly debt.
Quitclaim deed: A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
Rate lock: A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.
Tenancy in common: As opposed to joint tenancy, when there are two or more individuals on title to a piece of property, this type of ownership does not pass ownership to the others in the event of death.
Transfer tax: State or local tax payable when the title passes from one owner to another.
Truth-in-lending: A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s ability and willingness to repay the debt and the value of the property.
