HOME LOANS

THE ULTIMATE GUIDE TO BUYING AND FINANCING A HOMEYour one-stop shop

HOME LOANS

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MORTGAGE BASICS

HOMEBUYING TIPS

THE PROCESS

ALL ABOUT HOME LOANS

THE RUN DOWN ON RATES

DOCUMENTATION

AFTER YOU CLOSE

A LOOK AT REFINANCING

APPENDIX

HOMEBUYING 101Buying a home is a big decision that can open doors to friendships, community belonging, and a sense of ownership (not to mention financial benefits). Unfortunately, it’s also something they probably didn’t teach you in school. This guide will fill you in on the homebuying process from top to bottom, inside and out. So when you’re ready to make your dream of homeownership real, you’ll be prepared.

Let’s get started.

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MORTGAGE BASICSLet’s start with some homebuying ABCs. Here are several of the basic terms you’ll need to know as you go through this guide — and as you inch closer to that new set of keys for your ring.

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MORTGAGE ˈmôrgij (n)

An agreement between you and a lender that lets you buy a home without paying the entire cost up front. The home itself is used

to secure the loan.

PREAPPROVAL pri ‘ə ‘proovəl (n)

A written statement from your lender that officially determines how much you can borrow (AKA, how much home you can

afford). It’s based on things like your credit score, income, and employment history.

INTEREST RATE int(ə)rəst rāt (n)

Written as a percentage, this is the rate at which you pay interest on the principal amount of your home loan. All other things being equal, a lower rate means a lower monthly payment.

CLOSING klōzing (n)

The final step in completing your real estate transaction. The property is officially transferred from the seller to the buyer and

the buyer signs the loan documents.

DOWN PAYMENT ˈˈdounˈˈpāmənt (n)

The money you pay up front to purchase a home. A down payment covers part of a property’s purchase price, with the rest typically being covered by a home loan.

(P.S. You won’t necessarily need 20% down.)

EQUITY ekwədē (n)

The difference between the value of your home and the outstanding principal

balance on your mortgage.

THESE ARE JUST THE BASICSCheck out the appendix for some more advanced terms you might need to know.

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HOMEBUYING TIPSSome words of wisdom: There’s no universal rulebook to this whole homebuying thing. But there are a few tips, strategies, and nuggets of information that can help you make it from start to finish without any major headaches.

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DOEducate yourself on the homebuying process. Well, you’re here, so you’re on the right track! You may not be able to prepare for every detail of the process, but reading up on the foundations matters. Things will go faster, the steps will go smoother, and you’ll end up a happier homebuyer .

Get your finances in shape. A stronger credit score and budgeting skills will help as you apply for a home loan. And after you do apply, keep at least 3 months worth of expenses saved in case of a rainy day.

Consider all of your loan options. The 30-year fixed rate mortgage is the most popular, but it’s not your only option. There are several types of home loans to choose from: some with small down payments, some with shorter terms, some with adjustable rates, and more.

Put your purchase in a long-term perspective. A home is an investment — both personally and financially. If you only plan to hold onto it for a few years, it might not be the right move. Consider the long term as you balance the personal and financial benefits of owning a home.

DON’TAssume you need a 20% down payment. Don’t believe the old mantra. There are actually several loan options that accept as little as 3% down or 0% for veterans. Some that even allow for less-than-perfect credit, too. Check out your home loan options before making any assumptions.

Choose a lender based solely on rates. Interest rates are just one pixel in the big home loan picture. Pick a lender who offers you the help, tools, and resources you need throughout the application process and beyond. Also calculate fees and upfront costs into your decision, too.

Make any big purchases before closing. Wait to buy those new appliances until after you close. Making big purchases can impact your credit score and cause you to get a higher interest rate, or threaten your eligibility for some loans.

Let emotion win over reason. Sometimes, you can’t help but fall in love with a house. But make sure you’re comfortable living in it and paying for it over the life of the loan. Like many other people, a home may be the biggest purchase you ever make. You’ve got to be sure on this one.

SOME RULES OF THUMBBuying and financing a home is complicated (and for good reason).

Here are some quick tips.

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THE HOMEBUYING AND FINANCING PROCESSLet’s take this step by step. Even if you’ve been through this journey before, it makes sense to brush up on the process. After all, it’s an important one: Your dream home is at the end of it.

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YOUR TIMELINE FOR BECOMING A HOMEOWNERThis is your roadmap. It will give you a general overview of what to expect as you embark on the homebuying and financing process, steering you on the course to success.

6 MONTHS - 1 YEAR OUT

Researching and Soul Searching

The benefits of homeownership can be crazy good. But that doesn’t mean buying a home makes sense for everyone. Start with asking yourself: What are my goals? How long do I plan to stay in this location? Are my finances as healthy as my appetite to buy?

3 MONTHS OUT

Preapproval

Preapproval is a must if you’re financing your home. Based on hard documents and real numbers, it’s an official stamp of approval confirming how much a lender will loan you for a home.

2 - 3 MONTHS OUT

The House Hunt

Based on the outcomes of steps one through three, you should be equipped to get out there and start house hunting! If you’re working with a Realtor, keep him or her in the loop regarding your budget, goals, and timeline. And remember — don’t let emotion win over reason!

3 - 6 MONTHS OUT

Preliminary Home Search

Start perusing home listings online in your preferred area to get an idea of price. Now’s also a good time to consider getting prequalified, which estimates how much home you can afford. Better to set your expectations now than to fall in love with a home out of your reach.

45 - 60 DAYS OUT

Contract to Close

Once you find a home that: 1. You love, and 2. You and the seller have agreed on a purchase price, you will start the formal loan application process. Once everything is approved, you’ll complete a few final steps, like the home inspection, and you’ll then head to closing (which we’ll touch on later).

P.S. It might make sense to ask for a clue report now, which lists insurance claims on the property for the last seven years.

FINAL STEP

Hello, Homeownership

Home loan secured? Check. Papers signed? Check. Keys acquired? Check. Next steps confirmed? Well, that one’s up to you! As a homeowner, you’ve got some basic obligations. But what you do with it is up to you. Throw a house warming, paint the front door red, become best friends with the neighbors — your imagination is the limit.

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ALL ABOUT HOME LOANSFind a loan that takes you home. Unless you’ve got reserves of cash stashed underneath your floorboards, like most people, you’re going to need a home loan to finance your purchase. Spoiler ahead: There’s more to loans than a monthly payment.

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What’s in a home loan?Mortgage veterans sometimes refer to

the parts of your home loan as “PITI.” Your payment always consists of a principal and interest (PI) portion, and many payments

also include an escrow portion for taxes and insurance (TI). If you live in a community with a homeowners association, your payment may also include association dues (A). This PITIA

payment is represented by the arcs of the circle here.

InsuranceThe amount paid for insurance (e.g., homeowners, flood, mortgage, etc.).

TaxesThe amount paid for school and property taxes.

InterestThe cost of borrowing, based on the interest rate on your loan.

PrincipalThe amount paid to reduce the original loan balance.

Homeowners Association Dues (HOA)Your community may include an additional fee for amenities and upkeep of communal spaces.

LEARN TO LOVE YOUR LOAN.“Loan” is a scary word to many people. But home loans are a tool many people use to buy a home, or in other words, to make their dream a reality. Before you dive head first into a new home, understand what a home loan is and what it means for you.

Here’s what you need to know.

NOT ALL HOME LOANS ARE BUILT THE SAME.Different loans are made for different people with different situations. While the main parts of each mortgage type will stay the same, there are a few variables that make each loan unique, including: Interest rate (higher or lower, fixed or adjustable), loan term, down payment guidelines, credit guidelines, and other eligibility requirements, like veteran status, income restrictions, or geographic availability.

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FIXED RATE

The Scoop. You set your rate at the beginning, and it stays the same over the life of your loan. It’s the most popular option, with 15- and 30-year terms being the most common.

The Pros. Fixed P&I payments over the life of your loan, interest rate can’t increase, and flexible term options.

The Cons. Monthly payment might be higher than initial payment of an ARM, interest rates can’t decrease, and you’re locked into the interest rate if you can’t refinance.

Why Pick This Loan? You’re someone who has a healthy down payment and wants to lock in today’s historically low rate. For you, consistency is key. Predictable monthly payments will help you budget better, and the surety of a fixed rate will grant you peace of mind.

Learn more about fixed rate loans.

VA LOAN

The Scoop. A home loan available only to veterans, service members, and certain surviving spouses of veterans and service members. It offers a 0% down payment option, among other perks.

The Pros. 0% down payment option available, no private mortgage insurance (PMI), and larger income-to-debt (DTI) ratios.

The Cons. Mandatory VA Funding Fee, can’t use it on a second home or investment property, and must meet specific requirements/status to qualify.

Why Pick This Loan? The VA loan is a great opportunity for veterans to buy a home with as little as no money down and no private mortgage insurance. While you’ll have to pay the Mandatory VA Funding Fee, a VA loan could bring your dream of homeownership closer to reality.

Learn more about VA loans.

FHA LOAN

The Scoop. Insured by the Federal Housing Administration (FHA), this loan is one of the easiest to qualify for, with small down payment options and allowance for less-than-perfect credit.

The Pros. Only 3.5% down required, relaxed credit requirements, and larger debt-to-income (DTI) ratios.

The Cons. Mortgage insurance requirement and minimum property condition standards.

Why Pick This Loan? Are you a first-time homebuyer or a repeat buyer looking for a small down payment option? An FHA Loan might be right up your alley. It’s a popular choice among people looking for more relaxed requirements than a traditional fixed rate mortgage.

Learn more about FHA loans.

ADJUSTABLE RATE MORTGAGE (ARM)

The Scoop. You’ll start off with a low, fixed rate for 5, 7, or 10 years. Then after your initial term, your rate will change as the market changes.

The Pros. Lower fixed rate during initial term, flexibility if you expect to move or experience a major life change soon, rate and payment caps, and payments might decrease during adjustable period.

The Cons. Rates and payments are harder to predict after initial term and payments might increase during adjustable period.

Why Pick This Loan? If you expect to move or get a significant raise soon, this loan may be the right choice. You’re attracted by the low initial rate, and if you plan to stay in place, you’re confident rolling the dice on your rate fluctuating in the future.

Learn more about adjustable rate mortgages.

GET THE RIGHT LOAN FOR YOUR PERFECT HOMEWhen it comes to home loans, one size doesn’t fit all. Find your fit by comparing your options here.

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THE RUN DOWN ON RATESYou’ll find this INTERESTing. If you’re using a loan to finance your home, mortgage interest rates are going to be an important factor in your decision.

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ALL ABOUT MORTGAGE INTEREST RATESEven if you’re new to the homebuying game, you’ve probably noticed there’s a lot of talk around rates. They’re an important slice of the mortgage pie. And it’s maybe the only time where a high “rating” isn’t necessarily a good thing.

Let’s go over the interest rate essentials.

WHAT IS A MORTGAGE INTEREST RATE? In laymen’s terms, it’s the cost of borrowing money from a lender. Just like you would accrue interest in a savings account, your mortgage interest rate is the rate at which your principal accrues interest (which you’ll need to pay). So generally, you’ll want a lower rate for a lower payment.

WHAT ABOUT APR?APR, or annual percentage rate, is a more comprehensive look at the cost for borrowing your loan. It reflects your mortgage interest rate plus other charges, like any points you’ve purchased, mortgage broker fees, and other charges.

Therefore, your APR is usually higher than your interest rate. Your mortgage rate is essential to know, but your APR will give you a more accurate measure of how much you’re spending to own your home.

TODAY’S RATESFind out where mortgage interest rates stand right now on ditech.com

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HOW CAN YOU GET A LOWER RATE?There are several ways to get a better rate from your lender. Every little bit counts. Even a small reduction in your rate can add up to significant interest savings over the life of your loan. Here are some ways you may be able to do it:

Improve your credit score. Your credit score is a big factor lenders use to determine your rate and eligibility. You can boost your score by paying your bills on time, keeping long-time creditors on your credit report, and maintaining a low utilization rate.

Consider your loan options. Your mortgage interest rate can vary depending on which loan you use. Typically, fixed rate loans with shorter terms offer lower rates than their longer counterparts, and adjustable rate mortgages often offer lower rates during the initial period that can then increase. Know the differences between your options.

Purchase discount points. As you’re closing on a home loan, you have the option to “buy down” the rate. The more points you pay, the lower the mortgage rate will be. Borrowers usually pay between 1 to 4 points. Generally, each discount point costs 1% of the original loan amount. 

Put more money down. If you have a larger down payment, lenders will often offer you a lower interest rate because their risk is lower. This example can vary between loan types, too. So it’s best to work with a Home Loan Specialist to determine the right choice.

RUN THE NUMBERS Enter your info for a quick P&I estimate.

Mortgage Amount Interest Rate

Monthly P&I payment for a 30-year, fixed rate mortgage

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DOCUMENTATIONAn organized homebuyer is a happy homebuyer. The documentation needed for the application can feel…extensive. But with a little planning, it doesn’t have to be overwhelming.

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YOUR APPLICATION CHECKLISTStep 1. Pull together these documents you may need before applying for a home loan.

Step 2. Bask in the glory of your awesome preparation skills.

W-2 documents Lenders want to see consistent income over the past 1-2 years.

Pay stubs Have your pay stubs from the last month or two to demonstrate you’re still bringing in an income.

Bank/Account statements Checking, savings, retirements, investments, etc. — be ready to show off your assets.

Tax returns Lenders will look at these closely to make sure they reflect your actual income and earnings.

Identification Driver’s license or an equivalent photo ID will do.

Proof of military service If you’re applying for a VA Loan, you’re going to need proof.

Proof of reserves Lenders want to know you can cover costs for at least 3 months if your employment somehow falls through.

Cancelled rent checks If you were a renter, a lender might ask for proof you’ve paid your rent checks on time.

Documentation for debt payments and balances Outlining your debt helps lenders get a fuller picture of your finances.

Gift letter Any contributions from a parent, grandparent, or whomever need to be documented and submitted.

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YOUR CLOSING CHECKLISTYou found the house. You applied for the loan. You agreed on a contract.

Now, it’s time to make it all official. Here’s what you’ll need before and after closing.

WHAT YOU’LL NEED TO BRING FOR CLOSING

Cashier’s check or proof of wire transfer A regular check won’t do. You’ll need a verified form of payment at closing.

Closing disclosure Your lender must provide this document three business days before closing. Double-check it’s correct, and ask questions if necessary.

A trusted friend, advisor, or lawyer as your advocate Confirm with anyone you want there with you at the closing table that they’ll be in attendance, and bring a list of numbers you may need to call.

Your co-borrower, if you have one If you’re taking on a co-borrower for your loan, he/she will need to come to the closing with you.

Driver’s license or equivalent photo ID You’ll need to be able to prove it’s really you.

WHAT YOU SHOULD LEAVE WITH AFTER CLOSING

Closing disclosure You should have a copy of this document for important closing details.

Promissory Note It’s the document containing your promise to repay the loan. You should get a copy, and your lender holds on to the original.

Mortgage/Security Instrument/Deed of Trust This document pledges your property as security for the loan. Make sure you get a copy.

Deed/Equitable Title The legal proof your new home has been transferred to your name — make sure you walk away with a copy (original will be recorded).

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AFTER YOU CLOSECongrats, you’ve got a home! Now what? First, you have to tear out that shag carpet in the living room. But afterwards, there are a number of responsibilities to keep front of mind as a newly initiated homeowner.

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YOUR HOMEOWNERSHIP RESPONSIBILITIESYou’re the captain now…or at least a proverbial one. You’re now responsible for keeping up on the obligations of homeownership (and you may be able to reap some amazing benefits because of it).

ARE YOU READY FOR THE BIG MOVE?Download the ultimate moving checklist so you can make sure the boxes are checked and your boxes are packed.

RenovationsRegular updates to your home can make living more comfortable. And if you make the right renovations, you can even increase the value of your home!

Property TaxesIf you own your home, you own a stake in the area you live in, too. So you’ll need to pay property and school taxes to local authorities. Typically, this is rolled into your monthly payment.

Utility CostsOften, you’ll need to set up personal accounts through local utility providers so your new house can have things like running water, electricity, and gas.

Mortgage Payments/HOA FeesKeeping up on your mortgage payments (and HOA fees, if your community requires them) is important to avoid potential penalties.

MaintenanceKeeping up on regular maintenance can help retain the value of your home and save on potentially costly repairs down the line.

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A LOOK AT REFINANCINGYou just bought. Why think about refi now? Again, repeat after us: An organized buyer is a happy buyer. Refinancing is not something to jump on immediately after you score the keys, but knowing what a refi is and how to do it will put you ahead of the game if and when the time comes.

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THE SKINNY ON REFINANCINGRefinancing lets homeowners take on a new home loan to replace their existing one. It’s a popular way to potentially shorten their term, reduce their monthly payment and more.

First things first…

THE TOP 4 REASONS WHY YOU’D REFINANCEReduce your interest rate. One main reason for homeowners to refinance is simply to lower their mortgage rate. If your current rate is higher than what’s being offered today, you should consider refinancing. You’ll lower your monthly mortgage payment, free up cash for other things, or just make daily living a bit easier. 

Shorten your loan term. Ever look at your mortgage and shudder at the number of years left on it? Refinancing to a shorter term could fix that. While your monthly payment could go up or down because of it, it may make more financial sense overall to shorten your loan term.

Refi from an ARM to a fixed rate mortgage. Adjustable rate mortgages offer a lower rate at the start, but then will readjust at a specific time. Many new homeowners choose an ARM because the monthly costs are cheaper, but it’s also a gamble since rates may rise during the adjustable period. Refinancing to a fixed rate mortgage means you’ll pay the same each month, and enjoy a sense of security.

Get cash out for major expenses. Believe it or not, you can use a refinance to get cash out of your investment. Taking equity as cash to use for other needs may be a cost-effective way to accomplish your goals, since mortgage rates are generally lower than personal loan rates. You’ll only need to make one payment each month instead of having multiple debt obligations, too.

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THE REFI PROCESS IS A LITTLE DIFFERENT THAN BUYINGThe buying and refinancing process share many similarities. But there are some key differences you should be aware of if you choose to refi down the line.

STEP 1

Weigh the pros and cons

As you saw, people refinance for several reasons. Work with your Home Loan Specialist to make sure your rationale for doing the same make sense for your situation.

STEP 3

Choose the right loan

Your goals may have changed since you first bought your home. So work with your Home Loan Specialist and consider all of your loan options. Using the same loan type might not make sense this time around.

STEP 4

Application and appraisal

This is the part where you dot your i’s and cross your t’s (and where you typically lock in your interest rate). Make sure all the information on your application is correct and submit it. Right after you finish your application, you’ll order the appraisal to determine the value of your home.

STEP 2

Pull together the important documents

Since you’re applying for a whole new loan, you may need the same documentation as when you applied for the first one.

STEP 5

Close on your new loan

Closing on a refi looks like a purchase, minus the transferring of the deed and other protocol associated with a seller.

STEP 6

Enjoy the benefits of your refinance!

Whether you refinanced to a better rate, a better term, or to get cash out, there’s reason to celebrate!

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GET PREAPPROVEDFind out how much home you can afford.

CHECK TODAY’S RATESSee if they are still near historic lows.

RUN THE NUMBERSGet a glimpse at your potential monthly payments.

WHAT’S NEXT?Now that you’ve learned the ropes of the homebuying process, where do you stand?

Here are a few logical next steps for the budding buyer.

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APPENDIXWelcome to the back of the book. Here you can find a comprehensive dictionary of mortgage terms and answers to the most burning questions other potential homebuyers like you have had.

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HOMEBUYING FAQSNo shame in having some questions. Check out the answers to the FAQs many potential homebuyers have. And if you need some extra help, give us a shout.

WHAT IS ESCROW AND HOW DOES IT AFFECT ME?Escrow is an account that holds funds paid by you that will eventually pay certain property related expenses. They could include taxes and/or homeowners insurance premiums.

An escrow account helps ensure property expenses are paid. It’s typically part of your regular payment amount because the lender or investor requires it, but it can make things easier for you.

WHAT’S THE DIFFERENCE BETWEEN A VA AND AN FHA LOAN?There are a few key differences between these similar loans, including eligibility, mortgage insurance premiums, and down payment flexibility. See a detailed side-by-side comparison in this blog.

DO I NEED A 20% DOWN PAYMENT TO SECURE A LOAN?The 20% down payment is a myth. While you may have to pay mortgage insurance with a down payment smaller than 20%, there are several loan options that have flexible down payment options, some that even allow as little as 3% or sometimes 0% down. Check out five of them here.

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WILL I HAVE TO PAY PRIVATE MORTGAGE INSURANCE (PMI)?Generally, if your loan amount is more than 80% of the home’s appraised value, you will be required to have PMI. This protects the lender if you default on your loan. But besides an extra monthly payment, there’s a little more to know about PMI.

DO I NEED TO HAVE A SPECIFIC PROPERTY IN MIND BEFORE STARTING THE HOMEBUYING PROCESS?Nope. You can get prequalified or preapproved first to get a better idea of how much home you can afford. It may be a good idea to start thinking about potential neighborhoods early on, though.

WHAT ARE CLOSING COSTS?Closing costs can vary and are determined by your mortgage type and geographic location. They typically include lender fees and third-party fees, such as for an appraisal and title insurance. 

Click here for a list of typical closing costs you can expect.

WHAT’S THE DIFFERENCE BETWEEN GETTING PREQUALIFIED AND PREAPPROVED?Prequalification is an unofficial estimate of how much you may be able to borrow from a home loan lender. It’s based on basic financial info like your income, assets, and credit score.

Preapproval is prequalification’s more official cousin. It verifies how much home you can afford using physical documentation and a formal underwriting process, making you look more like a qualified buyer to sellers and Realtors. After this step, you could be conditionally approved for a loan.

Check out this blog for a little more on the topic.

WILL I BE TURNED DOWN FOR A LOAN IF I’VE HAD CREDIT PROBLEMS?Not necessarily. Your credit score  is just one factor taken into consideration when you apply for a home loan. Lenders will also look at your employment history, income, debt, and cash reserves. There are even some loan types (wink, wink, the FHA Loan ) that allow for less-than-perfect credit.

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YOUR GO-TO MORTGAGE DICTIONARYForget what a “preapproval” is? Need a reminder why an “amortization schedule” matters for your home loan? You’ve come to the right place. Find all the important mortgage-related terms you should know here.

AAutomated Clearing House (ACH) An electronic network for financial transactions in the U.S. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills.

Adjustable Rate Mortgage (ARM) A mortgage with an initial fixed rate period (generally 5, 7, or 10 years) after which time the rate adjusts (usually annually) for the remaining term of the loan. Rate adjustment is based on the market rate at that time.

Amortization The process of your loan principal decreasing over the life of your loan. With each mortgage payment made, part of the payment is applied toward reducing the principal, and another part of the payment is applied toward paying the interest.

Annual Percentage Rate (APR) A measure of the cost of credit, expressed as a yearly rate. It’s a broader measurement than an interest rate because it reflects the interest rate, as well as mortgage points, broker fees, and other charges you pay to get the loan.

Appraisal The process of determining how much a home is worth — its market value. It also refers to the report establishing the value.

Appreciation The increase in the value of your home over time.

Assessed Value The price placed on a home by the local government to calculate its property taxes. It’s primarily calculated based on the value of comparable properties in the area.

B Balloon Loan or Balloon Payment A mortgage that requires a larger than usual one-time payment, sometimes called a balloon payment (typically more than two times a regular periodic payment), at the end of the term.

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Borrower A person who has applied, met specific requirements, received a loan from a lender, and signed a promissory note agreeing to pay the lender back. This person is legally responsible to pay back the loan based on agreed terms.

CCash-Out Refinancing Borrowing money from the equity in your home based on its value. For example, if your home is valued at $100,000 and your current mortgage balance is $50,000, you may be able to take $20,000 cash out of the equity in your home when you refinance, which would make your new loan balance $70,000. Learn more about it here.

Closing The final step in completing your real estate transaction. The property is officially transferred from the seller to the buyer and the buyer signs the loan documents.

Closing Costs Fees charged by lenders related to the financing of your home to finalize the sale. They vary widely depending on location and terms, but might include fees for attorney services, inspection, appraisal, surveys, escrow deposit, underwriting, and others.

Combined Loan-to-Value Ratio (CLTV) A ratio used by lenders to determine the risk of default by prospective homebuyers when you’re using more than one loan. (See Loan-to-Value)

Co-borrower Someone who is also a borrower on your mortgage. This person is jointly responsible for the mortgage payment.

Commitment Letter A formal and legally binding document issued to you by a lender to inform you that your loan has been approved. It offers you the loan based on specific terms and conditions.

Conventional Mortgage A home loan that is not backed by any government agency like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).

Convertible ARM An adjustable rate mortgage that can be switched to fixed rate loans for a fee. This type of loan usually requires a slightly higher interest rate on the ARM, on the fixed rate loan, or both. (See Adjustable Rate Mortgage)

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Credit Report A report that draws on your credit history to assess your creditworthiness (or ability to repay your loan). It considers factors like your outstanding debt, payment history, and length of credit history.

DDeed of Trust A legally binding document that officially transfers the title and property to a trustee, which holds it as security for your home loan between you and your lender. The equitable title remains with you.

Default When you fail to pay your mortgage, it may result in a default. If you’re at risk of missing any payments, there might be some help available.

Delinquent or Delinquency When you are late or overdue on your mortgage payment.

Depreciation The decrease in your property’s value due to economic or market conditions.

Discount Points Also called points, they refer to money you pay up front to “buy down” (or lower) the interest rate on your home loan. One discount point will cost you 1% of the loan amount.

Down Payment The money you pay up front to purchase a home. A down payment covers part of a property’s purchase price, with the rest typically being covered by a home loan.

EEarnest Money Deposit Money put down by a potential homebuyer to a seller to show their good faith in the transaction while they seek financing.

Equity The difference between the value of your home and the outstanding principal balance on your mortgage.

Escrow An account you make payments to each month. It’s managed by your mortgage servicer and used to make payments on your property and school taxes and homeowners insurance. Payments are typically rolled into your monthly mortgage payment.

FFannie Mae Federal National Mortgage Association, or Fannie Mae, is a government-sponsored enterprise (GSE). Fannie Mae was established to provide local banks with federal money to finance home mortgages in an attempt to raise levels of homeownership and the availability of affordable housing.

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Federal Housing Administration (FHA) A governmental agency that provides mortgage insurance on loans made by FHA-approved lenders, allowing for looser guidelines for loans like the FHA Loan.

FHA Loan A home loan insured by the Federal Housing Administration (FHA). It features a down payment as low as 3.5%, a debt-to-income ratio extending above conventional limits, and allowance for less-than-perfect credit.

FICO The best known and most widely used credit score model in the U.S. It’s used to provide an estimate of your creditworthiness, or the likelihood that you’ll pay your debts. Some of the criteria that factor into the FICO score include payment history, debt burden, length of credit history, types of credit used, and more.

Fixed Rate Mortgage (FRM) A mortgage that has a fixed interest rate for the entire term of the loan.

Fair Market Value (FMV) The price a property would sell for on the open market. It’s the price you and the home seller agree upon as you complete the transaction.

Foreclosure A proceeding where your right to a mortgaged property may be removed if you fail to live up to the obligations agreed to in the loan contract. The lender may be authorized to declare the entire debt due and owing and may seek to satisfy it by foreclosing.

GGinnie Mae Government National Mortgage Association, or Ginnie Mae, is a government-sponsored enterprise (GSE), wholly owned by the government and part of the Department of Housing and Urban Development. Its guarantee allows mortgage lenders to get a better price for their loans in the capital markets. Lenders can then use the proceeds to make new mortgage loans available to consumers.

HHardship Challenging financial circumstances you may face that could entitle you access to special discounts, exemptions, and support programs.

The Home Affordable Refinance Program (HARP) A program that may allow you to refinance into a more affordable mortgage if the loan to be refinanced was closed on or before May 31, 2009 and is held by Fannie Mae or Freddie Mac. It features looser guidelines than traditional refinances. Learn more here.

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Home Inspection An impartial, physical evaluation of the overall condition of the home you want to buy and items that need to be repaired or replaced. It gives a detailed report on the condition of the structural components, exterior, roofing, plumbing, electrical, heating, insulation and ventilation, air conditioning, and interiors.

Home Warranty An insurance policy to repair or replace major home systems or appliances, such as a dishwasher, stove, or air conditioning system.

Homeowners Insurance Also called hazard insurance or home insurance, it’s property insurance that covers a private residence or house.

HomeReady A Fannie Mae mortgage program for buyers with low-to-moderate income, featuring a low down payment, cancelable mortgage insurance, and flexible underwriting.

The U.S. Department of Housing and Urban Development (HUD) A government agency that supervises programs like Community Planning and Development, Federal Housing Administration (FHA), Public and Indian Housing, Fair Housing and Equal Opportunities, Ginnie Mae, and others.

IInstallment Loan A loan that you repay with a fixed number of periodic, equal-sized payments.

Interest Rate Written as a percentage, this is the rate at which you pay interest on the principal amount of your home loan. All other things being equal, a lower rate means a lower monthly payment.

Interest Rate Cap A limit on the highest interest rate your adjustable rate mortgage can reach. Your actual interest rate cannot be adjusted above this rate.

Investment Property Real estate you earn income on and do not occupy yourself. The income can be in the form of rent, future resale of the property, or other earnings.

J,KJumbo Loan A mortgage loan that may have high credit quality, but is in an amount above conventional conforming loan limits. Any mortgage for $453,101 ($679,651 in Alaska and Hawaii) or more is considered a jumbo loan.

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LLender Placed Insurance (LPI) An insurance policy sometimes placed by the lender on your home in the case of an insurance payment lapse or insufficiency in your own property insurance.

Lien A legal claim that a person or entity has on the property of another until a debt has been paid back.

Loan Amount The amount of money you borrow to finance your home.

Loan Balance The amount owed on your loan or mortgage.

Loan Modification A permanent change in one or more of the terms of your loan that allows it to be reinstated, and results in a payment you can afford.

Loan Servicing The process by which a company (mortgage bank, servicing firm, etc.) collects interest, principal, and escrow payments from you, the borrower.

Loan-to-Value Ratio (LTV) The amount of your home loan divided by the value of your home. It’s typically expressed as a percentage. For example: an $80,000 loan on a home appraised at $100,000 results in an LTV of 80%.

Lock Period The lender’s commitment to hold for you a certain interest rate at a certain percentage for a certain number of days.

MMaturity or Maturity Date The final payment date when the principal and all remaining interest is of your home loan is due.

Mortgage An agreement between you and a lender that lets you buy a home without paying the entire cost up front. The home itself is used to secure the loan.

Mortgage Insurance (MI) An insurance policy that protects lenders or investors from losses due to the default of a mortgage loan. If you have a government backed loan like the FHA or VA and your down payment is less than 20%, you may have to pay a mortgage insurance premium each month along with your regular mortgage payment.

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Mortgage Payment Your monthly payment is usually made up of principal, interest, taxes, and insurance (often referred to as PITI). If you have Private Mortgage Insurance (PMI), that will also be included in your mortgage payment.

Mortgage Term The number of years you’ll repay a mortgage loan. The most common terms for mortgages are 15 and 30 years.

NNegative Amortization An amortization schedule where the loan amount increases because the interest is not fully paid in each payment, and the amount of interest you do not pay is added to the principal balance. (See Amortization)

O

Origination The process of applying for a loan and all the necessary steps up to your approval.

Outstanding Loan Balance An amount owed on your loan that can indicate one or more loan payments or the loan balance in total.

P,QPayoff The final payment on a mortgage, loan, or other debt that satisfies your obligation and releases the lien.

Preapproval A written statement from your lender that officially determines how much you can borrow (AKA, how much home you can afford). It’s based on things like your credit score, income, and employment history.

Pre-Paid Interest Interest you pay from the day you close your loan to the first day of the next month. If you close on the 20th of a 30-day month, you’ll pay 10 days of pre-paid interest before you make your first mortgage payment.

Pre-Payment Penalties Some lenders charge you a penalty fee if you pay off your loan before the end of the term such as paying off your mortgage in a lump sum payment or paying more in your monthly mortgage payments.

Prequalification An estimate of how large a mortgage you can afford, based on your financial circumstances of the past two years.

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Principal In a home loan, this is the loan amount. Interest is calculated based on the principal.

Private Mortgage Insurance (PMI) An insurance policy you may need if you pay less than 20% of a home’s purchase price in the down payment. PMI protects the lender against loss if the borrower defaults on the mortgage loan.

Promissory Note A document containing the promise to repay the amount you borrow for your home and the terms for repayment. The lender holds your promissory note while you’re still paying back the loan. When it’s fully paid off, the note will be marked as paid in full and you’ll get it back.

R Refinancing The repayment of an existing home loan on a property from the proceeds of a new loan on the same property.

Remaining Balance The total amount that you owe on a home loan at any given time.

Remaining Term The amount of time remaining until a loan is completely paid in full.

SSecondary Income Any income from sources other than your job or primary source of income, such as alimony, child support, or separate maintenance agreements.

Short Sale An alternative to foreclosure proceedings that is any sale of real estate that generates proceeds less than the amount owed on the property.

TTitle A legal document showing your right to own your property.

Total Interest Percentage The total amount of interest that you will pay over the loan term, expressed as a percentage of your loan amount.

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UUpfront Mortgage Insurance Premium (UFMIP) A one-time insurance fee required for a government backed loan like the FHA if your down payment or equity is 20% or less than the value of the home.

V,W,X,Y,ZVA Loan A home loan backed by the Department of Veterans Affairs offered exclusively to military service members, veterans, and certain surviving spouses of veterans. It features a 0% down payment and an allowance for less-than-perfect credit. Learn more about it here.

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