Reaching the point of purchasing a home, especially if it is your first home, is typically a time of excitement and joy of reaching a life-long dream. But once you actually begin the process, you realize there is a lot more information involved in the process of buying a home and many terms used throughout the process that are confusing, particularly when it comes to the terminology used throughout your mortgage loan document. We are here to help by putting together an A-Z list of the most common mortgage loan document terms and their meanings, so you can go into the home buying process knowledge and confidently.
Acceleration Clause – if your mortgage loan includes an acceleration clause, then your mortgage lender is allowed to demand payment of the entire remaining principal balance on your loan if a monthly payment is missed or some other type of default occurs.
Amortization – amortization refers to the breakdown of your monthly mortgage payment between the principal amount borrowed and the interest payment. Amortization is the payment schedule over a period of time, at the beginning of your loan term most of your monthly mortgage payment will likely be applied towards interest, while towards the end of your loan term most of your monthly mortgage payment will be applied towards the principal amount borrowed on the loan.
Closing – closing is the final meeting between the buyer, the seller, the lender, and their agents at which the legal documents are signed, and the property documents and funds legally change hands.
Closing Costs – closing costs are the fees required to complete the real estate transaction including the loan origination fee, preparation and title search fees, discount points, attorney’s fees, recording fees, title insurance, appraisal, survey, taxes, and insurance escrow payments. The total cost of closing costs is typically between 3% and 6% of the total mortgage amount and can be paid by the borrower and/or the seller at closing.
Comparables (Comps) – comparables, commonly referred to as comps, are properties in the area of the property being purchased that are similar to the property being purchased in size, location, and amenities that have recently been sold. Comps help appraisers determine the fair market value of the property by looking at the amount similar properties have recently sold for in that area.
Contingency – a contingency is a specified condition made within the sales contract that must be satisfied prior to the completion of the sale of the home. The two most common contingencies are that the home must pass inspection and the buyer must be able to qualify for a loan, but there are many other contingencies that can be made to use as negotiating tools throughout the home buying/selling process.
Credit Worthiness – credit worthiness is the determination of the mortgage lender of a borrower’s likely ability and willingness to repay the loan. When determining a borrower’s credit worthiness, a number of factors may be considered including the borrower’s age, income, financial obligations, employment status, total debt owed, types of accounts, length and status of payment history, and their ability to repay debt. A borrower’s credit worthiness determines the interest rate, fees, and terms and conditions of the mortgage loan.
Debt-To-Income Ratio – the debt-to-income ratio is the calculation of the buyer’s total monthly payment obligations divided by their monthly gross income. When it comes to buying a home, a DTI ratio below 36% is ideal, although some lenders will approve a person with a DTI ratio up to 50%.
Down Payment – a down payment is the amount of money paid by the buyer up front towards the purchase price of the home and is not financed within the mortgage. Typically, a down payment must come from the buyer’s own funds, however in certain circumstances gift funds are allowed to be used towards the down payment on the home.
Earnest Money – earnest money is a term referring to a deposit that is made by the buyer, typically paid when an offer is accepted, and the purchase agreement is signed, that will be applied toward the down payment to show that the buyer is serious about purchasing the property.
Equity – equity is the difference between the fair market value of the home and the outstanding balance left on the mortgage loan. Over time the value of the home should increase, the balance of the mortgage loan should decrease, and the equity of the home should generally increase.
Escrow – an escrow account is used to deposit funds or documents with a third party to be held until a certain time or condition is met. Escrow accounts can be used to pay closing costs, property taxes, insurance premiums, and other similar expenses when they become due.
Fair Market Value – the fair market value is the price that a reasonable buyer would pay for a property and the lowest price a seller would accept. The fair market value is typically determined by an appraisal and will also often be the asking price for the home.
Loan-To-Value Ratio – the loan-to-value ratio is the calculation of the value of the home to the amount of money you borrowed to purchase the home. If your LTV ratio is greater than 80%, it is likely that you will need to purchase private mortgage insurance as well.
Mortgage Broker – a mortgage broker is a specialist that arranges financing for borrowers by shopping the loans around through multiple lenders to help the buyer find the best loan offer for them.
Mortgage Lender – the mortgage lender provides the funding for a mortgage.
Origination Fee – the loan origination fee is the fee that a mortgage lender charges for evaluating and processing the loan. The loan origination fee is typically expressed as a percentage of the loan amount, in points.
Points – a point is equal to one percent of the principal amount of your mortgage. Generally speaking, paying more points at closing will reduce a loan’s interest rate and monthly payments.
Pre-Approval – pre-approval is the process of determining how much money you will be eligible to borrow before you apply for a loan, and any specific requirements that will need to be met in order to qualify for the loan. The difference between a pre-approval and a pre-qualification is that with a pre-approval the mortgage lender is making a commitment to lend the specified amount listed as eligible as long as the necessary requirements are met.
Private Mortgage Insurance – private mortgage insurance, also known as PMI, is insurance that protects the mortgage lender in the event that you default on the loan. PMI is typically required when your down payment is less than the minimum requirement (usually 20%) or when your LTV ratio is greater than 80%. You can also sometimes use PMI as a negotiating tool when it is not required for you to carry it.
Title Search – a title search is completed by reviewing municipal records to ensure the seller is the legal owner of the property and has the legal right to sell the property and that there are not any liens or other claims being held against the property.
Underwriting – underwriting is the process the mortgage lender uses to evaluate a loan application and determine the risks involved with a particular loan and borrower and establishing suitable terms and conditions for the loan based on the risk.
Now that you understand the terms you need to be familiar with when looking for a mortgage loan, contact American Dream Home Mortgage today to speak with one of our professional mortgage brokers to help you through your mortgage finding process and help you find the mortgage loan with the best terms and conditions for you!