Mortgage Glossary
Acceleration
The right and act of the lender demanding immediate repayment of the balance on a mortgage that is in default.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is fixed for a predetermined amount of time, and then adjusts periodically based on an index. ARMS are also known as a variable rate mortgages.
Adjusted Basis
The cost of a property plus the value of any capital expenditures for improvements to the property less any depreciation taken.
Adjustment Date
The date when the fixed interest rate expires on an adjustable rate mortgage (ARM) and the rate becomes variable.
Adjustment Interval
The time interval between the first interest rate adjustment on an ARM depending on the index. Usually the phase is one, three or five years.
Adjustment Period
The time period between adjustment dates for an adjustable rate mortgage (ARM).
Affordability Analysis
A review of a buyers income, liabilities and assets is performed in an effort to determine the buyers ability to afford the purchase of a home.
Amortization
Mortgage repayment broken down into equal periodic payments through the mortgage term. Payments are frontloaded with more interest than principle at the beginning of the term. However, as time goes on, this ratio shifts so the principle portion incrementally increases as the interest decreases.
Amortization Term
The number of years required to amortize or pay down a mortgage.
Annual Percentage Rate (APR)
The true cost of a loan including interest rate and closing costs expressed as a yearly percentage rate. The disclosure of the APR allows borrowers a basis with which to compare multiple mortgage offers based on the note rate and closing fees.
Appraisal
A formal estimate of a propertys sales value based on nearby comparable properties that have sold in the past year.
Appraised Value
An evaluation of a property's market value based on the propertys amenities, size, square footage, condition, neighborhood, age, etc. These features are then compared to other similar properties that have sold recently neighborhood to derive a solid fair market value.Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights.
Assumability
This type of mortgage is rare, and allows the seller to transfer the remaining mortgage balance and terms to the buyer.
Assumption
An infrequent situation, whereby a buyer takes over the mortgage from the seller upon purchasing the sellers home. This option is usually cheaper as it involves no new closing costs and has a shorter term than the buyer would likely receive.
Assumption Fee
The fee the buyer pays to a lender for an assumption.
Balloon Mortgage
A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five or seven year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.
Balloon Payment
The final lump sum payment due at the maturity of a balloon mortgage.
Biweekly Payment Mortgage
A payment plan that requires a monthly payment be cut in half, and paid every two weeks. This results in an extra mortgage payment every year and henceforth pays down the principle balance on a 30 year mortgage in about 22 years. The term is significantly shorted and the homeowner saves tens of thousands of dollars in interest payments.
Blanket Mortgage
One mortgage against multiple properties.
Borrower (Mortgagor)
Person who seeks financing and makes a pledge to repay the mortgage in full according to the terms set forth in the mortgage note. Borrower also allows the property to serve as security for the mortgage.
Bridge Loan
A second mortgage collateralized by the buyers current home to obtain funds to close on a new house before the current home is sold. Also called a "swing loan."
Broker
An individual or company who assists with obtaining mortgage financing but does not lend the capital himself. Brokers charge a fees or commission for their services.
Buy Down
When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Cash Flow
The amount of cash netted from a rental property. The cash flow is positive if the rental income is in excess of the mortgage payment, taxes, insurance and maintenance costs. However, if rental income is insufficient to pay the mortgage, escrows and upkeep costs, negative cash flow exists.
Caps (interest)
Consumer safeguards which limit the amount of change to the interest rate for an adjustable rate mortgage.
Caps (payment)
Consumer safeguards which limit the amount of change to the monthly payments for an adjustable rate mortgage.
Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business and mobile homes. Certificates of eligibility may be obtained by sending form DADA (Separation Paper) to the local VA office with VA form 1880 (Request for Certificate of Eligibility).
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing the property's current market value.
Certificate of Veteran Status
The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD 214 to the local VA office with form 26-8261a (Request for Certificate of Veteran Status). This document enables veterans to obtain lower down payments on certain FHA insured loans.
Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable rate mortgage (ARM).
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount.
Closing Costs
Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
COFI
An adjustable-rate mortgage with a rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.
Construction Loan
A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.
Consumer Reporting Agency
An organization also called a credit bureau that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and other sources.
Contract Sale or Deed:
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.
Conventional Loan
A conforming or nonconforming mortgage that is neither FHA nor VA.
Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
Credit Report
A report documenting the credit history and current status of a borrower's credit standing.
Credit Score
A statistical summary of the information contained in a consumer's credit report. Fair Isaac or FICO score is the most well known type of credit risk score. This form of credit scoring is an algorithm based mathematical calculation that assigns numerical values to various pieces of information in the credit report. The credit score is very important in the credit underwriting process for a mortgage loan.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.
Deed of Trust
In many states, this document is used in lieu of a mortgage to secure the payment of a note.
Default
Failure to make the requisite monthly payments on a mortgage. Also called foreclosure.
Deferred Interest
The unpaid interest on a monthly payment which adds to the principle balance. This results from an optional minimum payment amount that is less than the full interest payment. Also called negative amortization.
Delinquency
Late mortgage payments which can lead to default.
Department of Veterans Affairs (VA)
An agency of the U.S. government that guarantees mortgages to eligible veterans.
Discount Point
See point
Down Payment
Money a buyer needs to bring to the closing to bridge the difference between the mortgage amount. and the purchase price.
Due-on-Sale-Clause
A standard provision in a mortgage that allows the lender to demand immediate payment of the mortgage balance if the mortgage holder sells the home.
Earnest Money
Money put down towards the purchase of a new home that binds the transaction.
Entitlement
A guaranteed benefit such as the VA loan. Recipient must be eligible.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
Equity
The fair market value minus the mortgage balance on any property. This debt-free portion of a homes value is also called the owner's interest.
Escrow
A savings account maintained by the lender from which real estate taxes and insurance on a property are paid. Homeowners can deposit money into this account monthly along with their principle and interest.
Escrow Disbursements
Payments from the homeowners escrow account for real estate taxes, hazard insurance, and mortgage insurance. These payments are made from the escrow account as they become due.
Escrow Payment
The part of a homeowners monthly payment that is collected by the mortgage company to pay for taxes, hazard insurance and mortgage insurance.
Fannie Mae
Federal National Mortgage Association.
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Mortgage Corporation(FHLMC) — "Freddie Mac"
A government sponsored corporation that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association — "Fannie Mae."
A government chartered entity that buys and sells conventional residential mortgages. Also purchases and sells FHA and VA loans.
FHA Loan
A government loan insured by the Federal Housing Administration. FHA loans are available to all qualified homebuyers and homeowners. Excellent for first time home buyers, FHA loans provide solid financing with competitive rates and terms up to 97% financing.
FHA Mortgage Insurance
FHA requires mortgage insurance (usually 0.5 percent of the new loan amount in monthly payments. Also requires an up front mortgage insurance fee at closing.
FHLMC
Also known as "Freddie Mac -The Federal Home Loan Mortgage Corporation buys and sells conventional loans from savings and loans by purchasing their.."
First Mortgage
The mortgage that occupies the first lien position. Usually the bulk of the combined liability.
Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed Rate Mortgage
A type of mortgage where the interest rate remains the same for the entire term.
Fully Amortized ARM
An adjustable rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
FNMA
The Federal National Mortgage Association is a secondary mortgage institution. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a default.
Freddie Mac
See Federal Home Loan Mortgage Corporation
Ginnie Mae
See Government National Mortgage Association.
Government National Mortgage Association (GNMA)
Also known as "Ginnie Mae." Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Guaranty
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Guarantee Mortgage
A mortgage guaranteed by a third party.
Hazard Insurance
Homeowners insurance that protects the homeowners from damages and losses such as flood, fire windstorm, etc. Necessary to obtain mortgage financing.
HUD-1 Statement
A settlement statement that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system.
Impound
The portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as escrows.
Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one, three, and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Indexed Rate
The sum of the published index plus the margin. For example if the index is 4% and the margin is 2.75%, the indexed rate would be 6.75%. Often, lenders charge less than the indexed rate the first year of an adjustable rate mortgage.
Initial Interest Rate
This refers to the interest rate at the time of closing. This rate changes for an adjustable rate mortgage (ARM). It's also known as "start rate" or "teaser."
Installment
The regularly scheduled payment that a borrower pledges to make to a lender.
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
Interest
The cost to borrow money.
Interest Accrual Rate
The rate at which interest accrues on a mortgage. Also used to calculate the monthly payments.
Interest Rate Ceiling
The maximum interest rate to which an adjustable rate mortgage (arm) can adjust, as per the mortgage note.
Interest Rate Floor
The minimum interest rate to which an adjustable rate mortgage (ARM) can adjust, as per the mortgage note.
Interim Financing
The construction financing made for the construction phase. Once the property is completed, the original construction loan needs to be refinanced to a permanent mortgage.
Investor
An institution that provides a source of capital for a lender.
Jumbo Loan
A loan in excess of the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because the loan amount presents an inherently higher risk, the interest rates for jumbo mortgages are at a premium.
Late Charge
The penalty incurred if a mortgagor makes an installment payment late
Lease-Purchase Mortgage Loan
A financing option that allows low and moderate income home buyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.
Liabilities
A borrowers total monthly financial obligations. Liabilities include both long term and short term debt.
Lien
A claim against a property for the satisfaction of a debt or obligation.
Lifetime Rate Cap
For an adjustable rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
Loan
A sum of money borrowed (principal) that is to be repaid with interest.
Loan to Value Ratio
The loan amount divided by the fair market value of the property. Used for qualifying purposes and to determine a rate. Higher Loan to Value Ratios mean greater risk for the investor.
Lock
A guarantee that the quoted mortgage rate will apply for a specific number of days from the day of the lock.
Margin
The spread between a pre-selected index and the interest rate for adjustable rate mortgages to establish the adjusted interest rate.
Market Value
A theoretical price that a buyer would be willing to pay and a seller would accept for any property. This subjective value relies on what nearby comparable properties have sold for in the last few months.
Maturity
The date when the principal balance becomes due on a mortgage.
MIP (Mortgage Insurance Premium)
FHA mandated insurance that protects the lender from a borrowers default. Homeowner must pay the premium to qualify for the FHA loan.
Mortgage
A document that legally pledges a property to the lender as collateral for a debt.
Mortgage Banker
An employee of a company that originates mortgages for resale in the secondary mortgage market.
Mortgage Broker
An individual or company that matches borrowers and lenders and originates mortgages for a fee.
Mortgagee
The mortgage company or lender.
Mortgage Insurance
Insurance that is necessary on FHA loans, VA loans and on conforming loans above 80% Loan to Value ratio. Mortgage insurance is added to the principle and interest payments and to escrows (if any) and included in the debt ratios for qualifying purposes.
Mortgage Life Insurance
An insurance policy that pays the remaining mortgage balance in the event the borrower dies. A basic term life policy equal to the loan amount is the most cost efficient. This is optional and paid by the borrower.
Mortgagor
The person who takes out the mortgage. The borrower who pledges to repay the mortgage.
Negative Amortization
A type of loan that offers an artificially low interest rate that is a portion of the fully indexed rate. When borrowers pay this minimum payment every month, a fraction of the monthly interest is paid and the residual is added onto the principle balance. This leads to a rising principle balance and can leave the homeowner upside down in their mortgage the home value fall. Also called deferred interest.
Net Effective Income
Gross income less federal income taxes.
Non Assumption Clause
A statement in a mortgage note forbidding an assumption of the mortgage.
Note
A legal document that obligates a borrower to repay a mortgage by the agreed terms of the contract.
Origination Fee
The fee charged by a broker or lender to prepare loan documents, pull credit, analyze income documents, calculate qualifying ratios, obtain a pre-approval, submit and process the mortgage. This fee is generally a percentage of the loan amount.
Owner Financing
A purchase transaction whereby the seller provides a private mortgage for all or part of the financing.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM). The payment change date usually occurs the month after the adjustment date.
Periodic Rate Cap
A limit on how high the interest rate during any one adjustment period, regardless of the index.
Permanent Loan
A mortgage that is long term (ten or more years) that typically follows a construction loan.
PITI
This acronym stands for Principal, interest, taxes and insurance.
Points (Loan Discount Points)
Optional closing costs to buy down an interest rate. 1 discount point is equivalent to 1% of the loan amount and nets the borrower a lower than par rate.
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Preapproval
The first phase of applying for a loan. Many homebuyers seek a pre-approval before they shop for a new home to know what they can afford. Also the first step in a loan approval process.
Prepaid Expenses
Up front monies collected at closing to create an escrow account. Includes pro-rated taxes, hazard insurance and can include private mortgage insurance
Prepayment
The act of pre-paying ones mortgage before the end of their term.
Prepayment Penalty
Penalty fee charged for repaying a mortgage early. Prepayment penalties are common with subprime loans, are not part of conforming loans and are banned in certain states.
Primary Mortgage Market
Lenders who make mortgage loans directly to borrowers including mortgage companies, savings and loan associations, credit unions and commercial banks. These lenders often securitize or sell their mortgages to the secondary mortgage.
Principal
The loan balance. Also, the portion of the monthly payment that reduces the remaining balance. .
Principal Balance
The outstanding balance on a mortgage.
Principal, Interest, Taxes, and Insurance (PITI)
The standard four parts of a monthly mortgage payment. Monthly payments may also include mortgage insurance.
Qualifying Ratios
Income ratios used to determine if a borrower qualifies for a mortgage loan. There are two separate ratios: new housing payment as a percent of income ratio and total monthly debt payments (including new mortgage) as a percent of income ratio.
Rate Lock
A rate commitment from a lender to a borrower that guarantees a specified interest rate for period of time.
Realtor
A real estate agent (broker or associate) affiliated with the National Association of Realtors.
Real Estate Agent
A person licensed to represent the seller and/or the buyer for purposes of negotiating and transacting the sale of real estate.
Recission
The cancellation of a mortgage contract during the recission period. Federal law stipulates that homeowners have three business days to cancel a mortgage contract after closing.
Recording Fees
Fees the lender collects at closing to record a deed with the local county courthouse. This recordation makes the latest transaction part of public record and is a function of the cost to record a deed in that specific municipality.
Refinance
Seeking and obtaining a new mortgage on a property that will payoff the existing mortgage or mortgages and will become the primary mortgage.
RESPA
Acronym for the Real Estate Settlement Procedures Act. This is a federal law that mandates lenders must provide information to prospective borrowers on the mortgage for which they have applied after the application, but before closing. The purpose of RESPA is to allow the borrower time to review information about estimated settlement costs.
Reverse Mortgage
A type of mortgage where the lender makes monthly payments to the borrower. The borrowers equity serves as collateral for the mortgage
Revolving Liability
A line of credit such as a credit card, that allows a customer to borrow up to a certain limit when purchasing goods and services.
Satisfaction of Mortgage
The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
Second Mortgage
A mortgage made after the first mortgage and subordinate to it. Occupies the second lien position.
Secondary Mortgage Market
The exchange where mortgage lenders sell or securitize the mortgages they have made to obtain more capital to originate new loans. This market provides liquidity for the mortgage lenders.
Security
The property to be pledged as collateral for a mortgage.
Seller Carry Back
An arrangement in which the property owner provides private financing, often as a second lien in combination with first lien.
Servicer
A company that collects mortgage payments from borrowers and manages escrow accounts. The company often services mortgages that has acquired in the secondary market.
Servicing
The collection of payments, management and payment of taxes, insurance, etc made by the lender or company that has acquired the servicing rights. The payments are then sent to the investor who now holds the mortgage as a bond instrument.
Settlement/Settlement Costs
See closing/closing costs
Simple Interest
The most standard calculation of Interest which is based on the principle balance.
Step Rate Mortgage
A mortgage with an interest rate that incrementally increases over a pre-set period of time that results in higher monthly payments. At the end of the step up phase, the rate and payments convert to a fixed rate and payment for the remainder of the term.
Survey
A map of a parcel of land, charting the coordinates with reference to specified points, dimensions, and the location and dimensions of any properties.
Title
A legal document that declares ownership of the property.
Title Insurance
An insurance policy that protects a home buyer against errors in the title search. Title insurance is issued most often by a title company and is a function of the property value.
Title Search
An examination of county records, by a title company to determine the legal ownership of property. This is necessary for any type of mortgage financing.
Total Expense Ratio
Total monthly obligations (including the new mortgage payment) divided by a borrowers monthly income.
Truth in Lending
A federal law that requires mortgage companies and brokers to disclose the Annual Percentage Rate on a new mortgage shortly after they apply. Also called Regulation Z.
Underwriting
The process of analyzing data (financial, credit risk and collateral) to determine whether or not to extend financing to a homeowner.
Usury
Excessive Interest rates relative to legal limits.
VA Loan
A government mortgage guaranteed by the Veterans Administration for individuals who qualify because of military service or other entitlements. Usually a low down payment loan with conforming terms.
VA Mortgage Funding Fee
A premium of paid on a VA fixed rate loan, which can be paid at closing or financed into the loan.
Verification of Deposit (VOD)
A document provided by the borrower's financial institution that verifies the balance of his/her financial accounts.
Verification of Employment (VOE)
A document verifying the borrowers position and salary executed by their employer.
Warehouse Fee
A fee charged by mortgage companies to originate a loan when the rates on short term debt are higher than on long term debt. This is because mortgage companies typically rely on a warehouse line of credit to extend mortgage financing before they can turn around and sell the mortgage instrument on the secondary market. Sale of the mortgage on the secondary replenishes the warehouse line of credit.
