Mortgages 101: What you should know before applying for one



When you are a first-time home buyer, you may encounter many new and sometimes confusing words and phrases related to real estate transactions.
Even if you have a real estate professional to assist you, it's important to familiarize yourself with the terminology so you can develop a better understanding of the home buying process.
This list provides definitions of some of the most common mortgage-related terms you need to know:

Adjustable Rate Mortgage (ARM).

Also known as a variable rate mortgage or adjustable rate mortgage, this type of loan has a changing interest rate. An initial rate is charged for a fixed period of time, then changes annually; most set a cap on interest rates. A low initial interest rate, thus low monthly payments, make these loans ideal for those who plan to sell their home after only a few years and before the adjustable rate goes into effect.

Affidavit of Title

A document provided by the seller of a property that strictly states the status of possible legal problems involving a property or the seller. It is designed to protect a buyer from unresolved legal issues that the seller may face. If problems arise in the future, the buyer can use an affidavit of title in legal proceedings to defend himself.


The process of paying off or extinguishing a debt through a series of regular or fixed payments over a set period of time. In the case of paying off a home mortgage, it is the process by which the principal amount of your loan decreases over the life of the loan.


Property that you own that is considered to have value, particularly in the case of applying for a loan, and that can be used as collateral for that loan.


In real estate, the final transaction between a buyer and seller in which title to the property is transferred to the buyer and both parties review and sign closing documents detailing the sale of the home, financing, title insurance and associated closing costs. Also known as settlement.


Usually a specific asset, such as real estate or personal property, that is used to secure a loan. To obtain a mortgage loan, the home you wish to purchase is generally used as collateral. Lenders will look at two values to determine a property's collateral: the home's sales price and its appraised value. The lender will use the lower of the two values, so if the property does not match the sales price, then the lender must determine if the seller will reduce the sales price or if the borrower is willing to pay the difference.


Construction-to-Permanent Loan (C2P)

A loan that converts from a construction loan to a mortgage upon completion of the construction of a home. Homebuyers often use this simplified option because it contains only one approval and one closing.

Debt-to-Income Ratio (DTI)

The percentage of a person's gross monthly income that goes toward basic living expenses and debt repayment. Lenders use DTI to determine the risk associated with a person applying for a mortgage and whether or not the lender should extend a loan offer. For example, a person with a gross monthly income of $6,000 and monthly payments of $2,400 would have a DTI of 40. Most lenders will generally accept a DTI of 40 or less.

Delinquent Mortgage

A delinquent mortgage occurs when a borrower has not made their mortgage loan payments as promised. A lender may initiate foreclosure proceedings if a borrower is unable to make payments on a delinquent mortgage within a certain period of time.

Earnest Money Deposit

A sum of money that a homebuyer provides to the seller when agreeing to a price as a show of good faith and intent to purchase the home. Typically, earnest money is held in an escrow account until the sale is completed and then becomes part of the buyer's down payment. The cash can range from 1 to 3 percent of the purchase price, depending on the real estate market in your area.


The current market value of your home minus the remaining balance of your mortgage loan equals the amount of equity or "ownership" you have paid for your home. Over time, you build equity in your home as you pay down your mortgage and the market value of your home appreciates. Also known as home equity or homeowner's equity.

Federal Housing Administration (FHA)

Part of the U.S. Department of Housing and Urban Development (HUD), the FHA offers mortgage loans with low down payments, low closing costs and easy credit qualification terms.

FHA Loan

An FHA-insured mortgage that protects a lender if the borrower defaults on the loan. FHA loans typically have lower interest rates.

Fixed Rate Mortgage

A fixed-rate mortgage is a fully amortizing mortgage loan where the interest rate on the note remains the same for the term of the loan. This type of loan is different from loans where the interest rate can adjust or "float". The payment amounts and length of the loan are fixed. Those who take out this type of loan benefit from a single, consistent payment and the ability to plan a budget based on this fixed cost.

Good Faith Estimate (GFE)

This document outlines the terms and required costs associated with your mortgage loan, including lender fees, loan interest rate, points, title and transfer fees, and insurance. Lenders must provide a GFE to all mortgage loan applicants within three business days of application unless the application is denied.

HUD-1 Settlement Statement

The department requires that this U.S. Department of Housing and Urban Development (HUD) form be used as a statement detailing all actual costs and adjustments for each party (buyer and seller) in a real estate transaction. These costs include the cost of the property, loan fees, title insurance, home insurance, realtor commissions, and attorney's fees. The statement is generally prepared by a closing agent, who then provides each party with a copy of the statement for review one day prior to the actual closing or settlement. It is also called a final statement.


A legal claim filed by a creditor on real property that allows the lienholder to receive a specified amount of money upon sale of the property to satisfy the debt. The property often serves as security against the amount owed. In some states, a home mortgage may be considered a lien, rather than a full transfer of title.

Interest-Only Loan

A type of loan in which the monthly payments consist of interest only for a specified period, usually 5 to 10 years. After this period, the mortgagor has the option to refinance, pay the principal in full, or begin making incremental payments on the principal.


A legal agreement in which the conditional right of ownership of a home is conveyed by the borrower (mortgagor) to the lender (mortgagee) as security for the loan to purchase the home. If you, as the borrower, default on the loan, the lender can foreclose on your mortgage.

Non-Competition Clause (NCC)

A legal agreement in which one party agrees not to do business with a competing entity, start a competing entity, or disclose another party's confidential information. An NCC is usually a contract between an employee and an employer designed to protect a company from having its trade secrets or other confidential information exploited. Also known as a covenant not to compete (CNC).


The lender has evaluated and verified the buyer's stated income, asset information and credit score to ensure that the buyer qualifies to purchase a home for a particular loan amount. The pre-approval process takes approximately 7 to 10 business days, but once the buyer receives pre-approval, the buyer can close on the actual purchase more quickly. This is especially important in a strong real estate market where available homes can sell quickly.


Refers to items or costs that your lender must pay up front at closing to protect the mortgage loan. These items, which include your homeowner's insurance premium (from several months to a year's premium), property taxes and private mortgage insurance (if applicable), are paid into an escrow account from which the lender can pay directly to the insurance company or a property tax collector. Prepayments should not be confused with other closing costs that are related to the loan itself, such as lender's fees, title charges or attorney's fees.

P&I (Principal and Interest)

The two main components of a monthly mortgage loan payment. Principal is the amount that goes to pay off the loan balance, while interest is the amount you, as the borrower, pay the lender for the loan. It is also called PITI (principal, interest, taxes, insurance), which includes the other components of your payment: property taxes and home and mortgage insurance.


Fees paid to the lender for the loan, usually at closing, to receive a lower interest rate and, therefore, lower monthly payments. One point equals 1 percent of the loan amount for your mortgage. This process of "buying points" can be beneficial if you plan to stay in your home for an extended period of time. Also known as discount points.

Contract of Sale

A legal agreement between the buyer and seller regarding the terms of purchase of a residential property. For new construction homes, a home may be considered sold upon the signing of the sales contract by the buyer and the builder's representative, even though the actual structure will not be completed for several months. Also called a contract of sale or agreement of sale and purchase.

Short Sale

A real estate transaction in which the proceeds from the sale are less than the amount needed to pay off the remaining mortgage debt. An alternative to foreclosure, a short sale occurs when the lender and borrower agree to take a loss on the property rather than the borrower defaulting entirely on the loan.

Single Closing Financing

A type of mortgage loan in which a buyer assumes responsibility for construction financing at the beginning of the building that then converts to permanent financing once construction is completed. A buyer can generally achieve this type of financing at a cheaper rate than a builder, thus reducing the overall cost of construction. Other advantages of single-closing financing include only paying one set of closing costs, fixed interest-only payments during construction (up to 12 months), no prepayment penalties, and the ability to assume occupancy immediately at the end of construction. Disadvantages of this type of loan include assuming the risk that the home is well built and there is no possibility of backing out. Also known as a loan from a closing, construction-to-permanent loan or C2P loan.


A legal document that lists the right to ownership and possession of a home or other real property. Title is recorded as public record.

"Underwater" mortgage.

This is when the price of someone's mortgage is greater than the market value of their home. If someone wants to sell their home, they will have to pay out of pocket the difference between the mortgage and the final sale price.

VA  Loan

A VA  loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA) that provides long-term financing assistance to eligible U.S. veterans or their surviving spouses. The VA home loan program provides home financing to veterans to help them purchase property with no down payment. The VA designates eligible areas for these households as housing credit-shortage areas, which are generally rural areas and small cities.

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1 comment

  1. I am willing to take a loan. I can learn many things by reading it. What documents are required to take a loan?

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