The homebuying industry is full of acronyms and terms you may not have heard before. It can be hard to keep up, so here are key mortgage and home buying terms you’re likely to hear at each stage of the homebuying journey.
Stage 1: Prepare your finances
Down payment: The amount of cash you can put toward the purchase price of a home. Down payments often range from 3 to 20 percent of the home price.
Annual income: Money you receive over the course of a year, whether it’s from wages or salary, alimony or child support, rental payments, commissions, investments or other sources.
LTV (Loan-to-Value) ratio: The LTV ratio is used to determine the risk factor for a lender taking on a loan. The LTV ratio measures the loan amount compared to the market value of the asset.
DTI (Debt-to-Income) ratio: The debt-to-income ratio compares your monthly gross income to your monthly debt payments.
Stage 2: Get a loan that’s right for you
Pre-approval: A pre-approval is a preliminary evaluation of a potential borrower by a lender to determine whether they can be given a pre-qualification offer.
Prequalification: When a lender estimates in advance how much you can borrow to buy a home, based on financial and other information (such as employment history) that you provide.
PITI (Principal, Interest, Taxes, and Insurance): This acronym represents the sum components that equal your monthly mortgage payment.
PMI (Personal Mortgage Insurance): Typically a lender will require you to buy PMI if you put down less than the traditional 20% down payment.
LE (Loan Estimate): A loan estimate is a 3-page document provided at the beginning of the home loan process that tells you important details about a mortgage loan you have requested.
Stage 3: The mortgage process
Appraisal: An informed estimate of a home’s value, generally done by an independent, professional licensed appraiser and typically required and ordered by the lender in conjunction with the mortgage application.
Closing costs: Also known as settlement costs, these are the costs incurred when getting a mortgage. They might include attorney fees, preparation and title search fees, discount points, appraisal fees, title insurance and credit report charges.
Escrow: Funds deposited with a third party and held until a specific date is reached and/or a specific condition is met. For example, when you make an offer on a home, your earnest money deposit may be held in an escrow account until closing.
Mortgage points (or discount points): An amount paid to the lender, typically at closing, to lower (or buy down) the interest rate if the buyer chooses to do so. One discount point equals one percentage point of the loan amount. For example, 2 points on a $100,000 mortgage cost $2,000.
Origination fee: A fee from the lender that covers expenses of processing a mortgage loan. It is usually a percentage of the amount loaned—often 1 percent. It can be expressed in the form of points or a flat fee.
Title insurance: Insurance that protects against issues, such as a tax lien or other legal claim, that would affect ownership of the property.
Underwriting: The lender reviews submitted documents to verify the borrower’s finances and other factors related to the home, such as the title search and appraisal, then decides to approve or deny the loan.
Stage 4: Mortgage closing
Closing: The last step of homebuying, also called the settlement. You sign all the necessary documents to finalize the sale and take responsibility for the mortgage loan.
Closing Disclosure (CD): A document that provides key information about your loan, such as the interest rate, monthly payments and closing costs.
Deed: A document that legally transfers ownership of real estate.
Other terms to know:
APR (Annual Percentage Rate): The APR is simply the interest rate you pay on a loan annually. Basically, it is the cost of borrowing the money from a financial institution.
ARM (Adjustable Rate Mortgage): An ARM is a mortgage with an interest that can increase or decrease depending on various factors. Adjustable-rate mortgages often begin with low interest rates, but the rate does increase or decrease based on the current market rate.
FICO (Fair Isaac Corporation): FICO is the first company to offer a credit risk model represented by a score. The credit score model FICO is still the primary method to determine your creditworthiness.
FHA (Federal Housing Administration): FHA is a government agency that sets standards for construction and underwriting. The FHA insures loans made by private lenders and banks for home building.