Loan Application, Debt to Income ratio, and Closing Disclosure are some of the key mortgage terms homebuyers and homeowners should know.
Whether a purchase or refinance transaction, it’s essential to understand the key mortgage terms used during the loan process. A borrower with a good understanding of these terms will be better positioned to secure a low-interest rate mortgage.
Below are the key mortgage terms you should know before moving forward with a new home loan application. These are industry-standard mortgage terms, and any Loan Officer with a few years of experience should be able to explain each term in detail.
Uniform Residential Loan Application (URLA)
The Uniform Residential Loan Application is the official mortgage industry loan application; established by Fannie Mae (Fannie Mae Form 1003) and Freddie Mac (Freddie Mac Form 65).1
Within the mortgage industry, the Uniform Residential Loan Application is referred to as the “1003” (ten-o-three). The loan application is a twelve-page document (sometimes extension pages are needed when someone owns many properties and/or has lots of creditors) that has the following information;
- interest rate
- transaction and property information
- personal information
- employment and income details
- housing payment
- your current debts
- real estate owned
- disclosure information
The URLA was updated in January 2021.2 Previous to this, the URLA was only four pages.
Before October 2015, the “Good Faith Estimate” was included in our list of key mortgage terms. However, after the mortgage crisis, the industry looked to simplify the loan disclosure and decided to combine the “Good Faith Estimate” and the “Truth-In-Lending” statement into what’s now called the Loan Estimate.3
Along with the Loan Application, the Loan Estimate is one of the essential key mortgage terms you should know.
What is in the Loan Estimate?
The Loan Estimate has all the essential things you need to know about your home loan. Interest rate, number of years for your loan term, if the interest rate is locked or not locked, if the rate is fixed or adjustable, if impounds are being set up, a breakdown of the cashback to you after closing, or the amount of money you owe to close.
It also has a breakdown of the costs and fees and more.
Doing a mortgage requires the borrower to send in specific documentation. The underwriter then reviews this documentation to see if you qualify for the loan you apply for. Your income, assets, and other personal documentation that’s needed during the mortgage process.
This also might include your insurance declarations page, mortgage statement, and other items needed during the approval process. If you own a Condo, it would include a copy of your HOA statement. If you own rental property, it would include a copy of your rental agreement.
A loan program is the mortgage loan term and the interest rate structure you choose to move forward with—a 30-year fixed-rate, 15-year fixed-rate, 7/1 Adjustable Rate Mortgage (ARM), 5/1 ARM, etc.
These are all known as loan programs. Fixed-rate loan programs are terms with an interest rate and monthly payment that is fixed throughout the term – your monthly rate and payment never change.
An Adjustable Rate Mortgage has an interest rate that is fixed for some time, and during the fixed period, your monthly payment is also fixed.
After a fixed period, your interest rate and your payment can adjust. Once adjusted, the interest rate and payment are fixed for six to twelve months before they can adjust again.
As an example
If you were to obtain a 5/1 ARM, that would mean your interest rate and monthly mortgage payment are fixed for five years (or 60 months), and then your interest rate and payment would adjust.
Once adjusted, it would stay fixed for one year (12 monthly payments) before its subsequent adjustment. It would continue to repeat that until the loan is paid off. Popular Adjustable Rate Mortgage Terms are 5/1, 7/1, and 10/1 ARMs.
HOA stands for Home Owners Association. Usually, when you buy or own a Condominium (aka Condo), there is an added expense called an HOA fee. It’s usually paid monthly, sometimes quarterly, or every six months.
What does the HOA due?
An HOA covers the cost of taking care of the community areas and, to a certain extent, provides limited insurance coverage to homeowners (not always, though). You must pay their fixed fee if you buy a home with an HOA; it’s not an option.
What is HOA Certification?
When you buy a Condo or refinance a mortgage attached to a Condominium, the Loan Officer has to complete an “HOA Certification.” This means that the HOA must provide certain information and, at times, documentation to be reviewed and “certified” as meeting underwriting standards by an authorized underwriter.
Most HOAs charge a fee to complete the process. This is not a lender fee but a fee charged by the Home Owners Association to everyone who owns a home that the HOA covers (when the refinance or sell).
Debt To Income Ratio (DTI)
Debt-to-income ratio (DTI) is very important to the mortgage process, specifically the approval you’ll receive from the underwriter. This is the percentage of a borrower’s income that goes towards paying debts.
When an underwriter computes the DTI, they include all debts along with the home (property taxes and insurance are factored in). If you own a Condominium or any property with an HOA fee, that is also added to the calculation.
PITI stands for – Principal, Interest, Taxes, and Insurance. This is your total house payment used to compute the debt-to-income ratio.4 PITI is one of the more critical key mortgage terms.
Discount Points and Origination Fees
A Discount Point is a fee charged by the lender to the borrower to lower the interest rate, which is equal to a percent of the loan amount.
Sometimes it’s a good idea to pay a discount point (or part of it) to get a lower rate; other times, it’s not. One discount point equals one percent of the loan amount. A $450,000 mortgage might have a rate of 4 percent but come with a charge of one discount point, or $4,500; the borrower pays that to obtain that interest rate.
A lender can charge a partial point (i.e., 0.25, .50, etc.) or a full one, two, or more points.
Then there are Loan Origination fees. Essentially they work the same way as Discount Points. One point origination fee is one percent of the loan amount. Loan Origination fees are charged by the lender to cover their costs for processing and providing the loan.
Some lenders don’t charge direct discount points/origination fees, and some do. Points do not include all lender fees associated with underwriting and processing nor 3rd party fees.
A great question about Discount Points and Loan Origination fees is when should you pay them and how much should you be willing to pay?
Every mortgage loan is different, but generally speaking, unless you are receiving a .25% discount in rate for a half or a full Discount Point/Loan Origination fee, then I suggest avoiding paying Discount Points and/or Loan Origination fees.
If you are quoted a 5.50% interest rate with zero points/zero origination fees and a 5.375% with one point, it probably makes more sense to go with the 5.50% option.
If they offer 5.25% or 5.125% for one point, then that is something worth considering. You want to make sure you make up the cost associated with the lower rate in a reasonable amount of time (1-5 years).
Other than Discount Points and Loan Origination fees, lenders sometimes charge administrative fees such as underwriting, credit report and processing. Some mortgage lenders charge junk fees like “expedited processing” or something similar, which you should avoid paying.
But administration and underwriting, along with a sub $100 credit report fee, are average fees to pay when refinancing a mortgage or purchasing a home.
These fees include the title, escrow, and appraisal fees. While lenders will always require title and escrow services, you can pick your own title and escrow company. All mortgage loans have third-party fees, which is why it’s included in the key mortgage terms. Sometimes, lenders will cover those fees with a lender credit if you pay a higher interest rate.
As for the appraisal, that is usually handled by a third-party company outside of the mortgage lender known as an Appraisal Management Company (AMC).5
Payment for the appraisal goes directly to the AMC, which then locates an appraiser in the area, and then the AMC pays the appraiser. At no time during the process can the Loan Officer call the appraiser to try and influence the outcome of the appraisal report.
A Pre-approval means the Loan Officer has reviewed your loan application and the documentation you’ve sent in and, based on that information, believes you will be approved for a loan (when it’s submitted to an underwriter for review).
During the pre-approval process, the initial interest rates are disclosed along with terms.
An underwritten approval means an underwriter reviewed your file and has approved the loan application. The underwriter will issue a list of conditions with the initial approval that needs to be cleared for the loan to close.
Remember that an “approval” is not a guarantee to lend; a lender can reverse its decision at any time during the process until the loan is funded and recorded with the county.
Loan-To-Value Ratio (LTV)
The Loan-To-Value ratio is the amount you’re borrowing compared to the value of your home. Along with your credit score, this is a significant determining factor for the interest rate you qualify for. Your income is also a factor but not necessarily within the confines of the program.
The Loan To Value ratio will impact the mortgage rate within the loan program you’ve chosen.
MI And PMI
MI is “Mortgage Insurance,” and “PMI” is Private Mortgage insurance. This is not the homeowner’s insurance policy but an insurance policy you pay in the possible event of default.
The payment is every month and is in addition to your monthly mortgage payment. And just to be clear, you do not receive a separate bill for this – it’s included in the same bill as your mortgage payment.
So if you default on your loan (miss three or more payments in a row), the insurance policy pays the costs associated with the foreclosure.
Some lenders claim they don’t charge PMI, and it appears those loans might be a better deal; however, they’re not. What is happening is that you are paying a higher interest rate to cover the cost of the PMI. This is commonly referred to as “Lender Paid PMI.”6
What’s the problem with that?
Once your Loan To Value ratio goes below a certain point, you can get rid of Private Mortgage Insurance (generally, it’s a 78% or less LTV ratio using the original appraised value7). However, if it’s built into your rate, you are stuck with a higher rate and the same payment.
At least with the PMI, you can eventually get rid of the monthly cost.
One important note about FHA Mortgage Insurance
When it comes to FHA Mortgage Insurance, you usually need to refinance (into a non-FHA home loan) or pay off the loan to get rid of the monthly MI payment. The only way around this is if you put 10% down and wait eleven years.8
And there are no lender-paid MI options with FHA.
You receive the Closing Disclosure (aka the CD) before you receive the final loan documents to sign. The Closing Disclosure is the final closing document and basically has the same information as the Loan Estimate plus some additional closing information.
The disclosure has a different format than the Loan Estimate, but it’s fairly easy to read. Do you notice how the Closing Disclosure doesn’t have the word “estimate”? That’s because once the CD is issued, there can be no added fees to the loan, and the disclosed fees can not go up.
They can go down at closing but not up.
The great thing about the CD is that you get three days to review the document (or more) before you sign your loan documents.9 That gives the borrower plenty of time to review your closing terms and see exactly what you’re getting in your new loan.
Signing Loan Docs, Funding, and Recording
When your loan is ready to close, the lender will send the loan documents to escrow to arrange a signing. This can only happen three or more days after you’ve received the Closing Disclosure. The signing of the loan documents takes place in front of a notary.
After the loan documents are signed, the loan “funds,” which means the lender has wired out funds and requested the title company record the new loan. The recording is when the mortgage is recorded with the county, and the refinance or purchase process is over.
- What Is the 1003 Mortgage Application Form? Definition and Example – Investopedia.com
- Uniform Residential Loan Application (Form 1003) – Fannie Mae
- TILA-RESPA Integrated Disclosure rule (page 10) – Consumer Financial Protection Bureau
- What is PITI? – Consumer Financial Protection Bureau
- What Does an Appraisal Management Company (AMC) Do? – AmeriMac Appraisal Management
- LPMI vs. PMI: Is Lender-Paid Private Mortgage Insurance Right For you? – Homebuyer.com
- How to get rid of PMI, or private mortgage insurance – BankRate.com
- FHA mortgage insurance removal: Get rid of FHA MIP – TheMortgageReports.com
- How the CFPB Three-Day Waiting Period Works – Ticor Title