Mortgage and Lending Terms

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 29, 2022

Mortgage and lending terminology can be quite confusing. There are jargons, technical words, and phrases lenders and borrowers use in the real estate market.

To better equip you with the knowledge you need to navigate the home-buying process and understand the language of mortgages, loans, and other related financial concepts, 50 commonly used terms and their definitions are provided herein.

Familiarizing these terms can help you understand the nuances of mortgages so that you can make informed decisions about your financing needs.

Mortgage and Lending Terms

Read up on these 50 mortgage lending terminology before acquiring a loan to move through the process smoothly and confidently.

5/1 Adjustable Rate Mortgage (ARM)

ARM is a type of mortgage with an initial fixed-rate period of five years, followed by annual adjustments based on an index plus a margin. It is often used to purchase or refinance a home. Other common fixed periods are 3, 7, and 10 years, while 1 signifies the rate adjustment period.

Ability-to-Pay Rule (APR)

APR requires mortgage lenders to ensure borrowers can repay their loans before granting them. It protects borrowers from taking on unsustainable debt. It considers income, credit history, employment, and other factors when evaluating the ability to pay.

Adjustable Rate Mortgage (ARM)

An ARM is a loan with an interest rate that may change periodically. It is structured with fixed period rates followed by a variable period where rates can adjust up or down depending on market conditions.

Amortization

It is the process of repaying debt in equal amounts over time. A portion of each payment is applied to the loan principal and the interest. As the debt amortizes, the amount paid toward the principal begins small and gradually increases month by month.

Annual Percentage Rate (APR)

An APR is a number that expresses the total annual cost of borrowing money as a percentage of the loan amount. The APR on a loan or credit card is intended to provide a clear picture of how much it costs to borrow money.

Appraisal

It is an estimate of the value of a property done by a licensed appraiser. It informs potential lenders of the amount they may be willing to loan on a piece of real estate. It also identifies issues that may decrease a property's value, like safety concerns or structural damage.

Balloon Loan

It involves making relatively small payments for a certain period of time and then one large payment to cover the remaining balance when the loan matures. The balloon payment comes due at the end of a loan’s term or after a set number of payments have been made.

Closing Costs

These are fees for finalizing a loan, like an appraisal, credit report fee, title search, title insurance, and attorney’s fees. Closing costs can vary widely depending on the location, lender, and type of mortgage. It can range from 2% to 6% of the total loan value.

Closing Disclosure

This five-page document outlines all the costs associated with a loan. It details the payment terms, interest rates, closing costs, and other fees a borrower must pay at the closing table. Lenders must give borrowers at least three days to review the closing disclosure.

Co-Borrower

A co-borrower has equal responsibility for a loan taken out; they may or may not live in the same residence as the borrower. But they are equally liable to repay the debt. Generally, both borrower and co-borrower must meet all credit criteria to qualify for a mortgage.

Credit History

This pertains to all information about an individual’s borrowing and repayment activities. It is compiled from different sources, including credit bureaus, banks, landlords, employers, and other entities that have previously extended credit or loaned money to a person.

Credit Report

This is a detailed record of your credit history. It includes information about the types of accounts held, payment history, credit limits, outstanding balances, and other details related to loans or lines of credit. Lenders use it to assess your creditworthiness.

Credit Score

Credit score is a three-digit number, typically ranging from 300-850, used to measure a person's creditworthiness. It considers a borrower’s credit history and is provided by one of the three major credit bureaus: Experian, Equifax, and TransUnion.

A higher credit score increases your chances of loan approval and getting favorable interest rates.

Debt-to-Income (DTI) Ratio

This is the percentage of an individual’s income that goes towards paying debts. It considers all debt, including mortgage payments, student loans, credit cards, and other obligations.

Generally, the highest DTI ratio a borrower can have and still qualify for a mortgage is 43%. Lenders prefer a DTI of less than 36%, with no more than 28% of that debt dedicated to mortgage or rent payments.

Deed

It is a legal document that outlines the ownership of a property and can be used in connection with the transfer of title. It includes the parties’ names, the sale price, legal description, and any restrictions or encumbrances associated with the property.

Deed in Lieu of Foreclosure

This agreement allows the borrower to voluntarily surrender a property back to the lender, usually done when the borrower cannot make their mortgage payments and is facing foreclosure. It is a way to mitigate losses.

Deed of Trust

This is a legal document that puts a mortgage into effect. It transfers the property title from the borrower to a trustee, who holds it as security for a loan from a lender. The trustee can sell the property if the borrower fails to make payments and use the proceeds to repay the loan.

Default

This happens when a borrower fails to make payments on their loan. After several missed payments, lenders can declare the loan in default and start the process of foreclosure or other remedies to collect on the loan. A default can have a long-term effect on your credit score.

Down Payment

The amount of money that you pay upfront when taking out a mortgage. Down payments reduce the total amount borrowed and usually range between 10-20% of a home’s purchase price. A higher down payment may help decrease loan interest rates.

Earnest Money Deposit (EMD)

An EMD is a fixed amount a buyer provides when making an offer on the house. It shows good faith and buyer seriousness and helps to protect both parties in a real estate transaction. If the sale goes through, an EMD is put toward the down payment and closing costs.

Equity

The equity is the amount of the home a borrower owns outright. It is calculated by subtracting the remaining balance on the mortgage loan from the home’s current market value.

Escrow

Escrow is a legal arrangement in which a third party temporarily holds money or property until a specific condition, such as a purchase agreement, is completed.

Fannie Mae

It is another name for the Federal National Mortgage Association (FNMA), whose objective is to provide equal and sustainable access to homeownership and excellent affordable rental housing throughout the U.S. 

Fannie Mae purchases mortgages from larger commercial banks and offers loan guarantees, helping to keep interest rates low.

Fixed-Rate Mortgage

This is a type of mortgage where the interest rate remains constant throughout the entire term of the loan, regardless of market fluctuations. It is a popular choice for many borrowers because they can anticipate their monthly payments and budget accordingly.

Forbearance

It is a temporary postponement or reduced payment on a mortgage. Lenders typically extend it to borrowers experiencing financial hardship who cannot make their payments normally. Forbearance is a means of loss mitigation.

Foreclosure

This is a process where a lender repossesses and sells the property when a borrower fails to meet their contractual obligation of repaying their loan. The number of missed payments before foreclosure and whether a legal proceeding will be needed is determined by state law.

Freddie Mac

This is another name for the Federal Home Loan Mortgage Corporation (FHLMC) which provides liquidity, stability, and affordability to the U.S. housing markets. It gives access to mortgage credit from smaller banks so people can buy homes.

The fundamental distinction between Freddie Mac and Fannie Mae is the source of their mortgages. 

Good Faith Estimate (GFE)

The GFE is a federal document with estimates from a lender of all the costs associated with getting a home loan. It is provided to the borrower within three days of submitting a loan application. All fees listed should not vary significantly from those stated in the final closing costs.

Home Appraisal

It is an evaluation to determine the value of a property in the current market. The appraiser will look at comparable sales, location, and the home’s condition to determine an amount that accurately reflects its worth.

Home appraisals are required for most mortgage loans and are paid for by the borrower.

Homeowners Insurance

This insurance covers home damages, including contents in a disaster. It also covers liability for any injury or property damage caused by tenants on the property. Lenders typically require homeowners insurance when providing financing on a home purchase.

Home Equity Line of Credit (HELOC)

HELOC is a unique type of loan that works like a credit card with an adjustable interest rate. It allows homeowners to borrow against the equity in their homes by using them as collateral. The borrower can draw funds up to an established limit with flexible repayment options.

Home Equity Loan

This type of loan allows homeowners to borrow money against the value of their homes. Funds are received in one lump sum and repaid over time with fixed monthly payments and interest rates. It is also known as a second mortgage.

Interest Rate

This is the cost of borrowing money, expressed as a percentage. It is calculated by taking the amount borrowed and dividing it by the total cost over the life of the loan. An interest rate can be fixed or adjustable and included in a borrower’s monthly mortgage payments.

Lien

It is a legal right used to secure the payment of a debt or obligation. Lenders use liens as security for loans and mortgages; if a borrower fails to make their payments, the lender has the right to repossess or foreclose the property.

Loan Estimate

This three-page federal form outlines the key terms of a home loan. It includes the estimated interest rate, monthly payment, key dates, closing costs, processing time, and funds available after closing.

Loan-to-Value (LTV) Ratio

This is a measure of how much money you are borrowing compared to the purchase price or appraised value of a home, expressed as a percentage. A higher down payment lowers the LTV ratio. It may affect whether a lender will require private mortgage insurance (PMI) to be paid.

Mortgage

A mortgage is a loan used to purchase, refinance, or borrow against real estate. The loan is secured by the property and is typically paid back over some time with interest. Mortgages allow borrowers to purchase homes without paying the total cost upfront.

Mortgage Insurance

This insurance policy helps protect lenders against losses due to a borrower’s default. Usually, mortgage insurance is required when borrowers cannot put down a 20% deposit on their loan.

Mortgage Term

This refers to the length of time over which a borrower commits to repay a loan. It can range anywhere from 1 to 30 years. The longer the term, the lower the monthly payments will be, but the higher the total amount of interest to pay over the life of the loan.

Origination Fee

This is a fee charged by a mortgage lender for processing your loan. It is usually around 0.5%-1.0% of your overall loan sum. Almost all lenders impose origination fees to cover the costs of processing, underwriting, and executing your loan.

Pre-approval

This is a process where a lender reviews a borrower’s financial information to determine how much they can qualify for and what type of interest rate and terms they may receive. It involves looking at income, assets, debt, credit score, employment history, and other factors.

Principal

This is the money borrowed or unpaid on a loan, not including interest and other fees. Interest is charged on this amount, and repayment plan schedules are designed to pay off the principal and interest over time.

Private Mortgage Insurance (PMI)

PMI is a policy that protects the lender if the borrower defaults on their loan. It is usually required on loans with down payments of less than 20%. It can range from 0.5% to 2.0%.

Generally, the smaller the down payment, the higher the PMI rate.

Property Taxes

These are local or state taxes assessed on a property’s value. They vary by locality and must be paid annually, typically in two installments. Property tax payments may need to be escrowed into the monthly mortgage payment to ensure they are paid on time.

Qualified Written Request (QWR)

A QWR is a document sent by a homeowner to their mortgage servicer that initiates an official investigation into any errors, fees, or other problems with a mortgage loan. It is a formal way of requesting information or for a servicer to address any issues with an account.

Quitclaim Deed

This is a document used to transfer ownership of real estate. It does not protect the buyer if another entity is interested in the property. A quitclaim deed is usually used when transferring real estate among family members. It cannot be used as a mortgage document.

Refinance

It is the process of replacing an existing loan with a new one. It reduces monthly payments, frees cash flow, or changes the interest rate and loan terms. Refinancing involves getting a new loan to pay off an old one while also taking out additional equity from the home.

Reverse Mortgage

This loan enables homeowners 62 or older to withdraw some of the equity in their home as cash. It features fixed interest rates and no repayment until the borrower passes away, sells the house, or moves out.

Title

This legal document proves ownership of real property issued by a government agency or other authorized entity. It states who owns the property and any associated liens or encumbrances. The title establishes the owner’s right to occupy, use, and possess the property.

Title Insurance

This insurance policy protects against losses due to property title problems, like outstanding mortgages or liens, forgeries, incorrect legal descriptions, boundary disputes, and undisclosed heirs. It is required for most loans and is paid for by the borrower.

Final Thoughts

Understanding mortgage and lending terms is an essential part of knowing how to navigate the real estate market. Knowing these terms can help you make more informed decisions about buying, refinancing, or selling a home.

Every homeowner must understand these terms to protect their financial interests throughout the process.

It is also a good idea to consult a mortgage loan officer to understand the nuances of mortgages, lending, and borrowing. They can help ensure you make the best decisions regarding your finances.

Mortgage and Lending Terms FAQS

What is a mortgage?

A mortgage is a loan, usually from a bank or other financial institution, that is used to purchase real estate. The borrower receives the loan in one lump sum and then pays it back over time with regular payments, usually over fifteen to thirty years. The interest rate on a loan will determine how much the borrower has to pay each month.

Is a mortgage the same as a loan?

A mortgage is a type of loan that is secured by real property. If a borrower defaults, the property is foreclosed. All mortgages are loans, but not all loans are mortgages.

What are the qualification requirements to get a mortgage?

Lenders look at the four Cs of credit when assessing a borrower’s eligibility: capacity (ability to repay), collateral (value of the property used as security), capital (available funds to contribute towards the down payment and closing costs), and credit (factors such as credit score and employment history).

How long does it take to close on a mortgage?

It varies depending on the complexity of the loan and other external factors. Generally, closing on a mortgage can take anywhere from 30 to 45 days. During this time, lenders will collect information about your income and credit history, verify assets and employment, and appraise the property you want to purchase. Then you will receive your Closing Disclosure, showing your estimated closing costs. Once you sign this document and it is delivered to the title company, you are ready for closing.

Can anybody get a mortgage?

Generally speaking, anyone with a stable source of income and a good credit score can qualify for a mortgage. Most lenders will typically look at your credit report, employment history, financial statements, and other documents to assess creditworthiness. Additional requirements, such as a down payment or additional collateral, may also be requested depending on the loan amount. The higher the loan amount, the more stringent the approval criteria will be. Understanding that interest rates and fees will vary from lender to lender is essential.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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