Definitions for common FHA loan and mortgage terms.
Navigating the world of mortgages and FHA loans can be confusing with all the specialized terminology. This comprehensive glossary explains common terms you'll encounter during the home buying and mortgage process, with special attention to FHA-specific terminology.
A mortgage with an interest rate that can change periodically based on changes in a corresponding financial index. ARMs typically start with a lower interest rate than fixed-rate mortgages for a specified period (commonly 3, 5, 7, or 10 years) before adjusting. FHA offers ARM options with various adjustment periods.
The process of paying off a loan through regular payments over time, gradually reducing the loan balance. Each payment is divided between principal and interest, with more going toward interest at the beginning of the loan term and more toward principal as the loan matures.
A measure of the total cost of a loan, expressed as an annual percentage. The APR includes the interest rate plus other costs such as mortgage insurance, discount points, origination fees, and other charges. It's typically higher than the interest rate and provides a more comprehensive view of loan costs.
A professional assessment of a property's value, required for all FHA loans. The appraisal determines if the property meets FHA's Minimum Property Standards and ensures the loan amount doesn't exceed the property's value. FHA appraisals are more stringent than conventional loan appraisals and focus on both value and property condition.
An increase in a property's value over time due to factors such as market demand, inflation, improvements, or development in the surrounding area.
The percentage of a borrower's gross monthly income that goes toward all monthly debt payments, including the mortgage, credit cards, car loans, student loans, and other debt obligations. For FHA loans, the back-end ratio typically shouldn't exceed 43%, though exceptions up to 50% may be made with compensating factors.
A large, lump-sum payment due at the end of a loan term. FHA loans do not allow balloon payments, as they require fully amortizing payment schedules.
The person or persons who receive money from a lender with a promise to repay the loan according to specified terms.
A short-term loan used to "bridge" the gap between the purchase of a new home and the sale of an existing home. FHA loans cannot be used as bridge loans.
A unique identifier assigned to an FHA loan application. The FHA case number is required for processing and tracking the loan through the FHA system.
The final step in the home buying process where ownership of the property is transferred from seller to buyer. During closing, all required documents are signed, funds are disbursed, and the keys are handed over to the new owner.
Fees and expenses paid by both the buyer and seller at the closing of a real estate transaction. For FHA loans, these typically include origination fees, appraisal fees, credit report fees, title insurance, and prepaid items such as property taxes and homeowners insurance. FHA allows sellers to contribute up to 6% of the purchase price toward the buyer's closing costs.
A five-page form that provides final details about the mortgage loan, including the loan terms, projected monthly payments, and closing costs. Lenders must provide this document to borrowers at least three business days before closing.
An asset pledged as security for a loan. In mortgage lending, the property itself serves as collateral, meaning the lender can foreclose on the property if the borrower defaults on the loan.
A mortgage loan that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. Conventional loans typically require higher credit scores and larger down payments than FHA loans.
A numerical representation of a borrower's creditworthiness based on their credit history. FHA loans typically require a minimum credit score of 580 for a 3.5% down payment, or 500-579 for a 10% down payment.
A measure of a borrower's ability to manage monthly payments and repay debts. DTI is calculated by dividing total monthly debt payments by gross monthly income. FHA loans typically require a front-end ratio (housing expenses only) of no more than 31% and a back-end ratio (all debts) of no more than 43%, though exceptions may be made with compensating factors.
Failure to fulfill the terms of a loan agreement, typically by missing payments. Default can lead to foreclosure on a mortgage loan.
The initial payment made when purchasing a home, representing a percentage of the purchase price. FHA loans require a minimum down payment of 3.5% with a credit score of 580 or higher, or 10% with a credit score between 500 and 579.
Programs that provide funds to help homebuyers cover their down payment and sometimes closing costs. Many state and local governments offer down payment assistance programs that can be used with FHA loans.
A deposit made by a buyer to show their serious intent to purchase a property. This money is typically held in escrow and applied to the down payment or closing costs at closing.
The difference between a property's market value and the amount owed on the mortgage. Equity increases as the mortgage balance decreases and/or the property value increases.
A financial arrangement where a third party holds and regulates payment of funds on behalf of two other parties in a transaction. In mortgage lending, an escrow account is often established to collect and hold funds for property taxes and insurance premiums.
An account established by the lender to hold funds for property taxes and insurance premiums. A portion of the borrower's monthly mortgage payment goes into this account, and the lender uses these funds to pay these expenses when they come due. FHA loans typically require escrow accounts.
A U.S. government agency within the Department of Housing and Urban Development (HUD) that provides mortgage insurance on loans made by FHA-approved lenders. The FHA doesn't make loans directly but insures loans that meet its guidelines, allowing lenders to offer more favorable terms to borrowers.
The standard FHA mortgage insurance program, which insures loans for the purchase or refinance of a primary residence. This is the most common type of FHA loan.
A type of FHA loan that allows borrowers to finance both the purchase (or refinance) of a home and the cost of its rehabilitation through a single mortgage. There are two types: Standard 203(k) for major rehabilitation projects and Limited 203(k) for minor repairs and improvements.
The maximum loan amount that the FHA will insure, which varies by county and property type (single-family, duplex, triplex, or fourplex). These limits are updated annually and are based on median home prices in each area.
A mortgage with an interest rate that remains the same for the entire term of the loan. This provides payment stability and protection from interest rate increases. FHA offers fixed-rate mortgages with terms of 15 or 30 years.
The legal process by which a lender takes possession of a property after the borrower fails to make mortgage payments. The property is typically sold to recover the outstanding loan balance.
The percentage of a borrower's gross monthly income that goes toward housing expenses, including mortgage principal, interest, taxes, and insurance (PITI). For FHA loans, the front-end ratio typically shouldn't exceed 31%, though exceptions may be made with compensating factors.
Money given to a homebuyer from a relative, employer, charitable organization, or government agency to help with the down payment or closing costs. FHA loans allow the entire down payment to come from gift funds, provided they are properly documented.
A document that provides an estimate of the fees and costs associated with a mortgage loan. While the GFE has been replaced by the Loan Estimate under TRID regulations, the term is still commonly used to refer to preliminary cost estimates.
The difference between a property's market value and the amount owed on the mortgage. Equity increases as the mortgage balance decreases and/or the property value increases.
A thorough examination of a home's condition by a qualified professional. While not required for FHA loans, a home inspection is strongly recommended to identify any issues that may not be covered in the FHA appraisal.
An organization in a planned community, subdivision, or condominium building that makes and enforces rules for the properties and their residents. HOA fees are included in the calculation of a borrower's debt-to-income ratio for FHA loans.
Insurance that protects a homeowner against damage to their home or personal property, as well as liability claims. FHA loans require borrowers to maintain homeowners insurance for the life of the loan.
The U.S. Department of Housing and Urban Development, a federal agency responsible for national policies and programs addressing America's housing needs, improving and developing communities, and enforcing fair housing laws. The FHA is part of HUD.
A document that itemizes all charges and credits to the buyer and seller in a real estate transaction. While the HUD-1 has been replaced by the Closing Disclosure for most transactions, it's still used for reverse mortgages and some other transactions.
The percentage of a loan amount charged by the lender for borrowing the money. The interest rate is used to calculate the interest payment on the loan.
A mortgage where the borrower pays only the interest for a specified period, typically 5-10 years, after which the loan converts to a standard amortizing loan. FHA does not offer interest-only mortgages.
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. FHA has its own loan limits, which vary by county, and loans exceeding these limits are not eligible for FHA insurance.
A financial institution or entity that provides funds to a borrower with the expectation of repayment, typically with interest. FHA loans are provided by FHA-approved lenders, which include banks, credit unions, and mortgage companies.
A three-page form that provides information about the key features, costs, and risks of a mortgage loan. Lenders must provide this document to borrowers within three business days of receiving a loan application.
The ratio of the loan amount to the appraised value or purchase price of the property (whichever is less), expressed as a percentage. For FHA loans, the maximum LTV is 96.5% with a credit score of 580 or higher (3.5% down payment) or 90% with a credit score between 500 and 579 (10% down payment).
Guidelines established by HUD that outline the minimum requirements for properties financed with FHA loans. These standards focus on safety, security, and soundness of the property and are assessed during the FHA appraisal.
A loan used to purchase or refinance real estate, where the property serves as collateral for the loan. If the borrower defaults, the lender can foreclose on the property.
Insurance required for FHA loans that protects the lender against losses if the borrower defaults. FHA MIP consists of an upfront premium (UFMIP) paid at closing (or financed into the loan) and an annual premium divided into monthly payments. Most FHA loans require MIP for the life of the loan, though some may be eligible for MIP cancellation after 11 years if the initial LTV was 90% or less.
A legal document that obligates a borrower to repay a mortgage loan at a specified interest rate and over a specified period. The note also contains any other terms and conditions of the loan.
A fee charged by a lender for processing a loan application, typically expressed as a percentage of the loan amount. FHA allows lenders to charge reasonable origination fees, which are included in the calculation of the APR.
A property that serves as the borrower's primary residence. FHA loans are generally only available for owner-occupied properties, though they can be used for properties with up to four units, provided the borrower lives in one of the units.
An acronym for Principal, Interest, Taxes, and Insurance, which are the four components of a typical mortgage payment. PITI is used to calculate the front-end ratio for FHA loans.
Fees paid to the lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount. FHA allows borrowers to pay points to "buy down" their interest rate.
A preliminary evaluation of a borrower's creditworthiness and ability to qualify for a mortgage loan. Pre-approval involves verification of income, assets, and credit, and provides a more accurate estimate of how much a borrower can afford than pre-qualification.
A preliminary assessment of a borrower's ability to qualify for a mortgage loan based on self-reported information about income, assets, and credit. Pre-qualification provides a rough estimate of how much a borrower might be able to borrow but is less reliable than pre-approval.
The original amount borrowed in a loan, or the remaining balance of the loan excluding interest. As payments are made, the principal balance decreases.
Insurance required for conventional loans with a down payment of less than 20%. PMI protects the lender against losses if the borrower defaults. FHA loans use Mortgage Insurance Premium (MIP) instead of PMI.
A commitment from a lender to hold a specific interest rate for a specified period, typically 30, 45, or 60 days. Rate locks protect borrowers from rate increases during the loan processing period.
The process of replacing an existing mortgage with a new one, typically to obtain a lower interest rate, change the loan term, or access equity. FHA offers several refinance options, including the FHA Streamline Refinance for existing FHA borrowers.
A type of loan that allows homeowners aged 62 or older to convert part of their home equity into cash without having to sell their home or make monthly mortgage payments. The FHA's Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage.
A loan secured by a property that already has a mortgage. Second mortgages have a lower priority for repayment than the first mortgage in case of default. FHA allows borrowers to have a second mortgage, such as a home equity loan or line of credit, provided it meets certain requirements.
Contributions made by the seller toward the buyer's closing costs. FHA allows seller concessions of up to 6% of the purchase price, which is more generous than many conventional loan programs.
A simplified refinance program for existing FHA borrowers that requires less documentation and may not require an appraisal. To qualify, borrowers must be current on their existing FHA loan and the refinance must result in a tangible benefit, such as a lower interest rate or monthly payment.
The legal right to ownership of a property. A clear title is free from liens or other encumbrances that could affect ownership rights.
Insurance that protects the lender (lender's policy) and/or the buyer (owner's policy) against losses arising from defects in the title. FHA loans require a lender's title insurance policy.
The process of evaluating a loan application to determine the risk involved and whether to approve the loan. FHA underwriting considers the borrower's credit, income, assets, and the property's value and condition.
A one-time premium paid at closing for FHA mortgage insurance. The current UFMIP is 1.75% of the base loan amount and can be financed into the loan.
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and certain surviving spouses. VA loans typically offer more favorable terms than FHA loans for those who qualify, including no down payment requirement and no mortgage insurance.
Now that you understand the terminology, use our calculators to estimate your monthly payments and determine how much house you can afford with an FHA loan.