Published August 7, 2024

The Expert Guide to Homebuying Financial Terminology

This list of mortgage and home finance terms will help you better understand the homebuying process and your options as a Homebuyer.

Homebuying Financial Glossary

Buying a home often means navigating complex and potentially confusing financial terms the average Homebuyer wouldn’t encounter in their day-to-day lives. Homebuyers usually want to better understand what financial options are available to them and what those options mean, so we’ve created a helpful guide to offer more clarity.

This glossary provides clear definitions and detailed descriptions of common home mortgage terms, allowing you to confidently understand the terms you’ll encounter in your homebuying process.

Rate Buydown

Interest rate buydowns provide a temporary reduction of the Homebuyer’s monthly payments by decreasing the effective interest rate on their mortgage for a set amount of time¹. The actual monthly amount owed doesn’t change, but a portion of the payments will be drawn from a deposit or subsidy attached to the mortgage’s escrow account².

Rate Lock

A rate lock is a condition in a Homebuyer’s agreement with their lender, which sets a mortgage interest rate at the time of the lock³. A rate lock gives the Homebuyer a set amount of time to close on their home at the specific mortgage rate. Without a rate lock in place, the interest rate will be subject to market fluctuations.

Seller Contribution Limits

Seller contributions are sometimes referred to as “interested party contributions” or “seller concessions.” Contributions cover costs paid on behalf of the Homebuyer by the seller or other interested party⁴. These contributions are limited by a selection of factors, including the type of loan the Homebuyer is using, whether or not the home will be the Homebuyer’s place of residence, and the loan-to-value ratio.

Adjustable Rate Mortgage

An adjustable rate mortgage (ARM) is a type of loan with a variable interest rate, as opposed to a fixed interest rate⁵. With an ARM, a monthly mortgage payment will change based on the index interest rate⁶.

VA Loans

VA loans are a type of loan offered to help U.S. military service members, veterans, and their families buy homes. These loans are operated and secured by the Department of Veterans Affairs, including the qualification rules and terms⁷.

Learn more about the advantages and disadvantages of VA Loans.

USDA Loans

USDA loans are a type of loan offered to help rural Homebuyers within certain income levels buy homes. These loans are operated and secured by the Rural Housing Service (RHS), which is part of the U.S. Department of Agriculture (USDA), and are leant directly to Homebuyers meeting the RHS qualifications⁸.

Conventional Loans

Conventional loans cover the full range of standard, retail loans available to Homebuyers without government provisions⁹.

Jumbo Loans

Jumbo loans are home mortgage loans for an amount greater than the Federal Housing Finance Agency’s (FHFA) set maximum for home loans. These maximums vary by region and are reviewed on an annual basis. Obtaining a jumbo loan is sometimes more expensive than obtaining a loan that conforms to the FHFA maximum¹⁰.

FHA Loans

FHA loans are a type of loan offered to expand homeownership opportunities to more Homebuyers. These loans are insured by the Federal Housing Administration (FHA), which is part of the United States Department of Housing and Urban Development (HUD), and operated by FHA-approved lenders. Homebuyers using an FHA loan will pay for the FHA mortgage insurance. Homebuyers who don’t qualify for a conventional loan may still qualify for an FHA loan¹¹.

Learn more about the advantages and disadvantages of FHA Loans.

Earnest Money

Earnest money is a type of deposit the Homebuyer pays to the seller when their offer on a home is accepted¹². The earnest money is rolled up into the down payment and closing costs when the sale is finalized. Reimbursement of earnest money is not guaranteed should the Homebuyer not purchase the home¹³. Earnest money regulations vary by state.

Closing Costs

Closing costs include a variety of expenses and fees that must be settled at the time of closing¹⁴. These costs are in addition to a down payment. Closing costs can include loan origination and underwriting fees, points, appraisal and title insurance fees, and other government fees, and more¹⁵.

Learn more about anticipating the costs of owning a home.

Private Mortgage Insurance

Private mortgage insurance (PMI) may be required for Homebuyers using a conventional loan while making a down payment of less than 20 percent of the home’s purchase price. PMI is paid by the Homebuyer and covers the lender in the event that the Homebuyer stops making payments on their mortgage¹⁶.

Debt-to-income Ratio

Debt-to-income ratio compares a Homebuyer’s cumulative payments from all debt sources to their gross monthly income. This ratio is used as part of a lender’s calculation of a Homebuyer’s qualification and maximum loan amount¹⁷.

Loan-to-value Ratio

Loan-to-value (LTV) ratio compares the potential mortgage amount on a purchased home to the home’s appraised value. This ratio is used by lenders to gauge the qualification of a loan and in determining whether or not a Homebuyer will need to purchase private mortgage insurance¹⁸.

APR

Annual percentage rate (APR) reflects the mortgage interest rate, any points applied to the mortgage and other fees and charges related to the home loan. A mortgage APR will often be higher than the base interest rate on the mortgage due to the inclusion of these fees¹⁹.

Appraisal

An appraisal is typically ordered by the Homebuyer’s lender to assess the value of the home. The fees associated with this appraisal are typically paid for by the Homebuyer as one of their closing costs. This appraisal will influence key qualifications of the loan, including the loan-to-value ratio and the Homebuyer’s potential need to purchase private mortgage insurance²⁰.

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