Commonly Confused Terms

Below are explanations for commonly misunderstood mortgage terms.

Question: What is pre-qualification? What is a pre-approval? Why should you get one or the other?

Answer: Pre-approval helps buyers “shop smart” by establishing the price range of properties for which they're likely to be able to obtain financing. Pre-approval may help strengthen your bargaining position by showing a seller that you should have no difficulty getting a mortgage to buy the property.

Pre-qualification is a loan officer's informal opinion – based solely on initial information you provide – of how large a mortgage you might be able to get.

Question: What is “LTV” and how will it impact you?

Answer: LTV stands for “loan to value” and is calculated by dividing the amount of the loan by the purchase price of the home. Ninety percent is a typical LTV, meaning that a buyer made a down payment of 10% of the home's purchase price. Some buyers put down 20%; some put down 5%; still others put down nothing. The LTV often determines which types of mortgages are available to you.

Question: What is “PMI” and should you try to avoid it?

Answer: PMI stands for “private mortgage insurance.” PMI confuses many first-time buyers, because it is designed to protect the lender in the unlikely case you default on the loan. However, the buyer pays the premiums for this insurance, which typically range from 0.3 to 0.5 percent of the loan amount. PMI is generally required on any mortgage with a down payment less than 20% of the home's cost.

Whether you should try to avoid PMI depends on many factors, including the cost of the premium and whether you have – and want to commit – additional funds to your down payment. See “A Guide to Private Mortgage Insurance” for information about programs that allow you to put down 10% or less without paying PMI.

Question: What is an “escrow"?

Answer: Generally speaking, an escrow refers to money deposited in an account that is held by one party for another. In the context of buying a home, escrows can be an easy way to save for large property tax and homeowners' insurance bills. That's because the mortgage company will collect an estimated portion of your property tax and/or homeowner's insurance payments each month with your mortgage payment, and hold them on your behalf in an escrow account. When the tax bill and insurance premiums are due, the mortgage company will pay them for you out of the escrow account. Collections are estimates based on information available at the time.  When your monthly payment includes escrow, adjustments will be made on an annual basis for the life of your loan.

Question: What does “underwriting” mean?

Answer: Underwriting is the process by which 1stAvenue Mortgage or another lender analyzes the risk associated with giving you a mortgage. It involves evaluating your financial situation (income, assets, debt, credit, etc.), a professional appraiser's assessment of the home and research into the property's ownership.