It is important to talk with a lender before heading out to look at homes. It is helpful to know the “language” lenders use. Here are definitions of several terms you will encounter as you confer with lenders:
Adjustable-rate mortgage (ARM): A mortgage loan with an interest rate that periodically changes.
Annual percentage rate (APR): The yearly interest rate paid on a loan. Federal law requires that this rate is disclosed as part of the truth-in-lending documents.
Conventional mortgage: A mortgage offered by a lender that will probably be bought on the secondary loan market by Fannie Mae or Freddie Mac; these loans have an upper limit of $625,500.
Federal Housing Administration (FHA): A government agency that offers low-down-payment loans along with housing information.
Fixed-rate mortgage: A mortgage loan in which the interest rate remains the same for the entire length of the loan.
Good faith estimate: An estimate of the entire cost of buying a home, including all down payment, interest payments and closing costs associated with a loan; to be provided by the lender within three days of a loan application.
Jumbo loan: A mortgage loan above $625,500; these loans sometimes carry a higher interest rate and require a higher down payment and higher credit score than smaller loans.
Loan origination fee: A fee charged by the lender for administering and processing the loan; also sometimes called a “point” and is equal to 1 percent of the loan amount.
Mortgage insurance: Insurance that protects the lender against loss if the borrower defaults on the loan.
Points: A fee charged by the lender equal to 1 percent of the loan amount; points can be paid at the closing to lower the interest rate on a loan.
Preapproval: A qualification for a mortgage by a lender based on proof of your income, assets and credit score that states the maximum loan that you can qualify for; final loan approval also requires an appraisal on the property, which demonstrates that the value of the property is more than the loan amount.
Prequalification: An estimate of your ability to qualify for a loan given by a lender based on your credit worthiness, income and assets but without a complete proof of all assets.