Mortgage glossary

The words nobody explains.

Escrow. Amortization. Loan-to-value. This industry runs on vocabulary it assumes you already have, and then treats not having it as though it were a lack of intelligence rather than a lack of exposure. Here is the whole list, in ordinary words, with nothing to fill in first.

The money

Down payment: The part of the purchase price you pay yourself, up front. It is not the same as your closing costs, and budgeting for one without the other is the most common planning mistake first-time buyers make. On common programs it ranges from zero to 20 percent of the price.
Closing costs: The fees to set the loan up and transfer the house: lender fees, title work, the appraisal, taxes, and the first year of insurance. Usually 2 to 4 percent of the price, so $5,000 to $10,000 on a $250,000 house. Separate from the down payment.
Cash to close: Every dollar you actually have to bring on closing day: the down payment plus the closing costs, minus anything the seller agreed to cover and minus the earnest money you already put down. This is the number that matters when you are deciding what you can afford, and it is the one people are least often given.
Earnest money: A deposit you put down when your offer is accepted, to show you are serious. It is held by a third party and credited back to you at closing. You can lose it if you walk away for a reason your contract does not protect, which is what contingencies are for.
Gift funds Gift letter: Money a family member gives you toward the purchase, with no expectation of repayment. Lenders allow it on many programs, but they need a signed gift letter saying it is a gift and not a loan, and they will trace where it came from. Tell your originator about it early rather than depositing it and explaining later.
Seller concessions: Money the seller agrees to put toward your closing costs as part of the deal. It does not reduce the price, it reduces what you need on closing day, and there are limits on how much each loan program allows.
Discount points Points: Money paid up front to buy a lower interest rate. One point is one percent of the loan. Whether it is worth it comes down to one question: how many months of savings it takes to earn the cost back, and whether you will still own the house by then.
Equity: What the house is worth minus what you still owe on it. It grows as you pay the loan down and as values rise, and it is what you are actually selling when you sell, after the costs of selling come out of it.

The loan

Principal: The amount you borrowed, not counting interest. Each monthly payment splits between principal and interest, and early in a loan most of it is interest.
Interest rate: The percentage the lender charges you for borrowing, before fees. It is the number everyone quotes and compares, and on its own it does not tell you what the loan costs. For that, see APR.
APR Annual Percentage Rate: The interest rate plus most of the loan fees, expressed as one yearly percentage. It exists so two offers can be compared honestly: a lower rate with high fees can have a higher APR than a higher rate with none. Compare APR to APR, not rate to rate.
Amortization: The schedule that splits every payment between interest and principal over the life of the loan. It is why a payment in year two barely reduces the balance and a payment in year 25 mostly does.
Loan-to-value LTV: The loan amount as a percentage of what the house is worth. Put 10 percent down and your LTV is 90 percent. It drives whether you pay mortgage insurance and often what rate you are offered.
Debt-to-income DTI: Your monthly debt payments divided by your monthly income before taxes. Lenders use it to judge whether a payment fits. Car loans, student loans, and credit-card minimums count; groceries and utilities do not.
Mortgage insurance PMI / MIP: An extra monthly charge required on most loans with less than 20 percent down. It protects the lender if you stop paying, not you. On a conventional loan it can usually be removed once you have enough equity; on most FHA loans made since 2013 it stays for the life of the loan.
Conventional loan: A mortgage that is not insured by a government program like FHA, VA, or USDA. Conventional 97 is the version that allows 3 percent down for a qualifying first-time buyer.
FHA loan: A mortgage insured by the Federal Housing Administration. 3.5 percent down and the most forgiving credit requirements of the common programs, in exchange for mortgage insurance and stricter standards for the condition of the property.
VA loan: A mortgage guaranteed by the Department of Veterans Affairs, for eligible veterans, service members, and some surviving spouses. No down payment and no monthly mortgage insurance.
USDA loan: A no-down-payment mortgage for houses in areas the Department of Agriculture designates as rural. The map reaches closer to Grand Rapids than most people assume, and eligibility is by address, so it is worth checking a specific house rather than guessing.
MSHDA Michigan State Housing Development Authority: The state housing agency. Its MI Home Loan program pairs a mortgage with money toward the down payment for buyers who qualify. There are limits on income, sales price, and credit score, and a required homebuyer education course.
ITIN Individual Taxpayer Identification Number: A tax processing number the IRS issues to people who have to file US taxes but are not eligible for a Social Security Number. Some lenders, including Priority Home Mortgage, will write a mortgage for a borrower using one.
Rate lock: An agreement that holds your interest rate for a set number of days while the loan is processed. If the lock expires before closing, the rate can change, which is one reason a delayed file costs money and not just time.

The process

Pre-approval: A lender has reviewed your income, credit, and assets and put in writing what they are prepared to lend. It is what makes an offer credible to a seller. It is not the same as a pre-qualification, which is an estimate based on what you told someone, and it is not a final approval.
Underwriting: The stage where a person at the lender examines the whole file against the program rules and decides yes, no, or yes with conditions. Conditions are normal and are usually requests for another document, not a sign that something has gone wrong.
Loan Estimate: A standardised three-page form a lender must give you within three business days of your application, showing the rate, the monthly payment, and the closing costs. Because every lender uses the same form, it is the honest way to compare two offers.
Closing: The appointment where you sign the loan documents, the money moves, and the house becomes yours. Bring photo identification and whatever form of funds the title company asked for, and expect to be there about an hour.
Contingency: A condition written into your offer that lets you back out without losing your earnest money if something specific does not happen: the inspection finds a problem, the appraisal comes in low, or your financing falls through.
Credit score: A number, usually between 300 and 850, that summarizes how you have handled borrowed money. Different loan programs set different minimums. Having no score at all is not the same as having a bad one, and some programs can work with a borrower who has none.

The house

Appraisal: An independent opinion of what the house is worth, ordered by the lender and paid for by you. If it comes in below the price you agreed, the lender will only lend against the lower number, and that gap has to be solved by renegotiating or by cash.
Home inspection: A paid walkthrough by someone who examines the condition of the house and writes up what is wrong with it. It is not the same as the appraisal, it is for you rather than for the lender, and it is almost always worth the money.
Escrow Escrow account: A holding account. Part of your monthly payment goes into it, and the loan servicer pays your property taxes and homeowners insurance out of it when they come due. It is why your payment is larger than principal and interest alone, and why it can change from year to year even on a fixed rate.
Title insurance: Protection against someone later claiming a right to the property: an unpaid contractor, an heir nobody knew about, an old lien. The lender requires a policy for itself; a separate owner policy protects you, and it is usually worth buying.
Property taxes: What the local government charges for owning the house, based on its assessed value. In Michigan they can rise after a sale, so the amount the seller was paying is not necessarily what you will pay. Ask what the number will be for you, not what it has been.
Homeowners insurance: Coverage against damage to the house. The lender requires it and will not close without proof of a policy, so it needs to be arranged before closing day rather than on it.

Talk to Israel

Still not clear? That is the industry's fault, not yours.

If a definition here did not land, or you met a word that is not on this list, call and ask. Explaining these is most of the job and Israel would rather do it twice than have you sign something you did not follow.

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