Are you considering buying a home in California? If you are, it’s important to familiarize yourself with key terminology commonly used within the mortgage loan industry to help understand all the ins and out’s about what the application and approval process entails, what it means to have your future home appraised, its’ market value, how you benefit from having an FHA loan, and what PITI actually stands for.
To help you take the first step onto an exciting new path, here are some basic and highly popular phrases used by all professional mortgage affiliates (A-Z):
Amortization | a schedule of payments for the course of the loan which includes regular and consistent payments of principal and interest.
Annual Percentage Rate (APR) | an interest rate’s expressed cost for a mortgage within a yearly rate. Includes a buyer’s account points and credit costs while allowing for comparison over different types of mortgages available based off of the annual cost each loan requires.
Appraisal | a valued estimate for property, performed, assessed, and stated by a professionally licensed “appraiser.”
Broker | a professionally licensed individual who assists in arranging, funding and or negotiating contracts on behalf of a borrower, but who does not loan the money himself.
Closing | also known as a Settlement, is an agreement between the buyer, seller and lender or their agents to allow the property and funds to legally change ownership.
Closing Costs | all applicable fees associated with a real estate transaction, excluding the purchase price of the home.
Commitment | a contractual agreement between a lender and approved borrower to loan money on a stated date subject to the completion and compliance for all outstanding paperwork and stated conditions.
Debt-to-Income Ratio | a percentage indicating a borrower’s monthly income used to repay debts. Ratio aids lenders in determining how large of a mortgage a borrower can afford.
Down Payment | an amount of money a borrower contributes upfront on a real estate purchase.
Escrow | a neutral third party who carries out all the instructions of both the buyer and seller to handle all the paperwork of settlement or “closing.” Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
Federal Housing Administration (FHA) Loan | a loan insured by the Federal Housing Administration open to all qualified home purchasers. FHA Loan’s primary role is to insure residential mortgage loans made by private lenders.
Gross Monthly Income | the total amount a borrower earns each month before any expenses/debt payments are deducted.
Loan-to-Value Ratio | relationship between the amount of a mortgage loan and the appraised value of the property expressed as a percentage.
Market Value | the estimated highest price a buyer would pay and the lowest price a seller would accept on a property. Market value may not reflect the price a property was actually sold for at a given time.
Mortgage Insurance | money paid to insure the mortgage when the down payment is less than 20 percent.
Mortgagee | the lender providing the financial loan for purchasing of a property.
Mortgagor | the homeowner approved by the lender and responsible for total amount stated in the loan. Also known as the Borrower.
Origination Fee | a standard fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually stated as a percentage of the face value of the loan.
PITI | an acronym for Principal, Interest, Taxes, and Insurance. Also known as the Monthly Housing Expense.
Principal | the amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI) | if a borrower is does not have a 20 percent down payment, lenders will may also allow a smaller down payment. With the smaller down payment, borrowers are often required to carry Private Mortgage Insurance (PMI), an insurer provided by a non-government affiliate that protects the lender against the loss of a borrower in default. PMI will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan’s arrangement.
Realtor | a real estate broker or an associate holding an active membership within a local real estate board affiliated with the National Board of Realtors.
Truth-in-Lending | a federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.
Underwriting | the decision process on whether to approve a loan to a potential homebuyer based on credit, employment, assets, and other factors while matching this risk to an appropriate rate and term or approved loan amount.
Verification of Deposit (VOD) | a document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE) | a document signed by the borrower’s employer verifying his/her position and salary.