Borrow Mortgages

Mortgage 101: What Is Escrow, Prequalification?

Nancy Mann Jackson  |  March 17, 2020

In the middle of the homebuying process and need definitions for common mortgage terms? Here’s our glossary of everything you need to know.

It can feel like mortgage lenders and real estate agents speak a secret language. If you’re planning to buy your first home — or your first in a while — you’re bound to hear unfamiliar terms during the mortgage process.

Here’s a cheat sheet to help you understand key terms.

Prequalification: This is the first step in the mortgage process and can be done over the phone. In the prequalification process, you give a lender your basic financial information — income, debt, assets — and after evaluating this information, the lender can tell you about the amount of mortgage for which you qualify. This step does not include a credit check, but it does allow the lender to explain the various options available and make recommendations.

Preapproval: The preapproval process is more in-depth than prequalification. During this phase, a borrower submits a loan application along with documentation of income and assets, and the lender runs a credit report to determine whether the borrower can be officially approved. After this process, the lender can tell you the specific loan amount for which you can be approved, and will provide you with a conditional commitment in writing for a specific loan amount, which can give you more leverage with home sellers.

Private mortgage insurance: Often referred to as PMI, private mortgage insurance is usually required by lenders when borrowers put down less than 20 percent of the purchase price as a down payment. PMI costs about 0.25 to 2 percent of your loan balance per year, depending on your down payment, loan term, and credit score. It’s paid as part of your monthly payment until you reach 20 percent equity in your home.

Appraised value: This is the evaluation of a property’s value performed by a professional appraiser during the mortgage origination process. Most lenders require an appraisal by a third party to ensure the property is worth the purchase price. The lender usually chooses the appraiser, but the borrower pays for the appraisal. If the appraisal value doesn’t match or exceeds the contracted purchase price, the mortgage is unlikely to be approved.

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Loan points: A point is a fee charged to the borrower, equal to 1 percent of the loan amount. Points are usually charged by the lender as a way of making a profit on the loan, but you may be able to negotiate for zero points or lower points fees. A 30-year, $150,000 mortgage might have a rate of 4.5 percent but come with a charge of one point, or $1,500. A lender can charge one, two or more points.

Origination fee: An upfront fee charged by the lender for processing a new mortgage loan application.

Down payment: This is the amount of money that the buyer puts toward the price of the home out of her own pocket. Traditionally, most mortgage lenders require borrowers to make a down payment of 20 percent of the cost of the home, but many now allow lower down payments, sometimes as low as 3 percent. The earnest money you pay upon making an offer to purchase a home is usually credited back to you to be included in your down payment at closing.

Earnest money: When you’re ready to make an offer on a home, you’ll supply earnest money, or a deposit on the purchase, to show the seller you’re serious about the offer and convince them to hold the property for you. Earnest money allows the buyer additional time when seeking financing and is typically held jointly by the seller and buyer in a trust or escrow account until the contract is fulfilled.

Escrow: An escrow is a deposit of funds that will be held by a third party (such as an attorney) until certain conditions are met. For instance, you may pay earnest money upon submitting a contract to buy a house, and those funds will be held in escrow until the closing date, when they will be paid to the seller.

Title: A formal document, such as a deed, that serves as evidence of ownership. Before you can purchase a property, you usually have to pay for title research so your lender can ensure that no other person or entity holds rights to the property and you can obtain a clear title.

Title research: This is the process in which a title professional retrieves documents that evidence events in the history of a property, like former purchases and construction, to determine any parties that have interests in or regulations concerning that property.

Balloon payment: Some mortgage loans do not amortize the entire loan amount over the life of the loan and only charge interest payments each month throughout the term. In those cases, a large payment of the remaining balance is due at the end of the loan. This final repayment to the lender is called a balloon payment.

Amortize: To pay off gradually, usually by periodic payments of principal and interest or by payments to a sinking fund.

Adjustable-rate mortgage: A mortgage with an interest rate that is adjusted periodically to reflect market conditions.

Fixed-rate mortgage: A mortgage that has a fixed interest rate for the entire term of the loan.

Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. This post contains references and links to products from our partners. Learn more about how we make money.
Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

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