Top Terms Every Home Buyer Needs to Know

From the time you start saving for a down payment to the day of your closing, purchasing a home is a multi-step process that may introduce you to new financial and legal terms along the way. We’ve compiled a list of some of the most important terms you should understand as you  contact lenders, sellers, real estate professionals, or browse available properties. Use this glossary to begin to familiarize yourself with the homebuying words, phrases, and acronyms you may need to know. Keep in mind that some of these terms, and their definitions, may vary from place to place.

Top home financing and/or buying terms to know:

Adjustable-Rate Mortgage (“ARM”) loan

A type of mortgage loan with an interest rate that fluctuates or changes, typically in relation to an index interest rate. Your payments can rise or fall over the life of the mortgage loan depending on introductory period, rate caps, and the index interest rate. (Source: consumerfinance.gov)

Aggregate Analysis (or Composite Analysis)

An accounting method a servicer uses in conducting an escrow account analysis by computing the sufficiency of escrow account funds by analyzing the account as a whole. (Source: https://www.consumerfinance.gov/rules-policy/regulations/1024/17/#a)

Amortization

Paying off a debt, such as a mortgage loan, with regular payments over a specified period of time, so that the amount you owe decreases with each payment. Most mortgage loans amortize, but some mortgage loans do not fully amortize, meaning that you would still owe money after making all of your payments. (Source: consumerfinance.gov)

Annual Percentage Rate (“APR”)

An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, any points, mortgage broker fees, and charges that you pay to get the mortgage loan. For that reason, your APR is usually higher than your interest rate. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Appraisal

A written document that provides an estimate or opinion of the value of a house or property. It describes what makes it valuable and may show how it compares to other properties in the neighborhood. An appraisal is usually made by an independent certified appraisal professional known as an Appraiser. (Source: https://www.consumerfinance.gov/ask-cfpb/what-are-appraisals-and-why-do-i-need-to-look-at-them-en-167/)

Closing

The “Closing”, sometimes also known as “Settlement,” is the last step in buying and/or financing a home when you and/or the other parties involved in the transaction sign the necessary documents. After signing the mortgage loan documents, you become responsible for the mortgage loan. In a purchase transaction, this is usually when ownership of the property changes hands from the seller to the buyer. (Source: https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-closing-what-happens-at-the-closing-en-176/)

Closing Costs

Mortgage loan Closing Costs are all of the costs you will pay at closing. This includes origination charges, appraisal fees, credit report costs, title insurance fees, and any other fees required by your mortgage lender or paid as part of a mortgage transaction. Lenders are required to provide a summary of these costs to you in the Loan Estimate. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Consummation

In the context of a mortgage/credit loan transaction, Consummation means the time that a consumer becomes contractually obligated on the mortgage/credit loan transaction. While consummation and Closing/Settlement may occur at the same time, they are separate and distinct events from a legal perspective. (Sources: See Reg Z – 12 CFR 1026.2(a)(13) – https://www.consumerfinance.gov/rules-policy/regulations/1026/2/#a-11)

Contingency (or Financing Contingency or Loan Contingency)

In the context of buying a home, a provision in a purchase and sale agreement stating that the transaction between the buyer and seller is dependent on a specific event. For example, a buyer may put in place a contingency for their current home to sell by a specified date, or a buyer can cancel the contract of the home purchase without penalty and receive a refund of their earnest money deposit if they’re unable to secure financing or a mortgage.

Credit Score

A score created using a mathematical formal, usually by a credit bureau. A Credit Score predicts how likely you are to repay a loan on time. Among other things, the score depends upon the information in your credit report, your credit history, how timely you pay your bills, and even your outstanding debt. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Default

In the context of a mortgage loan, when you default on, or breach, the terms and/or conditions of your mortgage loan documents. By example, when you stop making payments on your mortgage per the mortgage promissory note and/or mortgage security instrument loan.

Debt Ratio or Debt-to-Income (“DTI”) Ratio

Your Debt Ratio or Debt-to-Income (“DTI”) ratio is all of your monthly debt payments divided by your gross (before taxes and any other deductions) monthly income. Expressed as a percentage, it’s one way lenders measure your ability to manage monthly payments to repay the money you plant to borrow. (Source: consumerfinance.gov)

Down Payment

A Down Payment is the amount you pay toward the home upfront. It is separate from Earnest Money. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Earnest Money

Earnest Money is a deposit a buyer pays to show good faith on a purchase and sale agreement to buy a home. It is separate from a Down Payment. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Equity

The current market value of your house minus the amount you still owe on your mortgage(s) on your house. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Fixed-rate Mortgage Loan

A type of mortgage loan in which the interest rate is set when you take out the loan and remains the same for the life of the loan. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Home Inspection

A Home Inspection is often part of the home buying process. It involves visual examination of a home – usually including the plumbing, electrical, foundation, walls, heating, cooling, and/or appliances – by a home inspector to provide an evaluation of the home’s condition. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Homeowners insurance

A policy that pays for certain unexpected losses and/or damage usually resulting from burglary, fire, and other common damages or disasters. Lenders often require you to maintain an amount of insurance that is equal to the amount of the mortgage loan. Some properties, depending on their location, may also require to obtain additional policies to cover losses or damages resulting from certain other disasters, such as floods, hurricanes, wildfire, and the like. Note that homeowner’s insurance is not the same as Mortgage Insurance. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Interest rate

Your interest rate is the cost you will pay each year to borrow money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. (Source: https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-mortgage-interest-rate-and-an-apr-en-135/ and https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/)

Lien

In the context of a mortgage loan, a Lien is a claim or charge on property to ensure payment of a debt, obligation or duty to the lender or another. Liens are used by mortgage lenders to secure their interest in the collateral property and repayment of the mortgage loan/debt. (Source: https://www.consumerfinance.gov/rules-policy/regulations/1024/2/#b-9-3)

Loan Origination Fee

The amount charged by a lender for making the mortgage loan, which could include, among other things, an underwriting fee or a processing fee. (Source: https://www.consumerfinance.gov/ask-cfpb/what-are-mortgage-origination-services-what-is-an-origination-fee-en-155/)

Loan-to-Value (“LTV”) ratio

The Loan-to-Value (LTV) ratio, or percentage, is a measure comparing the amount of your mortgage with the appraised value of the property. Mortgage lenders may use the LTV in deciding, among other things, whether to lend to you and/or to determine if they will require private mortgage insurance.. (Source: https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-and-how-does-it-relate-to-my-costs-en-121/)

Margin

In the context of an Adjustable-Rate Mortgage (ARM), Margin refers to the number of percentage points added to the index by your mortgage lender to set your interest rate after the initial rate period ends. The Margin is set in your loan agreements and will not change after closing, and the amount depends on your lender and your mortgage loan. (Source: consumerfinance.gov)

Mortgage Escrow Account (aka Mortgage Impound Account, Mortgage Reserve Account, or Mortgage Trust Account)

A Mortgage Escrow Account, also known as an Mortgage Impound Account, Mortgage Reserve Account or a Mortgage Trust Account in some places, refers to an account that a lender and/or servicer establishes or controls, on behalf of a borrower, to hold those funds it collects from the borrower for the payment of certain expenses, such as real property taxes, homeowners insurance premiums, flood insurance premiums, association/condo dues, or other such agreed upon charges or expenses Note that “escrow” can also refer to different accounts, funds, or agents, such as an escrow agent who holds legal documents and funds for the seller and buyer until, and to assist with, closing. (Source: https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/ and https://www.consumerfinance.gov/rules-policy/regulations/1024/17/#30afbd46dc7ecb1e56f5f14055b5197a9c6f1e76f5f18d5d86fe3c11)

Mortgage Loan

A loan to help finance the purchase of a home/property or the refinance of an existing loan(s). The loan is evidenced by a Promissory Note, which is secured by the home or property through a Security Instrument. This loan, and all the terms and conditions with go with it, is all generally referred to as the “Mortgage” or “Mortgage Loan”. (Source: https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-en-99/)

Promissory Note

A document, contract or agreement in which you promise to repay a loan or debit to the lender, and which contains certain terms and conditions of the loan or debt, such as the repayment of a specified sum of money, with interest, at a fixed or adjustable rate, over a length of time. A mortgage Promissory Note is usually secured Security Instrument.(Source: https://files.consumerfinance.gov/f/201410-promissory_note_explainer.pdf)

PITI

Abbreviation for the four basic components of a mortgage payment: Principal, Interest, Taxes (usually real property or other such taxes), and Insurance (usually, homeowners insurance or the like). In some instances, the abbreviation may also include an A (PITIA) for Association dues, for home owners association dues, condo unit fees, and the like. (Source: consumerfinance.gov)

Points (aka “Discount Points”)

Generally, Points or Discount Points refers to the points, fees, or lender credits that you pay at closing to lower your interest rate for the life of the loan. One Point is equal to 1% of the requested loan amount. (Source: https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-136/)

Preapproval letter

A letter provided by a lender which provides a determination on whether you qualify for a loan or credit from the lender and/or the amount of credit for you qualify for with the lender. A preapproval usually includes, among other things, an evaluation of your financial history and a credit report. Usually, a preapproval is subject to certain limited conditions, such as the finding of a suitable property and/or verification that your financial condition has not materially changed since the letter was issued. (Source: https://www.consumerfinance.gov/ask-cfpb/whats-the-difference-between-a-prequalification-letter-and-a-preapproval-letter-en-127/) (See also, 12 CFR 1003.2(b))

Prepayment penalty

A fee that a lender may charge you for paying off all or some of your mortgage loan earlier than stated in the mortgage loan documents. Not all mortgages have a prepayment penalty (Source: https://www.consumerfinance.gov/ask-cfpb/what-is-a-prepayment-penalty-en-1957/)

Prequalification letter

A letter provided by a lender which provides a preliminary determination on whether you would likely qualify for a loan or credit from the lender, or for a determination on the amount of credit for you would likely qualify for with the lender. Usually, a prequalification is based upon certain information; some or all of which may not be verified.
(Source: https://www.consumerfinance.gov/ask-cfpb/whats-the-difference-between-a-prequalification-letter-and-a-preapproval-letter-en-127/) (See also, 12 CFR 1003.2(b))

Private Mortgage Insurance (“PMI”)

Private Mortgage Insurance (“PMI”) is a type of mortgage insurance that protects the holder of your mortgage (i.e., the lender) in the event that you can’t make your mortgage loan payments. You are responsible for paying the premium, usually as part of your monthly payment. You might be required to pay for PMI depending upon the mortgage loan product you choose and/or if your down payment is less than 20 percent of the property value and you have a conventional loan. You may be able to cancel PMI once you’ve accumulated a certain amount of equity in your home. (Source: consumerfinance.gov)

Rate Lock (or Lock-in)

A Rate Lock (or “lock-in”) on a mortgage loan, which is obtain during the mortgage loan application process, guarantees your interest rate won’t change during a certain period of time (e.g.,. between offer and closing), as long as you close within the specified time frame and there are no changes to your application. (Source: https://www.consumerfinance.gov/ask-cfpb/whats-a-lock-in-or-a-rate-lock-en-143/)

Security Instrument (also referred to as a “Mortgage” or “Deed of Trust”)

A document, contract or agreement which, usually, secures a Promissory Note and which may contain certain terms and conditions of the loan or debt. In a Security Instrument you give the lender the right to take certain actions, such as take your home or property, if you default on, or breach, the terms or conditions of the Promissory Note and/or certain other terms and conditions of the mortgage loan. Depending upon where you are, the Security Instrument is known as a Mortgage, Deed of Trust, Security Deed or the like.
In a Mortgage Security Instrument, legal and equitable title is held by the borrower, but the lender places a Lien on the home or property.

In a Deed of Trust Security Instrument, a Trustee holds legal title pending repayment to the beneficiary (the lender), while the borrower is given equitable title through the Deed of Trust document.

(Source: https://files.consumerfinance.gov/f/201410-deed_of_trust_mortgage_explainer.pdf)

Total Interest Percentage (“TIP”)

An abbreviation for Total Interest Percentage, TIP is a disclosure that tells you how much interest you will pay over the life of your mortgage loan. TIP is expressed as a percentage of loan amount and assumes you make all payments in full and on time and do not make additional payments. It’s calculated by dividing the interest by the loan amount. (Source: consumerfinance.gov)

Additional Resources

https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/
https://www.consumerfinance.gov/rules-policy/regulations/
https://www.bankersonline.com/regulations
https://www.bankersonline.com/regulations/12-1024-000
https://www.bankersonline.com/regulations/12-1026-000
https://www.hud.gov/sites/documents/45662C9HSGH.PDF