Making sense of loan terminology

We have provided you with the important details about various loan types and programs. This information is by no means complete. You should talk with a lender because he or she will know the product details better and can help find the right loan for you. Below are the terms/concepts that are used when comparing loans.
Loan types	Can you combine this loan product with any other loans? Will a secondary investor, like Fannie Mae or Freddie Mac, buy the loan? Is the loan insured by FHA or guaranteed by VA? (If the loan is not, then it is a conventional loan.) Is the loan intended to be used a second mortgage? Is the loan unsecured? (This means it does not require the borrower to secure the debt against some asset, usually property.)
Length and Terms	How many years will you have to pay your mortgage? What is the interest rate for the loan? (Interest rates vary for most mortgages, so you need to contact your lender for this information.) Is the rate fixed or adjustable?
Down Payment	What is the required down payment? (This can be expressed as a percentage of the mortgage or it can be a fixed dollar amount. Some loans require that the borrower make a prescribed down payment without assistance. Some loans allow for the use of gifts or other sources of funding besides the borrower’s money.)
Closing Costs	The closing costs are usually expressed as a percentage of the mortgage amount. Sometimes the lender or seller will pay all the closing costs, but most of the time the buyer will pay for them. Some loans allow for the use of gifts or other sources of funding besides the borrower’s money.
Gift funds	Some loans allow the borrower to receive a gift or a grant to help with the down payment and closings costs. These gifts can come from a down payment assistance program (for example, City of Memphis Down Payment Assistance) or from a non-profit down payment assistance organization (seller makes a contribution to the organization; for more information about seller’s assistance programs, click here). Gifts can also come from family members depending on the loan.
Eligible Properties	Most loans require that the borrower will live in the house as their primary residence. The loan may restrict the types of property that can be purchased. Types of property include single-family dwellings, condominiums, town house, Planned Unit Developments (PUD), manufactured homes, etc. Some loans may be restricted to new construction.
Maximum Loan Amount	Lenders may indicate the maximum dollar amount that they will lend to a borrower. Sometimes this is expressed as a percentage. The loan-to-value ratio describes how much the lender will lend in relation to the purchase price of the home. A 100% LTV means that the lender will provide a mortgage for the full amount of the purchase price of the home. A 95% LTV means that the borrower will have to provide 5% of the cost of the home.
Borrower Income/ Requirements	All loans state that the borrower must meet certain requirements. Many loans require that the borrower makes less income than the Area Median Income (AMI). HUD determines the AMI. The AMI for Shelby (including Memphis), Fayette, Tipton, DeSoto and Crittenden counties is $53,600. If you want to purchase a home outside this area, click here to find the limit for your area. When looking at AMI you may see the term MSA. This means the Metropolitan Statistical Area. The Memphis MSA includes Shelby, Fayette, and Tipton Counties in Tennessee; Crittenden County, Arkansas; and DeSoto and Marshall Counties, Mississippi.
Underwriting Ratios	Some loans require that the borrower’s debt, income and housing expenses are below a certain level for the debt-to-income ratio and the housing expense ratio. The debt-to-income ratio is calculated by dividing monthly minimum debt payments (car payments, monthly installment loan payments, bank/credit union loans, student loan payments, alimony, child support payments, the minimum payment on credit cards, etc.) by monthly gross income (the amount before taxes are removed). For FHA-insured loans, the debt-to-income ratio should not exceed 41 percent. The housing expense ratio is the result of dividing the monthly mortgage payment by monthly gross income. For FHA-insured loans, the housing expense ratio should not exceed 29 percent.
Buy Downs	Some loans allow the borrower to obtain a lower interest rate (buying down the rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buy down may be used to qualify a borrower who would otherwise not qualify. This is because a buy down results in lower payments, which are easier to qualify for.
Assumable	If you have to move before you pay off your mortgage, some lenders allow the next buyer to assume your mortgage. The new buyer will continue paying the mortgage you started. Your lender will have to qualify the new buyer to assume the loan. Be sure to get a release from liability from the lender.
Prepayment Penalty	A prepayment penalty is a penalty some lenders charge for paying a loan off early. Check to see if a loan has a penalty and how long it will be in effect. If you plan to make payments before they are due, or think you might sell your home before the loan is paid off, a penalty could be costly to you.
Homebuyer Education	Some loans require that the borrower attend homebuyer education courses or counseling. The lender will direct you to one of the agencies that provide the education. Click here for information about local homebuyer education/counseling.
Mortgage Insurance	Most of the time when a borrower makes a down payment less than 20% of the purchase price, the lender requires that the borrower pay mortgage insurance. This insurance protects the lender in case the borrower cannot repay the loan. The mortgage insurance can be paid both at closing and as a small part of the monthly mortgage payment.
Seller Contribution	Some loans allow the seller to contribute toward closing costs. The contribution is usually expressed as a percentage.
Credit History	Lenders look at your credit report and credit score when considering you for a loan. Some loans require a minimum credit score. Sometimes the credit score is called a FICO score.
Payment Reserves	The lender may require that the borrower have one or two month’s mortgage payments in reserve. This means you have the money saved in a bank account.
Geographic Restrictions	The loan may restrict where the borrower can buy a property. Some loans are just for the City of Memphis or Shelby County. Some loans are also restricted to specific zip codes.