Terms To Know When Applying For A Mortgage Loan
Going through the mortgage process, especially for the first time, can be a stressful endeavor. These feelings may come from not being familiar with the terms used within the industry. A bit of knowledge going into the process can help to ensure a favorable experience and can improve the communication between the borrower and the lender. Here is a list of terms that might help to provide some insight into mortgage loans:
Term – The length of the repayment window for the loan. It is typically measured in years.
Rate – The interest rate which will be charged on the loan amount.
30 Year Fixed – This is a type of mortgage in which the interest rate remains fixed for the entire life of the loan (30 years). The borrower will have 30 years to pay off the principal and interest of the loan. A borrower will select this type of loan in order to keep their monthly payment low while ensuring that the rate will not move.
15 Year Fixed – This is a type of mortgage in which the interest rate remains fixed for the entire life of the loan (15 years). The borrower will have 15 years to pay off the principle and interest of the loan. A borrower will select this type of loan to keep the total amount of interest paid lower, but will result in a higher monthly payment.
Adjustable Rate (ARM) – With this type pf mortgage, the rate is fixed for a set period of time and will adjust based on the index rate at that time. Interest rates during the beginning are typically low, resulting in a lower payment but can increase once the rate is set. The rate thereafter can adjust at set intervals.
Private Mortgage Insurance (PMI) – When the amount of the loan is over 80% of the appraised property value, lenders require the buyer to carry Private Mortgage Insurance. This insurance must be carried until the amount of the loan is under 80% of the value. The insurance protects the lender from default on the loan.
Down Payment – The percentage of the purchase price the borrower will be paying at the time of closing. Some loan programs require a minimum down payment to qualify for the loan
Escrow – At the time of closing, the borrower is typically required to set aside an amount of money for annual taxes and property insurance. The lender will hold the money, in a non-interest bearing account, on behalf of the borrower and pay the taxes. The lender will make the payment when it is due. If there is an overage in the escrow account at the end of the year, the borrower will receive a refund of those funds from their lender.
Homeowners Insurance – Prior to the close of the loan, the borrow will have to acquire property insurance to protect the home against loss due to a fire or other calamity. This will need to be in place in order for the loan process to be complete.
Appraisal – The process of assigning an estimated value of the property based on the review of a certified professional. The professional will assign the value based on an on-site inspection, as well as market analysis of comparable properties that have been sold in a recent timespan. This is typically a requirement for the lender.
Closing Costs – Rather than the borrower making individual payments for each line item at the time of service, the lender will typically receive payment for these services as the time of closing. Closing costs are fees and expenses associated with closing a mortgage loan. The term closing costs actually covers two separate categories: Closing Costs and prepaid Items. Closing costs would include such fees as: lender fees, appraisal, closing attorney fees. Prepaid items would include such fees as: first years homeowner’s insurance, daily interest and escrows.
Title Insurance – The lender is using the property as secured collateral to make the loan. In order to do this, the lender must make sure there are no liens or judgments on the property. The lender will require the borrower to have title insurance on the property. This ensures the home will always be free from any liens.
Conventional – A conventional loan is a mortgage that is not guaranteed or insured by any government agency and is typically fixed in its terms and rate. The minimum down payment for a conventional loan ranges from 3% to 5%.
FHA – 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. The FHA loan requires a minimum 3.5% down payment.
USDA – A USDA Home Loan from the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, is a mortgage loan offered to borrowers purchasing in an eligible MSA that meet the income eligibility limits for household income. The USDA loan offers 100% financing to eligible borrowers.
VA – A VA loan is a mortgage loan guaranteed by the Department of Veterans Affairs (VA). The VA loan was designed to offer long-term financing to eligible American Veterans or their surviving spouses (provided they do not remarry). The VA loan offers 100% financing to eligible Veterans.
Mortgage Insurance Premium (MIP) – This is an insurance premium paid by homeowner on an FHA loan and is used to protect the lender from losses in case of default on the loan. This insurance can possibly be deducted in the same manner as home mortgage interest on tax return filing.
Funding Fee – The Department of Veteran’s Affairs (VA) and US Department of Agriculture both charge a Funding Fee in connection with the mortgage loan. For VA, only veterans receiving VA disability are exempt from paying this fee. The funding fee is a percentage of the principal loan amount and is normally financed into the loan. The FHA loan also has what’s referred to as UFMIP, or “Upfront Mortgage Insurance Premium” which is also financed into the mortgage loan.
Discount Points – Discount points are a type of prepaid interest or fee that borrowers can pay to lower the interest rate on their mortgage loan. Discount points could be tax deductible only for the year in which they were paid.
Processing – This is the entire sequence of steps, from the time a loan application is completed by the loan officer to the time loan is closed.
Underwriting – This is the process that we undertake to analyze all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets the minimum loan criteria. As part of that process all data is verified, analyzed and summarized to generate a loan approval or counter offer for each applicant.
Closing – Date on which the mortgage deed and loan documents are signed and delivered, and the proceeds of the loan are paid to seller and/or lender. This is also the date on which the title to a property is conveyed to its buyer and the sales proceed funds are transferred to its seller.
Clear to Close – The lender has completed all their work, are satisfied with all documentation provided and the loan is clear to proceed to closing.
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