Learn About Mortgage Terminology

At Direct Finance Corp., our goal is to get you approved for the best mortgage that meets your needs. Varying circumstances dictate different loan types. For those of you who are a little lost when it comes to all the mortgage "mumbo-jumbo", we hope a short course in Mortgage 101 will answer your questions.

Why do so many mortgage companies try to make mortgages seem difficult and complicated? A mortgage is all about enabling you to realize the pride of home-ownership.

Whether you're just starting a family. . .
or just looking for a little more breathing room,
Direct Finance Corp. can help you realize your dreams.

Now, let's learn a little bit about mortgages. If you find this too confusing, relax. We would be more than happy to sit down with you to help explain it better. Let's start out with some common terms:

Fannie Mae (FNMA) - Fannie Mae is a quasi-governmental agency which was created in 1938. Its mission is to provide financing to home-buyers by buying mortgages in the secondary market.

Freddie Mac (FHLMC) - Freddie Mac was created in 1970 to purchase conventional mortgages in the secondary market.

Ginnie Mae (GNMA) - Is the governmental agency which purchases the majority of FHA and VA loans.

Conventional Mortgage - This is a mortgage for people who have managed their credit fairly well and have histories of paying their bills on time. Conventional mortgages usually require a down payment of 5%, however, the lower the down payment the better the credit history must be.

Reverse Mortgage - A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. For more on Reverse Mortgages, click here.

FHA or VA loans - These loans are government insured loans available for lower down payment amounts. FHA (Federal Housing Administration) allows down payments as low as 2.25%. You may even be able to get some assistance in making that down payment, but you should call Direct Finance Corp. to learn more about programs which are available. VA (Veterans Administration) loans are available to eligible veterans with no down payment. There are certain restrictions to both programs, so call or e-mail us for more information about them. Mortgage companies have to go through stringent testing and guidelines to offer FHA and VA Loans, and only the better mortgage companies qualify.

Interest rate - The cost you pay for borrowing money. Whether you are buying a house, a car or charging something on your credit card, you pay interest. The lower this number is, the less you are going to pay in interest.

Points - A point is simply 1% of your loan amount. People usually think of points as "discount points" which you can pay to buy down your "rate". For example, if your mortgage is for $100,000 and you are buying one discount point, it would cost you $1,000. You may also be charged "origination points" which is a charge for doing your loan. Most refinances are done with "no points".

Refinance - Since we mentioned it before, let's explain it now. When you refinance, you are paying off your old mortgage with a new mortgage. You might want to refinance if the interest rate is lower. For example, if you have a mortgage at 9% and the current rate is 7.5%, it might be a benefit to refinance. Another reason to refinance is to get cash from your home. We'll explain that later when we talk about "equity".

Buy-down - This is what happens when you purchase "discount points". Your rate is "bought down" to a lower level.

Equity - Now seems like as good a time as any to talk about equity. Equity is how much of your home you own. As an example, if your home is worth $200,000 and you still owe $100,000 you would have $100,000 of equity in your home. A portion of that would be available to you if you were to refinance.

Pre-qualification - Now we're getting into the meat of mortgages! Pre-qualifying is when a lender asks you about your income, assets (bank accounts, etc.) and liabilities. The Big Three! You will then be pre-qualified to buy a home for a certain amount based on your "DTI", which we'll explain below.

Are you confused yet? I hope not, but there's still some important terms for you to understand, so let's press on!

So what happens to a mortgage behind the scenes? Once your application has been turned in, a processor verifies everything you have told your loan officer. All of this information, by the way, is kept confidential to maintain your security. They verify this information by contacting your employer (don't worry, they're used to this) and reviewing your bank statements to verify your assets. They will order an appraisal of the property, to make sure you are not spending $150,000 on a house that is only worth $100,000. They order a survey, title work (for refinances), your credit report and any other information that will help them prepare the loan for the underwriter.

The underwriter, contrary to popular belief, is not a mean person. They're just there to review the loan to make sure it meets the standards of the secondary market. There's that term again, and it wasn't in the glossary! What's the secondary market?!? Maybe we should take a moment to explain that.

Mortgage lenders, for the most part, do not have vaults filled with money to lend you to buy your home. Some banks do, but even most banks utilize Fannie Mae or Freddie Mac to buy their mortgages. They receive their funds from those organizations, and other investors, who operate in the secondary market.

Investors put their money into these mortgages because they know they will get money back in the form of interest. If I were to go into it any further, it would be more confusing than is necessary. What is important to understand is that all lenders have to make sure their loans meet the requirements of the secondary market.

Once the underwriter has reviewed the loan they will either approve the loan, or ask for more information. If they ask for more information it does not mean there is anything wrong with your mortgage, it simply means the underwriter has noticed something the processor did not. It's just a system of checks and balances.

After your mortgage has been approved, you are ready to buy your home! The next time you look in the mirror you'll see the face of a proud home-owner.

Congratulations! You've reached the end of a very long page with a lot of information on it. Now you're ready for the real fun!  Call or e-mail us now for your pre-qualification.

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