Explanation of Terms Continued

Preapproval

A mortgage banker or broker preapproves a potential borrower by verifying their credit, debt and income information. This involves running a credit report on the borrower, and it may also involve filling out and processing a complete 1003 application form.

The mortgage banker or broker than gives the borrower a letter stating that they have been preapproved up to a certain amount, as long as standard conditions are met. Standard conditions include items like the property appraising for enough money and having a clear title report, and the borrower being able to document income and employment.

The advantage of getting preapproved is that it is a formal approval that is typically only contingent on standard conditions, so once a borrower has found a property they can complete the purchase much quicker than if they had only gotten prequalified and still needed to go through the formal approval process. In addition, from a seller's perspective a preapproved buyer already has the funds available, whereas a prequalified borrower may or may not have funds available depending upon what happens during the formal approval process.

Prequalification

A mortgage banker or broker prequalifies a potential borrower by going over basic credit, debt and income information that they have been told by the borrower. Borrowers can typically get prequalified with one phone call. After they've given the mortgage banker or broker their basic info, the mortgage banker or broker will then give them a maximum loan amount they could qualify for based on the information they've given.

Unlike a preapproval, a prequalification is not a formal approval. It is simply an estimate based on information from the borrower. Once a borrower finds a property, they will still need to go through the formal approval process (credit report, 1003 application form, etc.). The advantage of prequalification over preapproval is that it can quickly give borrowers who know their financial and credit situations a general idea about what they can afford.

Principal

Principal is the amount a borrower still owes on a mortgage loan. When a loan is first issued, the principal is the same as the total loan amount. As a borrower makes payments, they begin paying off the principal and building equity in the home.

Refinance (Refi)

A refi is when a borrower takes out a new mortgage on a home and uses it to pay off the old mortgage (or mortgages). Borrowers typically refinance their homes for one of two reasons: to take advantage of lower interest rates, or to take advantage of equity they've built up in the home.

If a borrower has significant equity in their home then they can refinance with a new mortgage, pay off the existing mortgage and have money left over to do with whatever they want. People often use this money to pay off credit card debt or to make improvements to their homes.

Zero Down Mortgage

A zero down mortgage loan is a mortgage loan that allows borrowers to finance a home's entire purchase price instead of only a percentage of the purchase price. In other words, zero down mortgage loans do not require a down payment. If you bought a home for $150,000.00 and financed it with a zero down mortgage loan, the loan would be for $150,000.00. There are many different zero down mortgage loan programs available in today's market, including both fixed rate zero down mortgage loans and adjustable rate zero down mortgage loans.

Zero down mortgage loans typically have higher credit requirements than regular mortgage loans, because there is a higher risk of default (foreclosure) with a zero down mortgage loan than there is with a conventional mortgage loans. However, there are many different types of zero down loan programs available today including zero down mortgage loans for those with perfect credit and zero down mortgage loans for those who have some credit issues. Although zero down mortgage loans do not require the borrower to make a downpayment, they have similar interest rates to regular loans.

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Calculators

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Our mortgage calculator can calculate principal and interest payments, calculate total monthly payments and display an amortization report.

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Our refinance calculator can calculate whether it would save you money to refinance your existing mortgage loan (s).

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