Top Confusing Mortgage Terms Explained
Published: August 2017
Author: Bank of England Mortgage Staff
If you think mortgage jargon is confusing, you're not alone. And it's not just first time homebuyers who are baffled. Some of the terms are so tricky even the experts don't agree on exactly what they mean.
To help ease the frustration, here are a list of the most common confusing terms:
A conforming loan is a mortgage that follows, or "conforms," to a set of loan guidelines or standards. By far, the most common type of conforming loan is one that meets Fannie Mae or Freddie Mac guidelines.
Loans that don't conform are known as "non-conforming." A non-conforming loan is a loan that fails to meet bank criteria for funding. Reasons can include the loan amount is higher than the conforming loan limit, lack of sufficient credit, the unorthodox nature of the use of funds, or the collateral backing it to name a few.
This category is comprised of FHA, VA and USDA loans. FHA loans are insured by the Federal Housing Administration. VA loans are guaranteed by the U.S. Department of Veterans Affairs. USDA loans are backed by the U.S. Department of Agriculture. USDA loans are also called RD or Rural Development loans, after the USDA division that handles them.
Jumbo loans have a loan amount that's higher than Fannie Mae or Freddie Mac guidelines known as loan limits. The current limit in most U.S. counties is $417,000. Loans for more are jumbo loans.
This category includes all conforming loans and many non-conforming loans, but no jumbo, government or subprime loans. A conventional loan is a mortgage that is not guaranteed or insured by any government agency.
APR (Annual Percentage Rate)
The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act and Regulation Z. Because it includes certain costs paid to obtain the loan, it is usually higher than the interest rate stated in the mortgage note. Aids in comparing the true cost of loans offered by lenders.
'Private mortgage insurance' or just 'mortgage insurance'?
Mortgage insurance, which may be required when a borrower's down payment or equity is less than 20 percent of the home's purchase price or value. Some mortgage insurance is called private mortgage insurance (PMI) and some is simply called mortgage insurance (MI) or mortgage insurance premium (MIP). Why two different terms?
PMI is private mortgage insurance, and is for conventional or conforming loans. It is a risk-management product that protects lenders against loss if a borrower defaults.
MIP is mortgage insurance premium, and that is on FHA and USDA government loans. The VA doesn't have MIP, it has a funding fee. It doesn't have mortgage insurance, so it's not applicable.
DTI (Debt-to-income ratio)
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.
A discount point, paid upfront to the lender, and generally is used to lower the borrower's interest rate over the life of the loan. This interest rate reduction is sometimes called a "buy down."
An origination point is a fee or collection of fees. Unlike a discount point, an origination point doesn't buy down the borrower's interest rate.
Closing is perhaps the happiest term in a real estate transaction since it refers to the process by which the loan is completed and everyone receives his or her due, whether that's the proceeds of a home sale for the seller or the title to a property for the buyer.
Settlement refers to the reconciliation of accounts or accounting process that takes place as part of the real estate closing.
Escrow refers to an account or entity that holds funds for others prior to disbursement.When used to describe the mortgage servicer as collecting a portion of your payment every month and holding it on your behalf to disburse payments to taxing authorities or insurance companies; this is an escrow account (sometimes referred to as an impound account).
If you have any questions at all in regards to home mortgages, please don't hesitate to contact BOE Mortgage!