More mortgage terms you should know

In our previous post, The ABCs of mortgage terms you should know, we covered quite a few basic mortgage terms. Today we’re continuing the topic with fifteen more key terms you should know. Use these terms to help your clients understand the mortgage process.

DTI (Debt to Income Ratio): The debt ratio is the total amount of money owed to all creditors (including credit card bills, loans, etc.) compared to monthly income and assets. A low debt ratio is more desirable to lenders, and most want to see a debt ratio (including mortgage) of 43 percent or less.

Disclosure: Disclosure documents provide details about the mortgage agreement, including how much interest would be paid over the life of the loan, and what the terms of the loan are.

Discount Points: Paying points on a mortgage is essentially pre-paying interest on a home loan. Paying points allows a borrower to secure a lower interest rate on the loan.

Dodd-Frank Act: The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed as a response to housing crisis of 2010. It made sweeping changes to the the nation's financial services industry. For mortgage lenders and consumers, it created tougher regulations mortgage lenders and created minimum lending standards. Consumers mostly see the impact of Dodd Frank in the disclosures they see when applying for credit and in the availability of credit. Some consumers with lower credit ratings may need to provide more supporting documents to demonstrate their creditworthiness.

Down Payment: The amount paid to the lender upfront in order to secure the loan. Some types of loans do not require a down payment (e.g. USDA, VA) while others require large down payments (sometimes up to 50 percent down in the case of foreign nationals without local credit history).

Earnest Money: A deposit placed on a home after the contract offer has been accepted by the seller. An earnest money deposit is meant to be a good faith gesture to emphasize the intent to complete the terms of the contract.

Equity: The amount of value in the home if it were sold and the remaining balance of the mortgage paid off. The amount of equity in a home increases as mortgage payments are made and/or the market value increases.

Escrow: An escrow account is created to hold money for some purpose. When buying a home, the earnest money deposit and any other payments made toward the sale of the property are held in escrow until the transaction is closed and funded. Escrow accounts are also sometimes used by lenders to collect payments for property taxes on behalf of the homeowner.

Fannie Mae: A government agency that buys mortgages from lenders to provide them more cash to create new loans. This loosens the credit market by encouraging lenders to make more loans.

FHA (Federal Housing Administration): A government-run agency that provides insurance on FHA-approved mortgage loans, in order to increase credit options for consumers. The goal of FHA loans is to help increase the affordability of housing.

FHA Funding Fee: The upfront cost and monthly premium you pay when you get an FHA. Also called the upfront mortgage insurance premium (UFMIP), the fee equals 2.25 percent of the mortgage amount.

FHA Limits: The FHA has established limits on amount it can insure on government-backed loans. These limits vary based on factors such as location, type of property, and parameters for conventional loans. In Dallas, Denton, Collin and Tarrant Counties, the FHA loan limit was recently raised to $362,250.

FHA Requirements: Guidelines that applicants must meet in order to be approved for an FHA-backed loan.

Fixed Rate Mortgage: A mortgage with an interest rate that remains the same for the entire term of the loan.

Freddie Mac: A government agency that buys mortgages from lenders in order to sell them to investors. The agency works to stimulate the real estate market and increase availability of low cost housing. This is meant to be in competition with Fannie Mae

HELOC (Home Equity Line of Credit): A type of loan in which the lender agrees to lend a maximum amount within a specified time frame, where the collateral is the borrower's equity in his/her house (similar to a second mortgage). Home owners are issued a line of credit from which they may draw funds and they make payment based on the amount drawn. Because it is a line of credit, homeowners may choose to only take out the amount they need as they need it.

HOEPA (Home Ownership Equity and Protection Act): A law designed to reduce the unnecessary payment of private mortgage insurance (PMI) by homeowners who are no longer required to pay it (they have enough equity in their home that it can no longer be considered a high-cost mortgage).

Home Equity Loan: A loan that is based on the amount of equity in a property. This is also known as a second mortgage since it is in addition to the primary mortgage.

Home Inspection: A professional evaluation of the condition of the house and its systems.

HUD (The Department of Housing and Urban Development): A government agency that implements programs and policies that stimulate the real estate market and ensure the Fair Housing Act is followed.