Glossary of Mortgage Education Terms
Understanding the language of mortgages is essential for anyone starting their mortgage education. This glossary explains common mortgage terms in simple words, helping future loan officers, real estate professionals, and homebuyers feel more confident. With the right knowledge, you can navigate the mortgage process, make better decisions, and guide clients with clarity.
Conventional Loan
DEFINITION:
A conventional loan is a mortgage not backed by a government agency, often requiring higher credit scores and larger down payments. Conforming loans meet standards set by Fannie Mae and Freddie Mac, making them eligible for the secondary market.
Credit Score
DEFINITION:
A credit score is a number that represents a borrower’s creditworthiness. Lenders use it to determine the likelihood of on-time repayment.
Debt-to-Income (DTI) Ratio
DEFINITION:
The debt-to-income ratio compares a borrower’s monthly debt payments to their gross monthly income. Lenders use this ratio to measure repayment ability.
Down Payment
DEFINITION:
A down payment is the upfront portion of the home’s purchase price paid by the buyer. It reduces the amount that must be financed with a loan.
Equity
DEFINITION:
Equity is the difference between a property’s market value and the remaining mortgage balance. As you pay down your loan or your home’s value rises, your equity increases.
Escrow
DEFINITION:
Escrow is a special account managed by the lender to hold money for property taxes and homeowners insurance. It ensures these important costs are paid on time.
FHA Loan
DEFINITION:
An FHA loan is insured by the Federal Housing Administration and helps buyers with lower credit scores or smaller down payments. These loans often make homeownership more accessible.
Fixed-Rate Mortgage
DEFINITION:
A fixed-rate mortgage has an interest rate that stays the same for the life of the loan. This provides consistent monthly payments and long-term stability.
Foreclosure
DEFINITION:
Foreclosure is the legal process where a lender repossesses a property when the borrower cannot make required payments. The property may then be sold to recover the debt.
Interest
DEFINITION:
Interest is the cost of borrowing money, expressed as a percentage of the loan amount. It is added to the principal balance and paid as part of the monthly mortgage payment.
Loan Origination
DEFINITION:
Loan origination refers to the complete process of creating a mortgage, from application through approval and funding. It includes tasks like processing, underwriting, and closing.
Loan Originator
DEFINITION:
A loan originator is a licensed professional who helps borrowers through the mortgage application process. They guide clients in choosing loan products and work with lenders to secure approval.
Loan-to-Value (LTV) Ratio
DEFINITION:
The loan-to-value ratio compares the loan amount to the property’s appraised value. Lenders use this percentage to measure risk in approving the mortgage.
Mortgage Loan Processor
DEFINITION:
A mortgage loan processor organizes and reviews borrower documents before the file goes to underwriting. They make sure everything is accurate and complete to avoid delays.
Mortgage Loan Underwriter
DEFINITION:
A mortgage loan underwriter is responsible for assessing the risk of lending to a borrower. They review credit history, income, assets, and property details before making a final decision.
NMLS
DEFINITION:
The Nationwide Multistate Licensing System (NMLS) is the official system for licensing and registering mortgage loan officers. It ensures that professionals meet regulatory requirements to protect consumers.
Origination Fee
DEFINITION:
An origination fee is charged by the lender to process the mortgage application. It covers administrative costs for setting up the loan.
PITI
DEFINITION:
PITI stands for Principal, Interest, Taxes, and Insurance—the four parts of a monthly mortgage payment. Knowing this breakdown helps borrowers budget accurately.
Pre-Approval
DEFINITION:
Pre-approval is a lender’s conditional commitment for a borrower to receive a mortgage up to a certain amount. It strengthens a buyer’s position when making an offer.
Principal
DEFINITION:
Principal is the original loan amount borrowed, not including interest. Each payment reduces this balance over time.
Refinance
DEFINITION:
Refinancing replaces an existing mortgage with a new one, often to secure a lower rate or different loan terms. It can also be used to access equity.
Title
DEFINITION:
A title is the legal document that proves ownership of a property. It shows who has the rights to sell, transfer, or use the home.
Underwriting
DEFINITION:
Underwriting is the lender’s review process to evaluate a borrower’s financial profile and approve or deny a loan. It considers credit, income, and property value.
VA Loan
DEFINITION:
A VA loan is guaranteed by the U.S. Department of Veterans Affairs and available to eligible veterans and service members. These loans often require no down payment and have favorable terms.