Mortgage Glossary | Common Terms

Learn About Mortgage Loans

This Mortgage glossary is designed to help borrowers understand the terms used in obtaining a mortgage includes a description of loan disclosures you will receive up front. When you shop for a mortgage you probably are going to hear many unfamiliar mortgage terms. Because of all the options available, obtaining a mortgage loan can be a real adventure. And since so much is at stake, your knowledge of the mortgage definitions will help you get qualified with the best possible deal.

Take a few minutes to browse through these mortgage terms and you will feel more comfortable when you decide to apply for a mortgage. The more you know, the better equipped you will be to get the best deal for you.

Mortgage Definitions and Terms

What is an Adjustable Rate Mortgage?

Any type of mortgage that includes an adjustment in the interest rate during the term of the mortgage. Such interest rate adjustments are typically made annually, or at three years or even at five years.

What is an Annual Percentage Rate (APR) in Regards to a Mortgage?

The APR, which is included in the disclosures you will be given by the mortgage lender, reflects the total amount of all finance charges including interest, points, origination fees and mortgage insurance. This APR allows consumers to compare mortgage costs among several mortgage lenders.

Mortgage lenders must provide this information to all loan applicants. The higher the APR, the higher the cost of the mortgage to you.

What is the Application Fee in Regards to a Mortgage?

Many mortgage lenders charge an upfront fee to cover their cost for the credit report and appraisal. This fee is usually not refundable, but will be credited at closing.

What is an Appraisal in regards to a Mortgage?

A real estate appraisal is an evaluation of both the market value and the reproduction value of a house by a qualified appraiser. Mortgage lenders require appraisals in most cases, but exceptions may be made with a refinance mortgage loan.

What is a Bridge Loan in Regards to a Mortgage?

A bridge loan is a form of second mortgage that is collateralized by the borrowers present home (which is usually for sale) that allows the proceeds to be used for closing on a new house before the present home is sold. This type of loan has its place, but it means that the borrower will have additional expenses that may reduce their ability to qualify for the mortgage on the new home.

What are Building Codes?

Building codes are designed and enforced by local government agencies. They regulate the design, the construction, and the materials used to meet standardized guidelines for building integrity. For example, building codes may define the materials and structure necessary to protect a home from hurricane damage.

What are Building Permits in Regards to Residential Construction Loan?

A building permit is legal permission from the local government agency authorizing construction of a new home or modification of an existing home. Permits are applied for by the builder or owner and fees are paid to the local government for the permitting process. The process may take several weeks depending on the permit being requested.

What is a Buy Down in Regards to a Mortgage Loan?

A buy down refers to the practice of paying larger loan fees (points) up front to provide a lower interest rate during the term of a loan. Buy downs only make sense when the borrower is going to have the loan for a long time and can recoup the cost of the buy down. Even then, if interest rates drop and the borrower refinances, the buy down fee is lost.

What is a Closing in Regards to a Mortgage Loan?

The mortgage closing is a meeting with the buyer and seller at the tittle agent or escrow agent office. The purpose of the real estate closing is for the sellers to legally turn over the property to the buyers and for the buyers to sign the loan documents.

If the buyers are financing the purchase, they will sign the mortgage note and associated disclosures required by the lender.

What are Closing Costs in Regards to a Mortgage Loan?

Closing costs represent all of the costs paid at the mortgage loan closing. Typically mortgage closing costs include loan fees, appraisal fees, credit report fees, title insurance, survey, documentary stamps, recording fees, and other mortgage lender costs assessed at closing. In addition to these fees, the borrower will have to provide a paid homeowners insurance policy.

Prepaid tax and insurance escrows and prepaid interest are also included. Closing costs can be surprisingly expensive in addition to the down payment required so be sure you understand all the costs involved as detailed in your closing disclosure.

What is a Closing Disclosure in Regards to a Mortgage Loan?

You will receive an estimate of closing costs called a Closing Disclosure from the lender three days prior to closing. Be sure to read this document carefully and ask any questions before closing. It is too late to start asking question at the closing table since it may delay the closing and violate the  terms of the purchase contract.

What is a Commitment Letter in Regards to a Mortgage Loan?

A commitment letter is a form letter issued by a mortgage lender stating the terms under which it agrees to loan money to a homebuyer. The letter will include the interest rate, loan amount, and loan term and is subject to the borrower meeting the terms of the commitment.

What is a Community Homebuyers' Program in Regards to a Mortgage?

A community homebuyer's programs is a low down payment loan designed for first time homebuyers. Applicants must complete a course in the responsibilities of home ownership. Like the FHA loans, applicants do not have to be as financially strong as with conventional loans. These type of loans are typically administered by local governments, but have become increasingly rare.

What is a Construction Loan in Regards to a Mortgage?

A construction loan is a type of mortgage loan designed to provide funds for building a new house. The construction loan is a short term, interest only loan, that is disbursed during the course of construction. At the end of construction and after the final disbursement, the loan may be converted to a permanent mortgage.

What is a Construction/Perm Mortgage Loan?

A construction/perm loan is a form of construction loan made to a borrower for the construction of new house. The loan may be converted to a permanent mortgage at the completion of construction.

What is a Credit Report?

A credit report illustrates a borrower's history of meeting financial obligations on a timely basis. Virtually all lenders require a credit report before making a loan for any purpose. You are entitled to receive a free copy of your credit report annually so that you may look for mistakes. Free credit report from Exerian.

When applying for a mortgage loan the cost of the initial credit report ordered by the mortgage lender will be added to your closing costs. Some lenders require an upfront fee to cover the cost of the credit report and show it as paid on the closing documents.

What is a Credit Score?

A numerical rating developed and maintained by Fair Isaac and Company that indicates a consumers creditworthiness. Learn more about your own credit score here. Credit scores may range from 300 to 850 and most lenders will require a minimum score above 600 to qualify for a mortgage. More about credit scores.

What is a Debt Ratio in Regards to a Mortgage Loan?

A debt ratio is a borrower's total monthly debt payments divided by their monthly income. It is sometimes called a "back end ratio" in mortgage slang. This ratio is used by the underwriter to determine if the borrower can afford the new mortgage payment. A general rule is that your mortgage payment should not exceed 28% of gross income and your total debt payments should not exceed 36% of gross income.

Down Payment in Regards to a Mortgage Loan?

The down payment is the portion of the home purchase price that the borrower pays upfront. The remainder of the cost of the home is financed with a mortgage. Mortgages are now available with as little as 3% down with an FHA loan and no down payment with a VA Loan.

What is Escrow in Regards to a Mortgage?

A tax and insurance escrow account is money held by a mortgage lender to assure timely payments of insurance and taxes for the borrowers. Typically, part of each mortgage payment goes into an escrow fund that the mortgage lender uses to pay the borrower's tax and insurance bills when they come due.

In some states, escrows of taxes and insurance premiums are called impounds or reserves. An escrow account will be set up at loan closing.

Since escrow accounts consist of funds to pay homeowner insurance, flood insurance if required, mortgage insurance if required, and property taxes, the escrow payment is your loan will be adjusted to reflect increases in these costs. Thus, if you homeowner's insurance is increased by $360, you can expect your monthly escrow payment portion of your mortgage payment to increase by $30 a month.

What is an FHA Mortgage?

These are government insured mortgage loans designed for homebuyers with little money for a down payment. Anyone may apply for a FHA loan and the underwriting criteria are more lenient than they are for conventional loans.

What is a Fixed Rate Mortgage?

A fixed rate mortgage is a mortgage loan where the interest rate is fixed for the term of the loan. The term may be 10, 15, 20, or 30 years. Fixed rate mortgages are the most typical mortgage, although some borrower will still select an adjustable rate mortgage due to lower rates..

What is Flood Insurance in Regards to a Mortage?

All homes that are identified as being in a flood zone are required to have flood insurance. Flood zones have been determined by the US Government and published on maps for this purpose. Mortgage lenders use a " Flood Certification " to determine if the house you are purchasing is in a flood zone.

The charge for this certification is passed onto the borrower and ranges from $15 to $25. The cost of the actual flood insurance is paid by the borrower in addition to normal homeowners insurance.

Flood insurance premiums will add several hundred dollars to your annual cost of owning a home, and if required by the lender will be added to you monthly payment. Flood insurance is in addition to the cost of homeowners insurance.