Getting to Know Your Mortgage Terms

The home buying process can be confusing and filled with jargon or unfamiliar words that can be confusing at times. The following is a list of terms and definitions related to mortgages, home loans and the home buying process to make it easier to follow.

Adjustable-rate mortgage (ARM) – this is a home loan with a variable interest rate.

Amortization – the process in which a debt is reduced by regular payments towards the principal and interest.

Appraisal – This is when a professional appraiser reviews and evaluates sales of nearby homes to provide an overall estimate of a home’s value. These are standard in most contracts and appraisal contingency allows a buyer the option to back out if the home’s market value did not come close to or match the sales price.

Annual Percentage Rate (APR) – this is a consolidated measure of closing costs that can include credit charges, origination fees, interest rates and other fees that can be in a mortgage.

Closing Costs – these are your standard upfront fees that are charged to originate a mortgage and can typically be between 2% to 6% of your loan amount. Your closing costs would be provided on your loan estimate before closing on the home purchase.

Credit Bureau – a data agency that collects information from banks and creditors to create an individual’s credit report and credit score. In Canada the main credit bureaus are Equifax and Transunion.

Credit Score – a three digit number between 300 to 900 in Canada that represents your creditworthiness based on factors like payment history, credit utilization, credit mix, debt and new credit inquiries. 

Credit Report – a summary of your overall credit history, debt and credit activity.

Credit Utilization – the percentage of credit used of the amount of credit available

Credit Report – this is a 3 digit number based on payment history, debt owed, length of credit history, new credit, public records, credit inquiries and credit mix. In Canada a credit score on a credit report is between 300 to 900. Borrowers of a personal loan or mortgage will usually see better interest rates starting in the low to mid 700s score.

Debt-To-Income (DTI) Ratio – This is a measure of overall monthly debt by dividing your debt by your monthly earnings (before taxes) to determine your ratio.

Down payment – the amount of money put towards a home purchase before financing the balance.

Fixed-rate mortgage – this is a mortgage where the interest rate stays the same for the loan term.

Gross Debt Service Ratio (GDS) – this is a comparison of housing costs versus a borrower’s gross income. This helps determine how much the homebuyer can reasonably afford when they are looking to qualify for a mortgage or home loan.

Loan-to-value ratio (LTV) – this is a comparison of the amount borrowed to a home’s value. Most loans usually have an LTV maximum of 95%, requiring a down payment of 5%, but this amount depends on the borrower, lender and home value.

Mortgagee – the lender.

Mortgagor – the borrower or homeowner.

Mortgage stress test – this is to determine if you would still be able to pay your mortgage if the interest rate were to rise and guides mortgage providers for how much you can qualify for. More >> 

Mortgage Term – this is the length of time your mortgage for your contract. 

Origination fee – this is an upfront fee paid to the lender for setting up the loan or mortgage.

Pre-approval – is the pre-qualification for a loan or mortgage.

Pre-qualification – is to meet the preliminary requirements of a loan.

Principal – this is the amount of money that was borrowed for your loan.

Refinance – is the process of paying off a previous loan, often replacing it for one with better rates and/or terms.

Term length – is the duration of a loan (typically in months) until it has been paid in full.

Total Debt Service Ratio (TDS) – a method that mortgage lenders use to evaluate a potential borrower’s capacity to take on a loan. It is calculated by monthly household income to housing costs and other debt. Depending on the lender it is often between 39% to 44%.

Learn more about the process and how you can help yourself to prepare for a mortgage.

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