An adjustable-rate mortgage (ARM) is a loan that offers an initial period of fixed interest that then resets at a specified milestone based on the term, as determined by the margin and index. You will often see an ARM expressed
as two numbers. For example, a 7/1 ARM has a fixed interest rate for the first 7 years that then adjusts based on market rates, and the index + margin, every year after that. While an ARM often has a lower initial interest
rate than a fixed-rate mortgage, it does come with a certain amount of unpredictability since it can go up or down based on the market.
Amortization is schedule of principal and interest ofa loan. It may be expressed as an amortization schedule which is effectively a monthly breakout and forecast of every payment need to be made to pay off the balance of the loan while also itemizing the interest and principal allocated to each payment over the term of the loan.
The annual percentage rate (APR) is the interest rate plus any and all additional charges and fees, including closing costs, title, escrow, and discount points. By definition, a loan’s APR is always expressed as a percentage next to the actual, nominal interest rate. The APR provides a very accurate indication of the total cost of the mortgage.
An appraisal is an unbiased, third-party estimate of a property’s fair market value (FMV) by a licensed appraisal typically delivered through a write-up or appraisal report. An appraisal is often required by lenders during the mortgage application process to provide a value of the property and a snapshot of the condition of the property. An appraisal is based on many factors, which includes the condition of the property, its location, and sales of similar homes in the market.
Basis points (BPs) are a unit of measurement typically used in finance and lending. A BP is equal to one one-hundredth of one percentage point (0.01%).
Cash to close is the amount of cash needed to bring in order to close an escrow on its closing day. It typically includes a bucket of items such as the down payment, all related fees, pre-paid taxes, homeowner’s insurance, and any homeowners association fees that are relevant for a given transaction.
A cash-out refinance is when a mortgage is taken out that pays off the old, existing mortgage while also providing a surplus amount to the borrower in the form of cash or cash equivalent. It is effectively used to convert home equity into cash and is an effective way of utilizing built-up equity.
A closing disclosure (CD) is a standardized document provided by a lender to a borrower with all of the granular details of a mortgage loan and the costs. It will include loan terms, the monthly payment, a breakout of fees, and other closing costs. Any lender, by law, is required to providethe CD at least 3 business days before the date of closing so you can review it and compare against the loan estimate (LE).
Closing costs are itemized and paid to various third party groups or companies to complete a transaction. This may include title costs, escrow costs, origination fees, credit report fees, appraisal fees, and more.
A closing disclosure (CD) is a standardized document provided by a lender to a borrower with all of the granular details of a mortgage loan and the costs. It will include loan terms, the monthly payment, a breakout of fees, and
other closing costs. Any lender, by law, is required to provide the CD at least 3 business days before the date of closing so you can review it and compare against the loan estimate (LE).
A co-applicant is an able bodied person whose income and credit position are put onto the loan application in addition to the primary borrower. Co-applicants are commonly used when the primary borrower may not qualify for the mortgage on his or her own and need the support of another applicant.
A co-borrower is a spouse whose income and credit history are put onto the loan application in addition to the primary borrower.
Condominium insurance, which is also known as an HO-6 insurance, protects the interior condition of a condo unit. Since condo owners do not own anything outside of their 4 walls, the HO-6 insurance is defined as everything within its four walls. This is because the exterior of the buildings and the common areas are typically owned by the condo association.
A conforming loan is a type of home loan that meets the mortgage limits and criteria as defined by the Federal Housing Finance Agency (FHFA), which is ultimately an independent government agency. These conforming loan limits are based on property size and location, and based on data attributing to median and mean property values and sales prices, among other factors. They can change annually. Conforming loans also require the borrower(s) to meet Fannie Mae and Freddie Mac lending requirements and guidelines. Loans that are outside of these requirements and guidelines are typically known as non-conforming and are often called Jumbo Loans.
Your credit score which is also known as a FICO score is a numerical value that is reported by the three main bureaus – Experian, Equifax, and TransUnion – and represents your financial history and strength. Scores can range from 300–850. The lower the score, the lower representation of financial strength and history while the higher the score, the higher the representation of financial strength and history.
Your debt-to-income ratio (DTI) is a numerical value or percentage (e.g. 38%) of your monthly debt divided by your monthly income. It is usually measured by taking into account your monthly debt and payments and dividing that by your gross pre-tax income (gross income). DTI is a vital scoring factor used to determine eligibility of a mortgage payment.
A down payment is the amount of cash you pay upfront toward the purchase of a home. It’s often expressed as a percentage of the selling price of a home—typically 5–20% depending on the type of loan. The difference between your down payment and the price of the home is what you finance with a mortgage. Generally, if you put less than 20% “down” on a home, private mortgage insurance (PMI) is required in addition to your monthly payment.
Earnest money (also known as a good faith deposit) is money that the buyer gives the seller when a sales contract is drawn to show intent to purchase. The money is deposited into a third-party account, known as escrow, and held until closing. Once contracts are signed, the earnest money becomes part of the down payment. If the contract falls through, the earnest money is either forfeited and the seller keeps it or the money has to be returned to the buyer, dependent on the contract.
Equity is the difference between the amount you owe on a property and its current market value. In other words, your equity is the amount of ownership you have in your property.
An escrow (also known as an impound account) is a third-party account where money between two or more parties is managed. Escrow accounts may be used to hold a buyer’s deposits while a real estate transaction is being processed. Escrow accounts are also commonly used to hold property taxes and insurance premiums (collected as part of the monthly mortgage payment) until the payments are due.
Fannie Mae is the nickname for the Federal National Mortgage Association—the government sponsored entity that provides funding to mortgage lenders by buying mortgages and selling the debt to investors. The primary purpose of Fannie Mae is to ensure that there are affordable housing options and programs for homebuyers, sellers, and renters. They do this by setting lending guidelines to ensure that loans are originated fairly and that home loans are not given to those who cannot afford them.
The Federal Housing Administration (FHA) is a government agency that promotes affordable, easy-to-qualify-for home loans. FHA loans are only available through approved lenders. If you’re a first-time homebuyer without a substantial credit history, an FHA loan could be an attractive option. You can qualify for an FHA loan with a minimum credit score of 500 and a 3.5% down payment. FHA loans require an upfront mortgage insurance premium and, if there’s less than a 10% down payment, require mortgage insurance for the life of the loan.
The Fair Isaac Corporation (FICO) generates credit scores based on information collected by three national credit reporting agencies: Experian, Equifax, and TransUnion. Typical FICO scores are in the 300–850 range. However, FICO has variations of scoring for different types of lenders. Credit scores are designed to give lenders an evaluation of your likelihood to pay your bills on time. A higher credit score indicates a more favorable borrower.
A fixed-rate mortgage is a home loan that has a constant interest rate for the lifetime of the loan. Fixed-rate mortgages are typically offered in 10-, 15-, 20-, 25-, and 30-year terms—giving homebuyers the security of a predictable monthly payment. Shorter-term fixed-rate loans typically carry the lowest interest rates and are more desirable if you’re comfortable handling a larger monthly payment.
Flood certification (also known as a flood determination and certification) is a document issued to certify whether a property is located in a flood zone based on FEMA (Federal Emergency Management Association) flood maps. A flood certification is required by your lender and determines whether special flood insurance is needed for your home.
Flood insurance is special coverage that covers water damage caused by flooding. If your home is found to be located within a flood zone, your lender will likely require you to have a flood insurance policy. Premiums vary depending on how prone the property is to flooding.
Foreclosure is the process of repossessing a home after the borrower defaults on their mortgage.
Freddie Mac is the nickname for the Federal Home Loan Mortgage Corporation, a government-sponsored entity that provides funding to smaller mortgage banks and lenders by buying their loans. The primary purpose of Freddie Mac is to ensure that there are affordable housing options and programs for low-income homebuyers, sellers, and renters.
A gift letter documents money that has been given to you by a family member, spouse, or partner to support your down payment or closing costs. Its purpose is to assure the lender that the gift funds have no expectation of being repaid—otherwise they would be classified as debt and included in your debt-to-income ratio.
A home inspection is an examination of a home’s physical condition in connection with its sale. It’s on the homebuyer to organize and pay for a home inspection after their offer has been accepted but before they sign on the dotted line. The purpose is to uncover any potential issues with the home before finalizing the purchase. There are no federal regulations governing home inspectors, and licensing requirements vary by state.
A homeowners association (HOA) oversees the development and enforcement of rules, regulations, and day-to-day operations for a community. The HOA is also responsible for maintaining community spaces. HOA fees may be collected on a monthly or annual basis.
Homeowners insurance is a form of financial protection against loss or damage to your home in the event of burglary, fire, or natural disaster. Most lenders require proof of a homeowners insurance policy prior to closing. That’s because the lender wants to protect their investment as much as you do—and if something ever happened to your home, they want to know that you’ll have the resources to pay off your loan.
An investment property is real estate that’s purchased with the exclusive purpose of generating a profit. Unlike a primary residence or a secondary home, an investment property is not something you’d typically own for personal use. More likely, the property would be rented out, sold for a return on investment, or both. Investment properties tend to have the highest interest rates and down payment requirements of all property types.
A jumbo loan (also known as a non-conforming loan) is a home loan that exceeds the maximum Federal Housing Administration (FHA) limit. Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, which means that the lender has no protection in the event that the borrower defaults. The maximum limit depends on the location of the home and what the conforming loan limit is for that area. Typically, more expensive areas of the country have higher conforming loan limits.
A lien is a legal claim to an item of property until an owed debt is paid off. When you take out a home loan, your lender has a lien on your home. This gives them the right to seize your home if you fail to repay your loan.
Listing agents (also known as seller’s agents) work on behalf of someone who is selling a property. They are authorized to handle negotiations and meet with potential buyers on behalf of the property owner.
A loan commitment is a letter from a lender indicating your eligibility for a home loan. In essence, it is the lender’s promise to fund the loan as stated by the terms in the letter. You receive a loan commitment letter once your application has been reviewed and the underwriting process is complete.
A Loan or Mortgage Consultant (also known as a Mortgage Expert) is a lender representative who is your dedicated and primary contact through the loan process, in addition to a Processing Expert.
A loan estimate (also known as an LE) is a standardized 3-page form that details the interest rate, term, monthly payment, and closing costs associated with your loan. Lenders are required by law to provide you with a loan estimate within three days of your application. At Torchlight Mortgage, we deliver loan estimates online within minutes. You won’t see origination fees or lenders fees on our loan estimates because we don’t have them.
A Loan Processor (also known as a Processing Expert) is the person responsible for preparing your loan package before it goes to an Underwriter. This person will review your income, credit, and asset documentation and ensure that everything matches what is stated on the application. You can reach Torchlight Processing Experts via call, text, or email at any time during your application process.
A loan term is the length of time over which the loan is to be repaid.
A loan-to-value (LTV) ratio is an equation that lenders use to assess the amount of risk associated with a home loan. LTV is calculated by dividing the total home loan amount by the appraised market value of the home. Typically, if the LTV ratio is higher than 0.8, lenders require private mortgage insurance (PMI) to offset the higher risk of default.
Mortgage insurance premium (MIP) is an upfront and annual insurance premium that’s required for any Federal Housing Administration (FHA) home loan—regardless of the size of the down payment. It protects the lender in case the borrower defaults on the loan. MIP differs from private mortgage insurance (PMI), which is reserved for conventional loans.
A mortgage note (also known as a “note”) is a document signed at closing outlining the complete terms of your new home loan. Think of it like an official “IOU.” A mortgage note states how much you are borrowing from the lender, whether the loan has a fixed or adjustable interest rate, and when you are expected to pay it back.
Origination fees are the one-time costs you pay to a lender for your home loan.
Owner-occupancy refers to the concept of living in the home that you own. It is crucial information from the lender’s point of view because if you weren’t planning to live at the home you were purchasing or refinancing, you would be classed as an absentee owner. In that instance, the home may be considered an investment property and you would not be eligible for the same types of home loan products or rates available for a primary residence.
In the due diligence process, a pest inspection is performed by a certified pest inspector to determine whether a property has an active or previous infestation. Pest inspections are a part of closing costs but may be paid for by either the buyer or seller.
PITI represents Principal, Interest, Taxes, and Insurance which make up the total monthly obligation for any homeowner.
A planned unit development (PUD) is a cohesively designed community that consists of townhouses, detached homes, or condos, as well as public spaces and commercial real estate.
Points (also known as discount points and mortgage points) are a way to lower the interest rate on your home loan by agreeing to pay more at closing. One mortgage point is equal to 1% of the mortgage amount and can lower your interest rate by up to 0.25%. The more points you pay, the lower your payment and rate will be. Points are the inverse of credits.
A pre-approval letter is a document from a lender that states the exact amount you’re approved to borrow once your stated information is verified. Getting a pre-approval letter is an essential time-saving first step in the home shopping process.
Prepaid costs are payments made at closing for upcoming line items of your new home loan. They’re called “prepaid” costs because you’re paying for them before they are technically due. The most common kinds of prepaid costs are homeowners insurance, property taxes, and mortgage interest. These are paid into an escrow account to ensure that you have money to pay your bills when they become due.
A prepayment penalty is a fee that’s charged when you pay off your mortgage early. Torchlight Mortgage home loans have no prepayment penalties so you can pay off the balance or refinance at anytime.
A primary residence is a home in which you live for the majority of the year. It could be a free-standing home, a condo, a co-op. You can only have one primary home. And home loan rates are generally usually lower for a primary residence.
When referring to a home loan, the principal is the amount of money borrowed excluding taxes, interest, or homeowners insurance. In short, it’s what you originally borrowed from your lender when you first took out your home loan.
Private mortgage insurance (PMI) is insurance required by lenders when a borrower puts less than 20% down on a conventional loan. It’s meant to protect the lender in the event that the borrower defaults. PMI can be cancelled once the borrower has at least 20% equity in the property. The PMI amount is determined by many different factors, similar to your interest rate—including FICO score, loan-to-value ratio, debt-to-income ratio, property type, and occupancy.
A purchase contract (also known as a contract to purchase real estate) is a legal written agreement between a buyer and seller. Purchase contracts vary state to state depending on local law. When both the buyer and seller finish negotiating terms and stipulations, they sign the purchase contract and it becomes legally binding—contingent upon the terms in the contract being met. Some states allow real estate agents to draw up purchase contracts but others only allow lawyers to write contracts.
A rate lock is a guarantee from a lender that the offered interest rate with the associated points and credits for a mortgage is the rate that they will receive, so long as their financial information matches what was provided during the rate lock process. Rate locks are good for a pre-set length of time, such as 30, 45, or 60 days. Torchlight offers a 24/7 online mortgage rate lock to protect you from rising interest rates.
Real estate agents are the state-licensed officials that are authorized to act as a buyer’s agent in the negotiation and purchase of a home, as opposed to listing agents or seller’s agents who act on behalf of the seller.
A refinance (also known as a refi) is the process of applying for a new home loan to replace an existing home loan. Homeowners generally refinance to change the rate or term of their home loan (rate/term refinance) or to take cash out of the equity that they’ve built (cash-out refinance).
A secondary home is, simply put, a vacation home. You must have sole control over the property, meaning that it cannot be a full-time rental, timeshare, or managed by a property management company. Secondary homes must be suitable for year-round occupancy. If you intend to rent out a secondary home for the majority of the year, it may be considered an investment property.
Settlement costs (also known as closing costs) are the fees that the buyer and/or seller have to pay to complete the sale of the property. Depending on the lender, these may include origination fees, credit report fees, and appraisal fees, as well as property taxes and recording fees.
A short sale is when a homeowner sells their home for a price less than the balance of their current mortgage. If a lender agrees to a short sale, the homeowner will typically owe the bank or lender the remaining balance due on their home loan after the sale. If a borrower has had a short sale in the past, there is a 4-year waiting period to qualify for a new mortgage.
A survey is a drawing of your property that details the location of the lot, property lines, home, and any other structures within its bounds. The purpose of a survey is to confirm land boundaries in the event of a legal dispute. Surveys are typically held by the local county tax collector and are part of the closing costs associated with buying a free-standing home.
A termite letter is a document issued by a professional inspector to certify that the property was inspected and found to have no termites or wood-boring insects such as powder-post beetles. Pest inspections are a part of closing costs but may be paid for by either the buyer or seller.
Third-party fees are the fees not paid to the lender to complete the sale of the property. Depending on the lender, these fees may cover your credit report, appraisal, land survey, recording fee for county, and transfer taxes.
Title is the legal concept of property ownership. States and counties require legal recording of property ownership for tax purposes. Having a record of ownership also ensures that the person holding the deed is the uncontested legal owner.
Title insurance (also known as owner’s title insurance) protects borrowers and lenders against financial loss from past defects or problems with the ownership of a property typically back taxes, liens, and conflicting wills. Most lenders require title insurance to protect their interest in the property until the home loan is paid off. You can also purchase borrower’s title insurance to protect yourself.
Title vesting defines who owns a certain property and thus who is liable for property taxes and other legal matters, as well as how the property can be sold. There can be multiple owners of a single property.
A transfer tax is a real estate tax usually paid at closing to facilitate the transfer of the property deed from the seller to the buyer. Depending on where you live, you may have to pay transfer taxes at the city, county, and state level. In special circumstances—such as the inheritance of a property—you may also encounter transfer taxes at a federal level.
An Underwriter is a member of your loan team who assesses your loan application and the appraisal of the property you are trying to finance. It’s their job to determine whether or not you qualify for a home loan.
Underwriting is the process of evaluating a complete and verified home loan application as well as the appraisal of the property being financed. Underwriting is the assessment of risk in a home loan and a borrower’s ability to repay it. The process ends with an approval or denial of a home loan.
VA loans are home loans with lenient qualifying guidelines and favorable terms for active military service members, veterans, and eligible military spouses. Because VA loans are backed in part by the federal government, lenders and banks are able to offer reduced interest rates.
A verified pre-approval letter provides you and your real estate agent the clearest idea of what you can afford. It’s based on verified information and requires a hard credit check.