Mortgage FAQs: Answers to Your Common Questions

Interest rate is the percentage of the loan amount the lender charges for lending the money. Lenders modify interest rates depending on how risky they judge a loan to be. The riskier they believe the loan to be, the higher the interest rate they offer. There are two general factors mortgage lenders use to set interest rates: One; the credit worthiness of the borrower. And two; macro-economic factors.

Mortgage lenders look at qualifying factors of the borrower to help set an interest rate. Qualifying factors like credit scores and loan-to-value ratios help quantify the likelihood the borrower will repay the loan. The better the borrowers qualifying factors are the less risky the lender believes the loan to be, the lower the interest rate they’ll offer. Borrowers with higher credit scores and lower loan-to-value ratios will typically be offered lower interest rates.

At a macro level, mortgage interest rates move up and down based on the current and expected rates of inflation, unemployment, economic growth, and other economic indicators. Generally, interest rates go up during times of fast economic growth, low unemployment, and rising inflation. Interest rates tend to decline when the economy is slow, with low inflation and rising unemployment.

APRs are typically higher than the interest rate because they reflect all the costs paid to the lender which include the interest rate, lender fees, discount points, closing costs and any private mortgage insurance. The more points the borrower pays for a specific interest rate, the more closing costs paid, etc. the higher the APR will be.

APR	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, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. APR does not include title insurance, appraisal, and credit report.
Interest Rate	Rate at which interest is charged on a loan.
Points	Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Closing costs	Fees and charges the borrower pays before their loan closes. Closing costs may include fees related to the origination, taxes, insurance, as well as title and record filing.

A FICO Score is a three-digit number based on information in a borrowers credit reports. FICO score considers both positive and negative information on a credit report. A person’s FICO score is computed using their payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). FICO scores are used by mortgage lenders to help them determine a borrower’s likelihood of repaying a loan.

To improve your FICO score you have to show you are consistently making loan payments on the credit card or other outstanding loans you have. There are number of actions a borrower can take to improve your credit. Below are a few of them:

• Limit how often you apply for new accounts or credit cards
• Pay down revolving credit balances
• Do not miss credit card or loan payments
• Lower your credit utilization

What is a Credit Score?	A measure of your credit worthiness.
What is a FICO score?	A mathematical equation developed by Fair Isaac Corp. that determines how likely an individual is to pay their bills on time. Many lenders use this score to determine not only if a mortgage loan will be made, but also the interest rate they charge that individual.

Individuals fill out a mortgage application and submit documentation to a lender for review to determine if the individual qualifies for the loan. The number of documents needed and minimum requirements vary depending on the loan product and loan amount the individual is applying for. Generally, lenders review a combination of a borrower’s income, credit, assets, subject property, and debt to determine if they can repay the loan. Regardless of the loan product, the first step in qualifying for a mortgage loan is filling out a mortgage application and having their credit pulled. Then, individuals submit the appropriate documentation required for the loan they are applying for. After the application and all documentation is submitted, an underwriter reviews the file and determines if the borrower qualifies. Generally, borrowers with higher credit scores, lower LTVs, higher income with little or no debt are offered favorable terms. Below are some basic definitions used in the mortgage industry during the qualification process. If you have questions do not hesitate to call us at 866-708-5626.

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(Gross) Income	Total amount of income before taxes or other deductions. Used to calculate ratios such as housing expense ratio and Debt-to-Income Ratio.
Credit History	A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
FICO Score	A mathematical equation developed by Fair Isaac Corp. that determines how likely you are to pay your bills on time. Many lenders use this score to determine not only if a mortgage loan will be made, but also the interest rate you will be charged. Because of differences in calculation methods, not all credit scores are the same. Your credit scores may differ among the credit-reporting agencies and likely also will vary from your FICO score.
Debt to Income Ratio	The ratio, expressed as a percentage, which results from a borrower's monthly payment obligations on long-term debts divided by gross monthly income. This also is referred to as a back-end ratio and is generally expected to come in at about 36-38 percent. Some lenders, especially those offering FHA or subprime loans, will stretch this ratio to 40 percent or even beyond. Also known as Total Debt Ratio.
Property	Item that is sold from one person to another
Flood Insurance	This insurance protects you from loss due to flood if your property is located in a flood hazard zone. The lender will require you to obtain flood insurance if your property is in a flood zone. (Homeowner's/Hazard insurance typically does not cover losses or damages from flooding.)
Loan To Value (LTV) Ratio	The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage calculated by dividing the amount of the loan by the appraised value. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered.
Mortgage Application	An initial statement of personal and financial information which is required to approve your loan.
Loan Application	A document in which a prospective borrower details his or her financial situation to qualify for a loan.
Loan Programs	The different types of mortgage products available for obtaining rates and qualification parameters.
Borrower (Mortgagor)	One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan principal in full.
Monthly Household Debt Amount	Total of recurring monthly payments (e.g. credit cards, student loans, car payments, etc.). Amount should exclude current housing expenses (current rent, current mortgage, etc.)
Documentation	Information a borrower is required to provide for proof of income. Primarily, this includes W2s, tax returns and pay stubs.
Down Payment	The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Earnings	All monies earned or received that are considered income.
Loan Amount	Amount of money borrowed to be repaid, usually with interest.
Origination Fee	A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.
Points	Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Qualifying Loan Amount	The amount which a person is able to borrow based on income and debts.
Total Debt Ratio	See Debt-to-Income Ratio

This program is designed for borrowers who are self-employed and would benefit from alternative loan qualification methods. Borrowers who write right-off a lot of their income a significant amount of expenses are the most typical recipients of this loan product. Reviewing Borrower’s bank statements (personal and/or business) are reviewed to help qualify them is the biggest differentiating factor between this product and other mortgage loan products. Bank statements are used as an alternative method to show the true cash flow of their business. Bank Statement loan programs provide a solution to help credit-worthy self-employed borrowers who otherwise would not qualify for a home loan.

The main aspects of qualifying for our bank statement loan are:

• Up to 24 months of personal or business bank statements
• Debt to income ratio used to qualify borrowers
• Credit score and credit history reviewed
• Down payments may be required depending on the borrower’s needs
• Borrowers do not have to own 100% of the business

Down Payment	The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Debt-to-income ratio (DTI)	A borrower’s monthly debt payments divided by their gross monthly income.
Bank Statements	A bank statement is a monthly or quarterly document that lists all of your banking activity.

An investment property is real estate you buy or own that is not occupied by the borrower and generates rental income. If you are looking to generate income with a rental home or buy a fixer-upper to rent for a profit and need a mortgage to do so, an investment property loan may work for you. An investment property mortgage loan qualifies borrowers based on rental income generated solely from the subject property. Reviewing existing lease agreements to calculate the property’s cash flow is how this is achieved. Reviewing lease agreements to help qualify for this loan is the primary differentiating factor between this product and other mortgage loan products. This loan product is designed for both experienced real estate investors and first-time investors provided certain qualifications are met. The interest rate for Investment property mortgage loans are typically higher than what you pay for a primary residence.

The main aspects of qualifying for our investment property loans are:

• Must have a credit score of 640 or higher
• Cannot be a first-time home buyer
• No tax returns or employment verification required
• Debt to income ratio reviewed
• Credit score and credit history reviewed
• Sufficient down payment needed for purchases
• Must be a residential property
• Property must have 4 or less units

Reserves	The borrower’s liquid assets that the lender wants to see in either the borrower’s bank, investments in stocks, bonds, mutual funds, money market funds and vested funds in a retirement savings account. The amount usually equals two to six months’ worth of the monthly mortgage payment amount (principal, interest, taxes, insurance and association dues), depending on how many properties you own and number of units in the property.
History of property management	Required to document or explain your experience renting properties.
Investment Property	Real estate that generates income, such as an apartment building or a rental house.

Below are other terms and definitions that are used in the mortgage industry.

Additional Principal Payment	A payment by a borrower of more than the scheduled principal amount due in an effort to reduce the remaining balance on the loan.
Adjustable Rate Mortgage (ARM)	A mortgage whose interest rate changes periodically based on the changes in a specified index.
Amortization Calendar	Detailed table showing the principal and interest portions of a payment, along with remaining principal balance and ending balance.
Amount Financed	Amount of money financed for a loan. Equal to the sales price minus the down payment and prepaid fees.
Annual Real Estate Appreciation	The increase in value of a property over time due to inflation, supply and demand, capital improvements and other factors.
Application Fee	A sum charged by a lender for accepting an application in which a prospective borrower details his or her financial situation in an effort to qualify for a loan.
Appraisal	A written analysis of the estimated value of real estate prepared by a licensed appraiser.
Appraised Value	An opinion of a property's fair market value based on the appraiser's analysis of the property and recent sales in the area.
Appraiser	A person licensed to evaluate the worth of real estate.
Balloon Mortgage	Usually a short-term fixed-rate loan that involves small payments for a certain period of time and one large payment for the remaining balance of the principal at a time specified in the contract.
Balloon Payment	A loan installment that is larger than the other periodic payments and pays off the remaining principal.
Biweekly Mortgage	A mortgage that schedules 26 payments per year instead of the normal 12. Biweekly payments are equal to one-half of a normal monthly payment and reduce interest payments (since the loan is paid off more quickly).
Blanket Mortgage	A loan secured by more than one property. Usually refers to commercial property.
Break Even Point	The time it takes to recoup the cost of refinancing a loan or paying discount points.
Bridge Loan	A Loan to bridge the gap between the purchase of a new home and the sale of the borrower's current home. The borrower's current home is used as collateral, and the money is used to close on the new home before the current home is sold.
Cap	A provision of an adjustable-rate loan (ARM) that limits how much the interest rate or loan payments may increase or decrease. These can be lifetime payment cap, lifetime interest rate cap, periodic payment cap, and periodic interest rate caps.
Cash Out	The money left over when refinancing a mortgage and the money being borrowed is greater than the principal balance remaining on the original loan.
Cash Out Refinance	A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
Ceiling	The highest percentage a lender can charge for an adjustable-rate mortgage.
Collateral	Property pledged as a security to a debt. If a borrower fails to pay on a loan, the lender may seize the collateral and sell it to recover money.
CLTV (Combined LTV)	The unpaid principal balances of all the mortgages on a property (first and second, usually) divided by the property's appraised value.
Conforming Loan	Conforming loans meet two criteria: 1.) They cannot exceed the current year's maximum loan amount limits. The 2022 conforming loan limit is $647,200 2.) They also must conform to the credit history, income, loan-to-value, and debt guidelines established by Fannie Mae and/or Freddie Mac.
Conventional Loan	A mortgage that is not insured or guaranteed by a government agency such as the Federal Home Administration (FHA) or Veterans Administration (VA).
Credit Report	A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.
Creditor	One who is owed money.
Debt	Money that one person/business owes to another person/business.
Deed of Trust	Similar to a mortgage, except title is conveyed to the trustee, rather than the borrower.
Default	Condition where a borrower fails to make payments on a loan.
Earnest Money	Money offered by a prospective buyer when making a formal offer on a property. Earnest Money is used to indicate to the seller that the buyer is seriously interested in purchasing the property.
Equity	The difference between the fair market value of a home and current indebtedness; the value an owner has in real estate over and above the amount still owed on the property. Also referred to as the owner's interest.
Escrow	An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
Escrow Account	Account where property taxes and home owner's insurance are held until being paid.
Fair Market Value (FMV)	The selling price that both a buyer and seller would agree on for a property. Also known as Property Value.
Federal Home Administration (FHA)	An agency within the federal Department of Housing and Urban Development that provides mortgage insurance and sets construction and underwriting standards.
FHA Mortgage Insurance	A type of Mortgage Insurance offered by the Federal Housing Authority that is similar to PMI, but carry additional restrictions. For example, mortgage insurance lasts through the life of the loan, instead of until a certain point of equity is attained.
FICO Score	A mathematical equation developed by Fair Isaac Corp. that determines how likely you are to pay your bills on time. Many lenders use this score to determine not only if a mortgage loan will be made, but also the interest rate you will be charged. Because of differences in calculation methods, not all credit scores are the same. Your credit scores may differ among the credit-reporting agencies and likely also will vary from your FICO score.
Fixed Rate Mortgage	Mortgage where the interest rate does not change during the entire term of the loan.
Foreclosure	A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
Future Real Estate Value	The value that a piece of Real Property (which is a dwelling permanently attached to land) will be worth in the future based on a specified period of time and Real Estate Appreciation value.
Funding	How a loan will be paid off; frequently from another type of account the borrower holds, such as a checking or savings account.
Good Faith Estimate	A written estimate of expected closing costs that a lender must provide a prospective home buyer within three days of the homeowner submitting a mortgage loan application.
Gross Income	Total amount of income before taxes or other deductions. Used to calculate ratios such as housing expense ratio and Debt-to-Income Ratio.
Home Equity Line of Credit (HELOC)	A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.
Home Equity Loan	A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.
Home Inspection	Process where third-party inspector is hired, usually by the prospective buyer(s), to inspect the property before closing. Many times, the loan closing will be contingent on the results of the home inspection.
Home Owner's Insurance	Insurance policy that includes coverage for property damage or loss, as well as personal liability and theft.
Housing Expense Ratio	The ratio, expressed as a percentage, calculated by dividing a borrower's monthly housing expenses by gross monthly income. Also known as Primary Housing Ratio.
Housing Expenses	Payments for housing, rent or mortgage, plus any taxes and insurance paid. Also known as PITI.
Housing Payment	Payment (usually monthly) used to pay off principal balance of a loan. Also known as an Installment.
Installment	Payment (usually monthly) used to pay off principal balance of a loan. Also known as a Housing Payment.
Installment Debt	Money owed to a creditor that is expected to be in equal amounts over a pre-determined period of time.
Interest	Money paid to the lender by the borrower over the life of the loan, in return for being able to borrow money from the lender.
Joint Account	A bank account owned by two or more persons who share equally in the rights and liabilities of the account.
Jointly	Not individually, with a co-applicant.
Jumbo Mortgage	A loan that is larger (more than $647,200 as of 12/14/2022) than the limits set yearly by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, jumbo loans usually carry a higher interest rate. Also called a non-conforming loan.
Lien	Legal claim against a property for payment of a debt.
Locked	(Also known as Rate-lock) A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time.
Margin	Expressed as percentage points, the amount that a lender adds to an index to establish the adjusted interest rate.
Monthly Debt	The total amount of credit card, auto loan, mortgage, or other debt upon which you must pay.
Mortgage	A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower gives the lender a lien on the property as collateral for the loan.
Mortgage Insurance	Insurance required to be carried by a borrower if they fall under certain criteria. For example, a borrower may be required to carry private mortgage insurance if they have an LTV of higher than 80%, or they will have to carry FHA Mortgage Insurance if they have obtained an FHA loan and have a poor credit history.
Multi-Family Mortgage	Mortgage to buy property that will be inhabited by more than one family but having one property tax-payer. (e.g. mortgage to purchase an apartment building.)
Needed Loan Amount	The amount of money a borrower needs to borrow. If the purpose of the loan is to purchase a new property, this amount represents the difference between the purchase price of the property and the down payment amount. If the purpose of the loan is to refinance a loan for an existing property, this amount is determined by the current loan balance and cash-out options.
Payment Amount	A number of a particular mortgage payment used to determine a certain value for that point in time.
PITI	The sum of principal, interest, (property) taxes, and (home owner's) insurance, also known as monthly housing expense.
Points	Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Pre-Approval Letter	Letter from a lender stating the approximate amount that a borrower can borrow, based on current interest rates and a preliminary look of the borrower's credit history.
Prepaid Fees	Those expenses of property which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, insurance, rent, etc.
Principal or Principal Balance	The amount of debt, not counting interest, remaining on a loan.
Private Mortgage Insurance (PMI)	Money paid to insure the mortgage when the down payment is less than 20 percent. Lenders will allow a smaller down payment or no down payment at all, in some cases, but in those cases, borrowers are usually required to carry private mortgage insurance that generally calls for an initial premium payment and may require an additional monthly fee, depending on the structure of the loan. PMI is not tax-deductible and as a result, most homeowners have it removed once the value of the equity in the home reaches 20 percent. Also, paying PMI may be avoided by using a split loan to purchase property.
Property Use	How the property will be used by the borrower. Property can be designated as a primary residence, investment property, commercial property, or some other designation.
Purchase	Obtaining a new mortgage loan on a property the consumer does not already own.
Purchase Agreement	A document in which a buyer and seller agree on terms and price of the subject property. Also known as a Selling Agreement.
Recurring Debt	Credit card payments, child support, car loans, and other obligations that will not be paid off within a relatively short period of time (6-10 months).
Refinance	Obtaining a new mortgage loan on a property already owned, often to replace existing loans on the same property.
Rental Income	Income received from rental properties.
Single Family Mortgage	Mortgage to purchase property that will only be inhabited by one family and have one property tax-payer.
Subprime Loans	Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.
(Property/Real Estate) Taxes	Taxes owed to the local municipality based on the fair market value of property. The tax revenues are then used by the local municipality to pay for community schools, roads, police and other municipal services.
Title	Ownership of property to the exclusion of anyone else to make claim on the property. Evidence of Title is held in a deed, which is held at the county Recorder's Office.
Title Insurance	A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages.
A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages.	A person who holds and manages assets for the benefit of beneficiaries.
Underwriting	The decision whether to make a loan to a potential homebuyer based on credit, employment, assets and other factors, and the matching of this risk to an appropriate rate and term or loan amount.
Veteran's Administration (VA)	Now called the U.S. Department of Veterans Affairs, which oversees the VA loan program, a benefit to veterans that allows them to buy homes with no down payment.
Verification of Deposit (VOD)	A document signed by the borrower's financial institution verifying the status and balance of the person's financial accounts.
Verification of Employment (VOE)	A document signed by the borrower's employer verifying the person's position, length of service, and salary.