Glossary

Annual income refers to the total income earned during a fiscal year. This includes things like: salary, bonuses, commissions, overtime, and/or tips earned. Gross income is the money you brought in before tax and the net annual income is the amount you’re left with once deductions are complete.

A cash-out refinance replaces your current mortgage with a new home loan that is for more than you owe on your house. Why do this? By doing this, you will receive the difference in cash and be able to spend it on home improvements, debt consolidation, or other financial needs you deem necessary. To cash-out refinance, you have to have equity built up in your house. According to NerdWallet, here’s how cash-out refinance works:

Pays you the difference between the mortgage balance and the home’s value
Has slightly higher interest rates due to a higher loan amount.
Limits cash-out amounts to 80% to 90% of your home’s equity.

The current balance on your loan statement is what is owed as of the date of the statement. The current balance does not reflect how much you owe to fully satisfy the loan.

Your debt-to-income ratio is the total of all monthly debt payments divided by your gross monthly income. This total is one way lenders gauge your ability to manage the monthly payments to repay the money you want to borrow. Borrowers with low debt-to-income ratios are more attractive to lenders. Any ratio higher than 43 percent communicates that a buyer may be a risky borrower. To a lender, someone with a high debt-to-income ratio shouldn’t take on any additional debt. If the borrower defaults on his mortgage loan, the lender could lose money.

Currently, the maximum debt-to-income ratio that a homebuyer can have is 43 percent if they want to take out a qualified mortgage. According to the Consumer Financial Protection Bureau, “Borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. The 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a Qualified Mortgage.”

In addition, the lower your debt-to-income ratio, the better the mortgage rate you will lock in on your loan, which translates into more money in your pocket now and in the future.

A down payment on a home mortgage is a percentage of the total sales price of your home, which is paid by you to the seller of the home you are purchasing. The remaining payment of the home to the home seller is provided to them from your mortgage. Down payments are discussed as percentages. For example, 20 percent down means the borrower is paying the seller 20 percent of the purchase price. (A down payment of at least 20 percent lets you avoid private mortgage insurance, or PMI.)

According to Nerd Wallet, while 62 percent of Americans think they need (at least) a 20 percent down payment to buy a home, much less is required.

The minimum down payment for a home mortgage depends on the type of loan and your lender’s requirements. Different loan types come with their own minimum down payment requirements such as: 3 percent for conventional loans; 3.5 percent for FHA loans; and zero percent down for VA loans and USDA loans.

An FHA loan requires a 3.5 percent down payment on the purchase price of the loan.

FHA loans are appealing to first-time buyers because of the low down payment requirements. For new purchase loans, an FHA loan requires a minimum of a 3.5 percent down payment. If you purchase a home for $175,000, for example, your down payment will be at least $6,125. Typically, closing costs can be wrapped into the loan and do not need to be paid out of pocket.

Keep in mind that 3.5 percent is the minimum down payment required on the purchase of a home with an FHA loan. Your lender will determine your creditworthiness which can affect the size of your down payment. Borrowers with poor credit might need to put more money down in order to qualify for the loan. If your credit is not where you want it to be, you can improve it by paying your bills on time, keeping your balances low on credit cards, and checking your credit reports for errors.

The FHA loan limit is the maximum loan amount you can get for an FHA loan, which varies depending on the area you live in.

An FHA loan is a loan that is insured by the Federal Housing Administration (FHA). The loans are geared toward borrowers that do not have a large down payment on the home they wish to purchase. FHA loans require a minimum of a 3.5 percent down payment on the purchase price of the home.

In 2020, FHA loan limits in high-cost metropolitan areas increased to $726,525. In areas where housing costs are low, FHA limits are $314,827. To see specific FHA lending limits in your state, click here.

Private mortgage insurance (PMI) is the lender’s protection if your home goes into foreclosure because you default on your primary mortgage.

When borrowers apply for a home loan, lenders will require a down payment equal to a certain percentage of a property’s purchase price (usually 20%). If unable to afford that percentage, a lender will require the borrower to take out PMI. PMIs are usually included in your monthly payment to the lender for your mortgage. The PMI can cost anywhere from 0.5% to 1% of the entire loan amount annually.

An interest rate is the amount charged above the principal by a lender for the use of assets. This is the rate that a lender charges to borrow their money. Typically, the interest is expressed as an annual percentage of the outstanding loan.

A loan term is the length of your loan. The loan term will tell you how long the loan will last as long you make the required payments each month. The length of your loan will affect the total monthly payment required along with total interest.

For example, a longer term will mean you pay less each month but will accumulate more interest.

Different loan periods could be: 30 year, 15 year, adjustable rate, and more.

Your loan-to-value (LTV) ratio is an indicator of whether or not you can afford the home you’re wanting. Lenders will look at your LTV ratio to see how risky your loan will be. LTV ratio is the amount of your loan divided by the value of the asset, which would be the home that is securing the loan. The LTV is typically shown as a percentage. The higher the percentage, the more risky the loan will appear to lenders.

To calculate your LTV ratio, you divide the amount of your loan by the appraised value of the home securing the loan. Credit Karma provides this example:

You want to purchase a home for $200,000, which is also its appraised value. If you have $40,000 for a down payment, you would need a $160,000 loan. The LTV would be the loan amount of $160,000 divided by the appraised value of $200,000, which is 0.80, or 80%. Your LTV is 80% of the property’s value.

Lenders will look at monthly debt to further look into the risk of the loan. Lenders use monthly debt amounts compared to income to evaluate whether or not a borrower can afford a mortgage payment in addition to those debts.

Monthly debts include: minimum credit card payments, medical bills, personal loans, student loans, and/or car loan payments.

Total Interest Paid is how much interest you will pay over your loan’s lifespan. This amount is not the same as your interest rate or the annual percentage rate. Total Interest Paid will typically be larger than both the interest rate and annual percentage rate because it is based on the full amount you’d pay over your full mortgage term.

Consumer Financial Protection Bureau provides this example to give you a better idea: A $100,000 loan with a 4 percent fixed interest rate, for example, could have an APR of 4.25 percent and a TIP of 72 percent.

Total Loan Amount is the principal amount that will be borrowed. The total loan amount is calculated as the difference between your down payment and the home value.

The “total of all payments” number represents the total amount of money the borrower will have paid over the life of the home mortgage.

The Consumer Financial Protection Bureau explains that, “the ‘total of payments’ is found on page 5 of the Closing Disclosure form in the “Loan Calculations” section. This total includes principal, interest, mortgage insurance (if applicable), and loan costs. It assumes that you make each monthly payment as agreed – no more and no less – until the end of the loan.”

Up-front mortgage insurance (often referred to as Upfront MIP) is an insurance premium, required for Federal Housing Administration (FHA) loans, when the loan term begins. It differs from private mortgage insurance (PMI), which is collected by a conventional, private mortgage lender monthly if a borrower’s down payment on a home is less than 20 percent of the home purchase price. Up-front mortgage premiums are collected and used for a variety of groups, like the FHA, to insure loans for borrowers.

Like PMI, Upfront MIP is an insurance premium collected by the lender to protect them if the borrower defaults on his mortgage payments. The FHA collects 1.75 percent and is typically paid at loan closing or rolled into the monthly mortgage payment. Upfront mortgage insurance premium (MIP) is mandatory for most of the FHA’s Single-Family mortgage insurance programs, according to the U.S. Department of Housing. “Lenders must remit upfront MIP within 10 calendar days of the mortgage closing or disbursement date, whichever is later.”

While no mortgage insurance is required for a VA loan, borrowers are required to pay a one-time VA loan funding fee. The VA Funding Fee is a governmental fee applied to every VA purchase and refinance loan. The fee is given to the Department of Veterans Affairs to cover losses and safeguard the loan guaranty program for future generations of military homebuyers.

Typically, the VA funding fee is 2.3% of the amount borrowed on a VA home loan unless you are a borrower who has already used the VA loan program in the past. Then your fee is 3.6%. Borrowers that are looking to reduce the amount of the funding fee can do so if they put at least 5% down at closing.

Note: In the past, regular military members paid slightly reduced funding fees than Reservists and National Guard members, but in 2020 fees for all military branches are equivalent due to the passing of the Blue Water Navy Vietnam Veterans Act.

The VA loan limit is the maximum amount in which a qualified Veteran can borrow without making a down payment.

VA loans are home loans designed for American veterans or their surviving spouses that are guaranteed by the U.S. Department of Veterans Affairs. Benefits include no down payment requirements, a negotiable interest rate, no mortgage insurance premiums, and low closing costs.

In 2020, the VA loan limits are the same as the Federal Housing Finance Agency’s limits. The county you live in will affect how much you can borrow. In most counties, for example, the VA loan limit is $484,350. In counties with a higher cost of living, the loan limit is as high as $726,525.

A credit score is a three-digit number that lenders use to assess your creditworthiness. It is based on your credit report, which is a record of your borrowing history.

Your credit score is important because it can affect your ability to get a loan, the interest rate you pay on loans, and even your ability to get a job or rent an apartment.

There are a number of factors that go into calculating your credit score, including your payment history, the amount of debt you have, and the length of your credit history.

You can improve your credit score by making your payments on time, keeping your credit balances low, and disputing any errors on your credit report.

The purpose of a loan is the underlying reason why an applicant seeks a loan or mortgage. Lenders use the loan purpose to make decisions on the risk associated with the loan and what interest rate to offer.

Here are some common loan purposes:

To purchase a home: This is the most common reason for taking out a mortgage.
To consolidate debt: This involves taking out a new loan to pay off multiple existing debts. This can be a good way to lower your interest rate and simplify your monthly payments.
To finance a large expense: This could include things like a car, a college education, or a medical procedure.
To start or grow a business: Business loans can be used to finance a variety of expenses, such as inventory, equipment, and marketing.

Military Status refers to an individual's affiliation with the United States Armed Forces, encompassing active duty, reserve, or veteran status. Lenders carefully evaluate an applicant's military status during mortgage applications due to the potential benefits and risks associated with their military service.

Benefits of Military Status for Mortgage Applicants

Stable Income and Employment: Military personnel typically enjoy stable income and reliable employment, making them attractive borrowers to lenders.
Government-Backed Loans: Veterans and active-duty service members are eligible for special mortgage programs, such as VA loans and USDA loans, often offering lower interest rates and more flexible terms.
Protections under SCRA (Servicemembers Civil Relief Act): This law provides certain protections for military personnel deployed on active duty, including the ability to postpone mortgage payments and reduce interest rates.

Risks Associated with Military Status for Mortgage Applicants

Frequent Deployments: Military personnel may be deployed overseas for extended periods, making it challenging to manage finances and maintain property.
Potential for Relocation: Military personnel may need to relocate frequently, affecting their ability to maintain a stable mortgage payment history.
Potential for Injuries or Disabilities: Military personnel may sustain injuries or disabilities during service, impacting their income and ability to repay a loan.

How Lenders Consider Military Status

Lenders carefully review an applicant's military status as part of the mortgage underwriting process, considering factors such as:

Branch of Service: Each branch of the military has different pay scales and benefits, affecting an applicant's creditworthiness.
Length of Service: Borrowers with a longer history of military service may be considered more reliable and stable.
Deployment History: Frequent deployments can raise concerns about an applicant's ability to manage finances and property.
Military Pay Records: Lenders may review an applicant's military pay records to verify income and employment history.

Additional Considerations for Military Borrowers

VA Loans: Veterans and active-duty service members should consider VA loans, offering no down payment requirements, low interest rates, and no mortgage insurance premiums.
USDA Loans: Military personnel in rural areas may be eligible for USDA loans, providing financing for homeownership in underserved communities.
Military Housing Allowance (HA): Active-duty service members may receive an HA that can be used to offset their mortgage payments.
Financial Planning: Military personnel should seek financial counseling to develop a plan for managing finances during and after service.

In the context of mortgage financing, "Home Type" refers to the structural classification of a residential property. Lenders carefully evaluate an applicant's chosen home type during the mortgage underwriting process due to the varying characteristics and value associated with different types of homes.

Common Home Types in the United States

Single-family home: A detached dwelling unit intended for occupancy by one family. This is the most common type of home in the United States.
Condominium (condo): A unit in a multi-unit residential building, owned individually but sharing common areas and facilities. Condos offer shared maintenance and amenities but may have restrictions on modifications and pet ownership.
Townhouse: A multi-story attached dwelling unit, sharing walls with adjacent units but having its own entrance and private space. Townhouses provide more privacy than condos but may still have some shared areas and restrictions.
Manufactured home: A prefabricated dwelling unit constructed in a factory and transported to a site for installation. Manufactured homes can be affordable but may have lower resale value and stricter financing requirements.
Mobile home: A transportable dwelling unit typically used as a temporary or seasonal residence. Mobile homes are often less expensive but have limited mobility and may not be eligible for traditional mortgages.

Factors Lenders Consider Based on Home Type

Construction and materials: The construction quality, materials used, and age of the home can impact its value and durability.
Size and layout: The size, number of bedrooms and bathrooms, and overall layout of the home affect its livability and value.
Location and neighborhood: The location, neighborhood amenities, and proximity to schools, transportation, and employment centers influence the home's value and desirability.
Property ownership and restrictions: Homeownership structure (fee simple, leasehold, etc.) and any restrictions on use or modifications can affect financing options and property value.

Impact of Home Type on Mortgage Terms

Loan amount and eligibility: Lenders may have different loan amount limits and eligibility criteria based on home type. For instance, manufactured homes may have lower loan limits and stricter requirements.
Interest rates: Interest rates for mortgages may vary depending on the home type, with higher-risk properties like mobile homes potentially carrying higher rates.
Down payment requirements: Down payment requirements may differ based on home type, with manufactured homes often requiring a larger down payment compared to traditional single-family homes.
Property insurance: Property insurance premiums can vary depending on the home type, with factors like construction, location, and risk of natural disasters influencing the cost.

Additional Considerations for Homebuyers

Lifestyle and needs: Choose a home type that aligns with your lifestyle, family size, and future needs.
Resale value: Consider the resale value of the home type in your chosen location.
Financing options: Research financing options and eligibility criteria for different home types.
Community and restrictions: Familiarize yourself with any homeowner association (HOA) rules or restrictions specific to the home type and neighborhood.

Disability Status refers to an individual's physical or mental condition that limits their major life activities, such as working, walking, seeing, hearing, or speaking. Lenders consider disability status when evaluating mortgage applications due to the potential impact on an applicant's ability to repay a loan.

Types of Disabilities:

Physical disabilities: These can include conditions that impair mobility, such as spinal cord injuries, arthritis, or amputation.
Sensory disabilities: These can include vision or hearing impairments.
Cognitive disabilities: These can include intellectual disabilities, learning disabilities, or mental health conditions.
Developmental disabilities: These can include conditions that affect intellectual and physical development, such as autism or cerebral palsy.

A First-time VA Loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA) for eligible borrowers who have not previously utilized a VA loan to purchase a primary residence. VA loans offer several advantages, including no down payment requirement, competitive interest rates, and flexible repayment options.

Eligibility for First-time VA Loans:

Military service: Borrowers must have served in the U.S. Armed Forces, including active duty, reserve, or National Guard, and meet minimum service requirements.
Creditworthiness: Borrowers must demonstrate a history of responsible credit management.
Debt-to-income ratio (DTI): Borrowers must have a DTI within acceptable limits, indicating their ability to manage their debt obligations.
Character: Borrowers must exhibit good moral character and a satisfactory financial history.
Property eligibility: The property must meet VA appraisal standards and be intended as the borrower's primary residence.

The Mortgage Period, also known as the loan term, refers to the total duration of a mortgage loan. It encompasses the timeframe over which the borrower repays the principal amount and accrued interest to the lender. Mortgage periods are typically expressed in years, ranging from 10 to 30 years for conventional mortgages in the United States.

Common Mortgage Periods in the United States:

10-year mortgage: A shorter mortgage term with higher monthly payments, resulting in a smaller total interest paid over the loan's duration.
15-year mortgage: A balance between affordability and interest payments, offering lower monthly payments than a 10-year loan but higher than a 30-year loan.
30-year mortgage: The most common mortgage term, providing lower monthly payments and a longer repayment period, but also resulting in the highest total interest paid.

In the context of real estate, equity refers to the homeowner's financial interest in their property. It represents the difference between the property's current market value and the outstanding mortgage balance. Equity can be calculated as:

Equity = Market Value - Mortgage Balance

For instance, if a property's market value is $200,000 and the remaining mortgage balance is $100,000, the homeowner's equity would be $100,000.

Types of Equity:

Home equity: The most common type of equity, representing the homeowner's stake in their residential property.
Investment property equity: The equity held in properties owned for rental income or potential appreciation.
Business equity: The ownership interest in a business, calculated as the difference between the business's assets and liabilities.

Significance of Equity:

Homeownership security: Equity provides a financial cushion for homeowners, especially in case of unexpected financial setbacks or job loss.
Access to credit: Equity can be used as collateral for loans, allowing homeowners to access additional financing for various purposes.
Tax benefits: Homeowners can claim tax deductions for mortgage interest and property taxes, reducing their overall tax burden.
Wealth accumulation: Equity growth over time contributes to a homeowner's overall net worth and financial well-being.