Mortgage terminology may seem overwhelming to someone just joining the industry. No matter what your role is in the mortgage industry, staying educated on mortgage terminology will help you be more well versed and aware of what’s going on in your industry.
We’re here to help. We have put together some commonly used terms for you to reference when you need it. To learn more in-depth information about each term or acronym, click on the term name. If none of these terms are new to you, feel free to share this with someone who has recently joined the industry and pass on the knowledge.
An annual percentage rate (APR) is the annual rate charged for borrowing, expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. The APR takes into account things like prepaid interest, private mortgage insurance or closing fees.
Escrow is a legal concept in which an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction.
Example: If a home sale is dependent on something like an inspection, using an escrow may be something the buyer and seller may agree to do. If this were the case, the buyer would deposit the money for the house in an escrow account (third party account). This ensures to the seller that the buyer is able to make the payment. Once the inspection is complete and conditions are all agreed upon, the escrow will be responsible for transferring the payment to the seller and the title to the buyer.
An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. These loans are popular with first-time homebuyers.
A FICO Score is a type of credit score, created by the Fair Isaac Corporation. Lenders use borrowers' FICO scores along with other details on borrowers' credit reports to assess credit risk and determine whether to extend credit.
A fixed-rate mortgage is a mortgage that has a fixed interest rate for the entire term of the loan. Homeowners with fixed-rate mortgages will not have to deal with varying loan payment amounts that fluctuate with interest rate movements.
Home Equity Conversion Mortgages allow seniors to convert the equity in their home to cash. The amount that may be borrowed is based on the appraised value of the home (subject to FHA limits), and the age of the borrower (borrowers must be at least 62 years old). Money is advanced against the value of the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the mortgage must be repaid entirely.
A home equity line of credit is a kind of revolving credit that allows the borrower to borrow money as needed, with their home as collateral. Lenders approve applicants for a specific amount of credit based on taking a percentage of the home’s appraised value and subtracting the balance owed on the existing mortgage.
A mortgage refinancing program offered by the U.S. Department of Veterans Affairs (VA) to homeowners with VA loans. It is designed to allow homeowners to refinance a fixed loan at a lower interest rate or to convert an adjustable rate mortgage (ARM) into a fixed rate mortgage.
The LTV ratio is a lending risk assessment that lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as a higher risk and, therefore, if the mortgage is approved, the loan generally costs the borrower more to borrow.
PMI is a special type of insurance policy to protect a lender against loss if a borrower defaults. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home's purchase price.
Principal is the money used to pay the balance of the loan; interest is the charge paid to the lender for allowing them to borrow the money; taxes refers to the property taxes paid as a homeowner; and insurance refers to both property insurance and private mortgage insurance.
A right of rescission is a right under American federal law established by the Truth In Lending Act (TILA) that gives a borrower the right to cancel a home equity loan or line of credit with a new lender, or to cancel a refinance transaction done with another lender, within three days of closing.
Underwriters research and assess the risk each applicant brings to a mortgage. This helps to create the market for securities by accurately pricing risk and setting fair premium rates that adequately cover the true cost of working with borrowers. If a specific applicant's risk is deemed to be too high, underwriters may recommend not covering it.
The more educated you are when it comes to mortgage terminology, the more comfortable and confident you will be in this industry. For more industry training resources, check out the Education tab on our website.