SORTING OUT THE ACRONYMS: A Guide to General Mortgage Terms
Collected below are a few of the more common terms used in lending today. If you feel like you and your lender are speaking different languages, reading the definitions listed below can help you get on the same page. Most importantly, when discussing mortgages, make sure you talk to a professional you can trust.
APR (Annual Percentage Rate) APR is a number that the Federal government calculates to show the total yearly cost of a mortgage expressed by the actual rate of interest paid. This number is calculated using a standard formula, which includes the base interest rate, points and any other add-on fees and costs of your mortgage.
Conventional Loan Any non-governmental loan program is a conventional loan – most of which are provided by banks, savings and loans, mortgage bankers and mortgage brokers. Basically – the private sector.
FHA (Federal Housing Administration) An agency of the Department of Housing and Urban Development. The FHA guarantees certain loan programs for all Americans, insures loans that are made by approved lenders to qualified borrowers and allows low income and/or low down payment borrowers the opportunity to purchase a home that they might not have been eligible for under conventional loan programs.
GFE (Good Faith Estimate) Within 72 hours of signing a residential loan application, the federal government requires that a good faith estimate be sent to the borrower outlining the costs and charges a borrower is likely to incur in connection with the loan closing. However, the GFE is not a guarantee that the applicant will be approved for the loan or that the final amount will be the same figure. The amount (interest rate, terms, conditions) may change pending final loan approval and down payment terms
MIP (Mortgage Insurance Premium) The amount that the FHA charges up front when they insure a loan under one of their programs. The FHA pays the money into a fund where the money is held until it is needed in the event of a default by a borrower.
PMI (Private Mortgage Insurance) If a mortgage loan exceeds 80% of the sales price of a home, lenders require insurance coverage that will protect them in the event that a buyer defaults on their loan. The cost of PMI is typically charged to the borrower when the loan to value ratio is greater than 80%.
Points An upfront cash payment required by the lender as part of the charge for a loan, expressed as a percent of the loan amount – example, 3 pts means a charge equal to 3% of the loan amount.
Pre-approved A general term that means that a borrower has completed a loan application and provided their debt, income, and savings information which an underwriter has received and approved.
Prequalification A preliminary step in the loan application process – a prequalification is a lender’s written opinion of the ability of a borrower to qualify for a particular loan amount. The amount prequalified by the lender is determined based on inquiries into the borrower’s debt, income and savings, and may or may not require a credit check.
TLS (Truth in Lending Statement) A federal law that requires lenders to fully disclose in writing the fees, terms and conditions associated with the loan – including the annual percentage rate (APR) and other charges