What do all these mortgage terms and acronyms mean?

Cherrie & Zach
Published on January 25, 2014

What do all these mortgage terms and acronyms mean?


Understanding Mortgage Acronyms and Terms

Getting a loan can be intimidating. Especially when you have no idea what lenders are talking about. There’s all this jargon you must understand to know what you’re signing up for, and that can be frustrating! Interest, back-end, front end, points, PMI, APR, DTI, WTH??? Here we’ve taken all the terms that get some people’s heads spinning, and put them in to words we can understand. You’re welcome ūüôā


1.¬†Pre-approval~ this is the very first step you should take if you’ve made the decision to buy a home. This is where a lender will take all your financial information, actually validate that it’s all true by running credit reports and checking banking history, and decide what kind of mortgage you are qualified to pay. It will let you know what amount you are “pre-approved” up to. You definitely need one of these when making an offer on a home. It’s just a reassurance to everyone in the transaction that you’ll be able to purchase the home. A seller will be more inclined to accept an offer from someone with a pre-approval letter. Especially here in Santa Clarita, most listing agents will not even consider an offer without a pre-approval, and really one from a know,trusted, local lender.
2.¬†Pre-qualification~ no, it is NOT the same thing as a pre-approval. A pre-qualification is a written letter by lender that qualifies a buyer based on the buyer’s word. It’s not as valid as a pre-approval because no credit has been run, bank statements weren’t checked, and nothing has been sent to underwriting. A lender will issue a pre-qual while working on a pre-approval, however it is not verified.
3. ¬†APR~ or Annual Percentage Rate, is the cost of the loan, or interest rate, expressed in an annual percentage. This includes fees and charges. It is used to compare loans from different lenders. It’s basically what each lender is charging you for the money you’re borrowing.
4. Fixed Rate Mortgage~ This is a loan where the interest rate stays the same the entire life of the loan. The principal and interest do not change; meaning your payment does not change.
5.¬†Adjustable Rate Mortgage~ aka ARM, it’s a loan with an interest rate that fluctuates annually, based on indexes. These indexes allow the rates that are being adjusted to reflect current market trends. Your payment may go up or down each year.
6. Conventional Mortgage~ You may have heard of Fannie Mae and Freddie Mac. Conventional mortgages are loans that are packaged and bought buy Fannie and Freddie, and therefore must fall under certain guidelines and criteria required by FNMA and FMCC (Fannie and Freddie).
7. FHA Mortgage~ Federal Housing Administration Mortgage has easier qualifying guidelines, allowing buyers to borrow with lower income, lower credit scores and lower down payments.
8.¬†VA Mortgage~ This is a mortgage offered to Veterans, backed by the US Department of Veteran’s Affairs. Only qualified lenders can issue these loans, and they offer 100% financing. Not too shabby!
9. DTI~ Your debt-to-income ratio is the amount of your monthly costs divided by your gross monthly income. There are 2 types of DTI, front-end and back-end. Front-end refers only to the cost of housing, (either rent or mortgage). Back-end refers to housing costs plus any other monthly payments you have. (credit cards, etc). Certain types of loans require a certain DTI.
10.¬†Points~ aka “discount points”. This is a way you can pay to get your interest rate lower. 1 point is equal to 1% of the principal (original amount borrowed). So you can buy points up front, and each point you buy lowers the interest rate. Each lender will have different deals with their points, so that’s kind of how they compete for your business. Let’s say you borrowed $100,000. If you pay for a point at closing, that’s $1,000 (1% of 1,000) added to your closing costs. But it brings down your interest rate, so it pays off.
11.¬†PMI~ Private Mortgage Insurance. This insurance protects your lender. It does not protect you in any way. If you are putting less than 20% down, most lenders will require you to pay PMI, on top of the mortgage payment. All FHA loans require it as well. So if you can’t put 20% down, you might have to swallow the PMI bullet, because it could be your only option at getting a loan.
With all these letters flying around your brain, it can get confusing and overwhelming when trying to decide which lender and which loan program to choose. We hope this helps someone on their journey to becoming a homeowner!
If you have any questions please fill out form below:
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