Essential terms every loan officer and homebuyer should know
A mortgage loan with an interest rate that changes periodically based on market conditions. ARMs typically start with a lower initial rate than fixed-...
The process of paying off a loan through regular payments over time. Each payment covers both principal and interest, with early payments going mostly...
The total cost of borrowing expressed as a yearly rate, including the interest rate plus fees and other charges. APR is typically higher than the inte...
A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the property is worth a...
A unit of measurement equal to 1/100th of a percentage point (0.01%). Used to express changes in interest rates or fees. For example, if a rate increa...
The final step in the mortgage process where ownership of the property transfers from seller to buyer. At closing, all documents are signed, funds are...
Fees and expenses paid at closing, typically ranging from 2-5% of the loan amount. Includes origination fees, appraisal, title insurance, attorney fee...
A five-page document provided at least three business days before closing that details the final loan terms, monthly payments, fees, and closing costs...
Property or assets pledged as security for a loan. In a mortgage, the home itself serves as collateral. If the borrower defaults, the lender can forec...
Recent sales of similar properties in the same area used to determine a property's market value. Appraisers typically use 3-6 comps that have sold wit...
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits. In 2024, the conforming loan limit is $766,550 for most...
A mortgage not insured or guaranteed by a government agency (FHA, VA, USDA). Conventional loans can be conforming or non-conforming and typically requ...
A three-digit number (typically 300-850) that represents creditworthiness based on credit history. Mortgage lenders use FICO scores from all three bur...
The percentage of monthly gross income that goes toward debt payments. Front-end DTI includes only housing costs; back-end DTI includes all debts. Mos...
Failure to meet the legal obligations of a mortgage, typically by missing payments. Default can lead to foreclosure. Most loans are considered in defa...
Upfront fees paid to the lender at closing to reduce the interest rate. One point equals 1% of the loan amount. Paying points makes sense if you plan ...
The portion of the purchase price paid upfront by the buyer, not financed by the mortgage. Conventional loans typically require 3-20% down; FHA requir...
A deposit made by the buyer when submitting an offer, showing serious intent to purchase. Typically 1-3% of the purchase price, held in escrow until c...
The difference between a property's market value and the outstanding mortgage balance. Equity increases as you pay down the loan and as the property a...
A neutral third party that holds funds or documents during a transaction. Also refers to the escrow account where lenders hold monthly payments for pr...
The Federal National Mortgage Association, a government-sponsored enterprise that buys mortgages from lenders and sells them as mortgage-backed securi...
A mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores or smaller down payments. FHA loans require ...
A mortgage with an interest rate that remains constant for the entire loan term. The most common terms are 15 and 30 years. Fixed-rate mortgages provi...
A temporary reduction or suspension of mortgage payments granted by the lender due to financial hardship. Unlike forgiveness, the missed payments must...
The legal process by which a lender takes possession of a property when the borrower fails to make payments. Foreclosure timelines and processes vary ...
The Federal Home Loan Mortgage Corporation, a government-sponsored enterprise similar to Fannie Mae. Freddie Mac buys mortgages from lenders, packages...
Money given to a homebuyer by a family member or other approved source to help with down payment or closing costs. Lenders require a gift letter stati...
A document that was replaced by the Loan Estimate in 2015. The GFE provided an estimate of settlement charges the borrower would likely pay. Now, the ...
Total income before taxes and deductions. Lenders use gross monthly income to calculate debt-to-income ratios. For self-employed borrowers, gross inco...
A second mortgage that allows homeowners to borrow against their equity in a lump sum with a fixed interest rate. Different from a HELOC, which provid...
A revolving line of credit secured by home equity, allowing borrowers to draw funds as needed during a draw period (typically 10 years), then repay du...
A thorough examination of a property's condition by a licensed inspector, covering structure, systems, and components. Unlike an appraisal, an inspect...
Insurance that protects against damage to the home and personal property, plus liability coverage. Lenders require coverage at least equal to the loan...
The cost of borrowing money, expressed as a percentage of the loan balance. Interest is calculated on the outstanding principal and is paid monthly as...
The percentage charged by the lender for borrowing money, expressed as an annual rate. The interest rate determines how much interest you pay over the...
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans typically have stricter requirements including highe...
A legal claim against a property that must be satisfied when the property is sold. The mortgage itself is a lien, and properties can have multiple lie...
A standardized three-page form that lenders must provide within three business days of receiving a loan application. It includes estimated interest ra...
A permanent change to the original mortgage terms, such as interest rate, loan term, or principal balance, to make payments more affordable. Modificat...
The length of time to repay a mortgage in full. Common terms are 15 and 30 years. Shorter terms have higher monthly payments but lower total interest ...
The ratio of the mortgage amount to the property's appraised value, expressed as a percentage. An $320,000 loan on a $400,000 home is 80% LTV. Lower L...
Insurance required on FHA loans that protects the lender if the borrower defaults. FHA MIP includes an upfront premium (1.75% of loan amount) and annu...
The monthly payment made to the lender, typically consisting of principal, interest, taxes, and insurance (PITI). The payment amount is determined by ...
A fee charged by the lender for processing a new loan application, typically 0.5-1% of the loan amount. The origination fee covers administrative cost...
An acronym for Principal, Interest, Taxes, and Insurance - the four components of a typical monthly mortgage payment. PITI is used to calculate housin...
A lender's conditional commitment to lend a specific amount based on verified financial information. Stronger than prequalification, preapproval invol...
An initial assessment of how much you might be able to borrow based on self-reported financial information. Less rigorous than preapproval and doesn't...
The original loan amount borrowed, excluding interest. Each mortgage payment includes a portion that goes toward reducing the principal balance. As th...
Insurance required by lenders on conventional loans when the down payment is less than 20%. PMI protects the lender if you default. Costs 0.5-1.5% of ...
An agreement with the lender to hold a specific interest rate for a set period (typically 30-60 days) while the loan is processed. Rate locks protect ...
Replacing an existing mortgage with a new one, typically to get a lower interest rate, change the loan term, or access equity. Rate-and-term refinance...
A loan taken out using your home as collateral when you already have a mortgage. Also called a subordinate or junior lien. Includes home equity loans ...
Insurance that protects against losses from defects in the title, such as unknown liens, forgery, or errors in public records. Lender's title insuranc...
The process of evaluating a loan application to determine if it meets lending guidelines. Underwriters assess credit, income, assets, and property val...
A mortgage guaranteed by the U.S. Department of Agriculture for rural and suburban homebuyers who meet income limits. USDA loans require no down payme...
A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. VA loans offer ...
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