The ABCs of mortgage terms you should know

If you’re applying for a loan or helping clients through the closing process, you’ll need to know a few mortgage terms. While you should always refer your clients’ specific questions about their situation to their lender, it’s still a good idea to familiarize yourself with common terms and practices in Texas. Pay particular attention to the abbreviations. There’s a lot of alphabet soup out there, especially for first time buyers and buyers who haven’t been in the market since the TRID changes. Know the terms or use these definitions to create a guide for your clients. This list covers the ABC’s. Watch our upcoming posts for more definitions.

Amortization: An amortized loan has regular payments of both principal and interest that are paid within the term of the loan. Amortization schedules detail the monthly payments and how much of each payment goes to principal and interest.

Annual Income: All the income earned over a year including wages, salary, tips, bonuses, commissions, and overtime.

Appraisal Fee: The appraisal fee is the amount charged by the appraiser who assesses the value of the property in question.

Appraisal Report: An appraisal is the value of the home as determined by the appraiser. An appraiser will consider the age, size, location, condition, and features of the home as well as recent sales in the neighborhood of similar properties. The lender uses the appraisal report to determine the maximum loan amount for which the property qualifies.

APR (Annual Percentage Rate): The cost of borrowing money from the lender, as a percentage of the mortgage amount. The APR includes the interest rate as well as all other fees that are paid over the life of the loan.

ATR (Ability To Repay): Lenders are required to make a reasonable, good faith determination of a consumer's ability to repay a mortgage.

ARM (Adjustable Rate Mortgage): Adjustable rate mortgages have interest rates that change periodically. Such loans have an introductory period of low fixed rates, after which the interest rate may vary, depending the terms of the loan.

Balloon Payment: Loans with a balloon payment are characterized by very low monthly payments with a large “balloon payment” paid at the end of the mortgage term.

Bankruptcy: After bankruptcy, the borrower must wait before borrowing for a mortgage again. For a Chapter 7 bankruptcy, borrowers must wait two years plus any additional amount of time as required by the lender. People who have filed for Chapter 13 bankruptcy may borrow again once all of the payments to the bankruptcy have been made and a minimum of one year has passed. Other requirements must also be met in addition to the waiting periods.

Cash-out Refinance: A cash-out refinance is when you replace your current home loan with a new mortgage. You agree to a larger loan amount in order to use the equity you've earned on your home.

CFPB (Consumer Finance Protection Bureau): The CFPB was created enforce federal consumer financial laws and protect consumers in the financial marketplace.

Closing Checklist: Closing checklists are important to keep track of all the items needed prior to closing.

Closing Costs: Closing costs is a tally of all the fees and costs that need to be paid before or at the time of closing.

CD (Closing Disclosure): A confirmation of the transaction provided to consumers, sellers, and their agents. A closing disclosure affirms the terms of the loan (in the case of borrowers) and the amounts paid or credited to each party to settle the transaction.

Co-borrower: Co-borrowers allow their income, assets, and credit score to help others qualify for a loan and/or get lower interest rates. Co-borrowers are equally liable to pay back the loan in the case of default by the borrower.

Conventional Loan: Conventional loans are provided by lenders who are not insured by the government. These mortgages require higher down payments and typically have fixed terms and rates.

Credit History/Credit Report: A history of a person’s borrowing and payment habits. It demonstrates a person’s financial habits and gives the lender an idea of how likely one is to repay a loan.

Credit Score: A number assigned to a person’s credit files based on their credit report. On a scale of 350 -850, a credit score of 720 or higher is considered “excellent” or “prime.” A credit score from 690 – 720 is considered “good” while a score of 650-690 is a “problem” or “fair” score. A score in the 350- 650 range is considered “poor.” A person is thought to have no credit if their score is below 349.