Unless independently wealthy, first-time home buyers need to borrow money from a bank or finance company. This involves reams of paperwork, the surrender of financial privacy -- to a degree -- and a lot of waiting. As the lender reviews and evaluates prospective borrowers and the subject property, applicants are inundated with terminology that can seem outright alien at times. Rest assured, none of these strange words or phrases is dangerous once they are properly decoded and defined. By the end of the process, in fact, first-timers may become quite fluent in the mysterious vocabulary of property loans.
MORTGAGE: This is both a noun and a verb. To mortgage something is to put it up as security for a loan. As a noun, then, it is a legal agreement to do so. Yet the word is often used synonymously with the loan itself.
COMMITMENT: When an applicant receives a commitment from a lender, he or she knows that the loan is approved. The commitment may have conditions, or contingencies, attached. This means that although the borrower is an acceptable candidate, certain caveats must be addressed before the financing can proceed to closing.
PRINCIPAL: Principal is the loan amount, in and of itself. Over the term of the loan, the borrower pays back principal along with interest, escrows and any fees or penalties incurred.
INTEREST: Interest represents what the lender charges to borrow the principal loan amount. For example, if a home buyer asks for $350,000 to purchase a dwelling and the bank charges four percent interest, the buyer will owe the bank roughly $600,000 over the life of a 30 year loan.
MORTGAGE POINTS: Borrowers willing to pay more interest up front in order to pay less each month can opt for points. Paid at closing, they reduce the interest rate and, accordingly, the monthly remittances.
ESCROWS: The lender protects its collateral, i.e. the house, by making sure it is safe and intact, on the one hand. On the other, the bank must assure that the home can not be seized by the taxing authority for delinquency. To preserve these conditions, the lender pays property taxes and insurance premiums by collecting a little of each from the borrower every month. These accruals are called escrows.
LOAN-TO-VALUE RATIO: LTV for short, this figure represents the percentage of home value that the loan consumes. In other words, an LTV of 80 percent means that the buyer contributes 20 percent of the funds to the purchase while the lender provides the remainder. Most lenders put a cap on the LTV.
EQUITY: Equity is what the buyer brings to the table. In short, it is the percentage of the buyer's ownership in the house. As the loan is paid down over the months and years, the borrower's equity increases in comparison to home value.
DEBT-TO-INCOME RATIO: This measures how much of the applicant's revenue is consumed by debt. Monthly payments on credit cards, auto loans, student loans and the like are tabulated -- along with the monthly remittance on the new loan -- to determine how much a candidate will pay in debt measured against how much money is coming into the household.
SETTLEMENT: AKA closing -- this is when and where home loan documents are signed, money is wired and the property is conveyed from seller to buyer. The settlement agent is most often either a lawyer or title agency.
NET WIRE: The amount sent from lender to settlement minus its fees and any withholdings.