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Dictionary of Common Mortgage Terms
The lending terms used in mortgage banking can be extremely confusing. Here is a list of commonly used words and phrases with brief definitions. As always, please do not hesitate to call us if you would like more information.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate and monthly payments fluctuate up (or down) during the life of the loan. Depending on the terms, the interest rate may change every six or twelve months. Because the initial interest rate is often lower for an adjustable-rate loan, the monthly payments during the first few years may be lower than a fixed-rate loan. Usually a good option for buyers who do not expect to stay in the home for more than few years or think interest rates will go down. It can be expensive if rates rise suddenly or dramatically. This has also been called a variable rate mortgage.
Amortization & Amortization Schedule
The breakdown of a mortgage loan (including principal and interest) into equal periodic payments calculated to pay off the debt at the end of a fixed period. Most loans are amortized over 30, 20 or 15 years. An amortization schedule shows the amount of each payment applied to principal and interest and the remaining balance after each payment is made.
Amount Financed
Loan amount minus any prepaid finance charges.
Appraisal
A written report by a state certified professional - an “appraiser” - estimating the fair market value of a property. As part of the loan approval process, the lender will hire an appraiser to ensure that the mortgage loan amount is not more than the value of the property. The appraiser uses several factors to determine the property's value, including its size, location, condition and the sale price of recently sold comparable properties in the area. The cost of the appraisal is part of closing costs.
Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s inspection and analysis of the property.
Appreciation
An increase in the value of a property due to changes in market conditions or improvements to the property.
APR (Annual Percentage Rate)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it includes all charges paid by the borrower to the lender/broker in addition to other credit costs.
Assumable Mortgage
A type of mortgage that a buyer can assume, or take over, from the seller of a property with no change in the terms of the loan. The lender must be notified and agree to the assumption, may require the new buyer to qualify for the loan, and may charge a fee for the assumption. Not commonly available in recent years.
Balloon Mortgage
A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance must be paid off in full in a single "balloon" payment or is refinanced by the borrower. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.
Biweekly Mortgage
A mortgage under which one-half of the monthly payment is payable every two weeks, giving the benefit of two extra payments a year; this allows a 30 year loan to be paid off in approximately 18 years.
Bridge Loan
A loan that “bridges” the gap when a borrower purchases a new home before receiving cash proceeds from the sale of a prior home. Also called “gap” financing or a swing loan.
Broker A person who arranges mortgage loans or negotiates contracts for a client but who does not loan the money himself. This person acts as a middleman and is not limited to the restrictions of having to go through only one lender. This person can "shop" the loan to get the best rate and term available for a client. Brokers usually charge a fee to the borrower &/or receive a commission for their services from the chosen lender.
Buy Down
The option a borrower has to lower the overall interest rate of a home loan by paying more money when they first get the loan. This fee - referred to as "discount points" - can reduce the interest rate for the entire life of the loan, or just part of it.
Caps
Limits on the amount the interest rate can change per year or cumulatively over the life of an adjustable-rate mortgage.
Chattel
Articles of personal property such as household goods, furnishings, and fixtures that are not permanently affixed to the house. Another example is a mobile home in a mobile home park where the land is not owned by the mobile home owner.
Clear Title
A title that is free of liens or legal questions as to ownership of a piece of property.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands and the sale of a property is finalized. Also called a settlement meeting.
Closing Costs
The costs associated with processing and closing a loan, such as application fees, brokerage commissions, lender discount points, title search, title insurance premiums, credit report fees, deed recording fees, loan prepayment penalties, inspection and appraisal fees, attorney's fees, etc. These various fees and expenses are paid by the buyers and sellers at the time of the closing and are above and beyond the sale price of the property and the down payment. Closing costs usually are about 3 percent to 5 percent of the mortgage amount. Also termed transaction costs or settlement fees.
Closing Statement
A financial statement, also called a HUD1, that discloses all the funds received, disbursed, credited or debited from each party at the time of closing. It includes the down payment, loans funded or paid off, taxes, escrow fees, title and homeowner insurance charges, loan fees, and all other fees that are associated with the real estate transaction.
CLTV (Combined Loan to Value)
Combined value of a first mortgage and any additional mortgages or home equity lines.
Collateral
Assets that secure a loan. In the case of a mortgage, the house serves as the collateral for the mortgage loan. This way the bank is secured against the default risk of the borrower not being able to meet the payments. In case of default the bank can sell the house and get its money back.
Commission
The broker or sales person’s fee for assisting in the transaction.
Commitment Letter
A formal offer from a lender stating the approved terms for lending money to the homebuyer.
Community Property State
A state in which a spouse has a spousal interest in all assets owned by their spouse.
Comparables (COMPS)
Properties which are similar to a particular property and are used to compare and establish a value for that property during the appraisal process.
Conditions
Items the underwriter has stipulated as necessary in order for a loan to close; also known as stips.
Condominium
A real estate project in which each unit owner has title to a unit of the project and sometimes an undivided interest in the common areas.
Conforming Loan
A loan that conforms to the standard rules for purchase by Freddie Mac or Fannie Mae.
Construction Loan
A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Contingency
A condition placed on a contract that must be met in order for the contract to be legally binding. For example, a bid placed on a house might contain a contingency that states the house must pass inspection.
Contract
The legal document that describes the property, names the price, apportions the closing costs and sets forth a closing date; it is the legal document that the buyer and seller use to make offers and counteroffers.
Conventional Loan or Mortgage
Any loan secured by a mortgage or deed of trust that is not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA), Farmers Home Administration (FmHA) or Veterans Administration (VA).
Credit Report
The report of a person’s credit history prepared by a credit-reporting agency. It lists all past and present debts and the timeliness of their repayment, including credit cards, previous mortgage history, bank loans & other debts. Credit reports also list any judgments, tax liens, bankruptcies or similar matters of public record entered against the individual. Lenders use credit reports to determine if they should approve a loan and to set the terms (interest rate, fees, and length) of the loan.
Debt Ratio or Debt to Income (DTI)
One of several financial calculations performed by the broker and lender to determine if a borrower can afford a particular monthly payment. The debt ratio (also known as the obligations ratio) is the total of all of a borrower’s monthly debt payments, including their total monthly mortgage payment, divided by their total monthly income. Maximum acceptable debt ratios for Conventional Loans are 50-55%, for FHA Loans are 41-43%, and for VA Loans are 41%.
Deed
The title to a piece of real estate; implies ownership.
Deed of Trust
Document that gives a lender claim on the deed so they are able to foreclose if payments are not made; also known as a mortgage in some states.
Delinquency
Failure to make payments on time; this can lead to foreclosure.
Depreciation
A decline in the value of property due to physical or economic changes such as wear and tear, deterioration of the neighborhood, or any other reason; the opposite of appreciation.
Discount Points
Discount points are paid to obtain a lower interest rate on a mortgage loan. They may be paid by the buyer or the seller and can be negotiated in the purchase contract. The more points paid, the lower the mortgage rate the borrower may obtain. The longer the borrower owns the property and continues to pay on the home loan, the more likely it will be that paying points will be advantageous. If the borrower intends to hold the mortgage loan for only a short period of time, the cost paid upfront may exceed the benefit received from obtaining this lower interest rate. Each point is equal to one percent (1%) of the loan amount (e.g. one point on a $100,000 mortgage would cost $1,000).
Disposable Income
Amount of money left after monthly debts are paid.
Down Payment
A down payment is the cash a borrower deposits towards the purchase of a home. The larger the down payment, the less the borrower needs to borrow. Gifts from related parties are usually permissible with disclosure to the lender. Down payments generally vary from zero percent to 50 percent of the sales price; however, a down payment of 20% of the home purchase price is generally required to avoid private mortgage insurance.
Earnest Money
A deposit given to the seller or his agent by a prospective buyer when he makes an offer to show that he is serious about buying the house. It is returned if the offer is rejected or is forfeited if the buyer pulls out of the deal without cause. If the offer is accepted, the earnest money is placed by the broker in an escrow/trust account until closing. It is then returned to the buyer or incorporated into the closing transactions.
Encumbrances
Liens or legal claims against a property.
Equal Credit Opportunity Act (ECOA)
Is 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 difference between the fair market value of a home and the balance of the mortgage.
Escrow
The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance which the lender then uses to pay those bills when they are due.
Fair Market Value
The price of a home based on recent sales of properties of similar size and quality in the neighborhood.
Fannie Mae (FNMA)
Nickname for Federal National Mortgage Association, a tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
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 standard for underwriting mortgages.
FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA Mortgage Insurance
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount.
First Mortgage
A mortgage that is the primary lien or first claim against a property. When the property is sold, the lender who issued the first mortgage is paid first. See also Second Mortgage; Subordination Agreement
Fixed-Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.
Flood Insurance
Insurance that compensates for physical property damage resulting from rising water. Most lenders search a FEMA (Federal Emergency Management Agency) map to determine if a home or any portion of the property is in a flood plain. This insurance is required for properties located in federally designated flood areas and must be obtained prior to closing.
Foreclosure
The process by which a mortgaged property is taken over by the lending institution when the borrower defaults on the loan. The foreclosed property is usually then auctioned off, with the proceeds being applied to the unpaid portion of the loan.
Freddie Mac (FHLMC)
Nickname for Federal Home Loan Mortgage Corporation, a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Ginnie Mae (GNMA)
Nickname for Government National Mortgage Association and the securities issued by them. These debt securities have the objective of funding high-risk mortgages for high-risk borrowers. The government body also buys home loans issued by others, such as commercial banks, mortgage banks, and insurers and, after pooling them together, sells shares to investors. Unlike Fannie Mae and Freddie Mac, Ginnie Maes are backed by the United States and thus have a higher credit standing.
Good Faith Estimate (GFE)
A written estimate of closing costs that a lender must provide a prospective homebuyer within three (3) days of submitting a mortgage loan application.
Grantor
The person who is giving up their interest in a property, who gives title to another.
Gross Monthly Income
The total amount the borrower earns per month before any expenses are deducted.
Hazard Insurance/Homeowners Insurance (HOI)
Insurance coverage that compensates for physical damage to a property from specified losses, such as fire, windstorm or other hazards.
Home Inspection
An inspection by a building professional that evaluates the structural and mechanical condition of a property.
Homeowners Association
A nonprofit association that manages the common areas of a condominium or planned unit development (PUD).
Index
A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used indices include the 1 Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost of Funds (COFI).
Indexed Rate
The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.
Interest
Money paid to a lender for the use of the money borrowed; payment for the “rental” of money.
Jumbo Loan
A loan which is larger than $333,700 or whatever the current limits are that are set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate than a conventional mortgage.
Lease Purchase Mortgage
A financing option allowing a potential homebuyer to lease a property with the option to buy.
Lien
A legal hold or claim by one person on the property of another for the payment or satisfaction of a debt or obligation.
Lien Position
The position of a lender’s Deed of Trust in relation to the deed; where the lender is in line to having a claim on the deed (whether it is a first or second mortgage, etc.)
Lis Pendens
A pending lawsuit.
Loan Commitment
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Loan Origination
The beginning of the loan process; the initial contact wherein the borrower and broker/lender agree to work together to secure a loan. Usually an application is taken and an initial quote is given. The borrower is asked to supply documents supporting the information that is included in the application and upon which the quote is based.
Lock
The lender’s guarantee that the mortgage rate quote will be good for a specified amount of time.
LTV (Loan to Value)
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. The ratio is obtained by dividing the amount of the loan by the appraised value or purchase price of the property.
Margin
The number of percentage points a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Maturity
The date on which the principal balance of a loan becomes due and payable.
Mortgage
Document that gives a lender claim on the deed so they are able to foreclose if payments are not made.
Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance
A policy that insures the lender against loss if the homeowner defaults on a mortgage. It is usually required when the down payment is less than 20 percent.
Mortgagee
The lender in a mortgage transaction who takes a lien interest in the property as security for the debt.
Mortgagor
The owner of real estate who pledges his property as security for the repayment of a debt.
No-Doc or Low-Doc Loans
Loans designed for the self-employed or salaried employee who cannot verify income by the standard documentation.
Note
The most important document in the loan file, it is the proof that a loan exists and a promise to repay money. It is signed by borrowers only.
Origination Fee
A fee paid to a broker or lender for processing a loan application. This fee covers the broker/lender’s administrative costs in processing the loan and will vary among brokers and lenders. It is often expressed as a percentage of the loan, sometimes called a “point” or “points”.
PITI
The usual components of a monthly mortgage payment: Principal, Interest, Taxes and Insurance.
PMI
Private Mortgage Insurance – see mortgage insurance
Points
Each point is one percent (1%) of a mortgage loan.
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Pre-Approval
The written offer from a lender to a borrower for a specific loan amount and LTV. Generally a pre-approval must meet certain underwriting conditions for the loan to close.
Prepaid Finance Charges
Amounts paid to a lender or broker in connection with the loan.
Prepayment
A privilege in a mortgage permitting the borrower to make additional principal payments in advance of their due date.
Prepayment Penalty
A fee imposed by certain lenders levied if the mortgage is paid off early.
Principal
The actual amount of money being borrowed and returned; the amount, not counting interest, left on a loan.
Processing
The steps a broker or lender takes to gather borrower information for underwriting. Processing includes getting the credit report, appraisal, verification of employment, assets, etc.
Purchase Money Loan
A loan used specifically to purchase a property, rather than to refinance.
Quit Claim Deed
The formal document by which a claim on a property is released. The person who provides a quit-claim deed makes no warranty or representation that they actually own anything. It is often given to clear the title when the grantor’s interest in a property is questionable.
Recording Fees
Money paid to the closing agent for recording a home sale with the local authorities such as the County Clerk, thereby making it part of the public records.
Refinancing
Securing a new loan in order to pay off the existing mortgage. The object may be to save interest costs, extend the maturity of the loan, or gain access to the existing equity in the home.
Right to Cancel or Rescind
Any time there is a loan that uses equity in the borrower’s existing primary residence as security, the borrower must be given three business days (including Saturday) to cancel the loan.
Second Mortgage
A mortgage that is in second or "junior" position to the first mortgage. This gives it lower rights than a first mortgage meaning that if the property goes into foreclosure, the first mortgage must be paid in full before the second mortgage holder is entitled to be paid. There is no limit to the number of junior mortgages that can be placed against a property. See also First Mortgage; Subordination Agreement
Secured Loan
The person or institution lending the money is given security in addition to a signed Note. The borrower pledges an asset such as a home or car that may be sold if the borrower is unable to repay the loan.
Security Instrument
The document or means of having a secondary way of collecting any money lent if the payments are not made; it is collateral. The security instrument is more specifically described as a security deed, a mortgage or a trust deed.
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, and the like.
Subordination Agreement
Used to allow another party to give up their lien position in lieu of another, subsequently recorded lien. Example – A borrower has a first and second mortgage and wishes to refinance the first only. The second mortgage would become the first mortgage if the second mortgage holder did not sign a subordination agreement permitting the new first to again be in first lien position. See also First Mortgage; Second Mortgage
Sub-Prime Mortgage
A mortgage which does not conform to Fannie Mae or Freddie Mac guidelines.
Survey
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.
Title
A legal document proving a person’s right to claim entitlement to a property. It includes the history of a property’s ownership.
Title Binder
Written evidence of temporary title insurance coverage.
Title Company
A company that specializes in examining and insuring titles to real estate. The closing often takes place at the title company's offices. The title company represents the lender at the closing.
Title Insurance
Insurance that protects against loss from disputes over ownership of a property.
Title Search
An examination of municipal records to determine the legal ownership of property. Usually performed by a title company, it also ensures that there are no unsettled liens or other claims against the property.
Trustee
A person who holds title in trust for the benefit of another. In a deed of trust, the trustee is the person named to hold title in trust for the benefit of the lender until the loan is paid off. In the case of a foreclosure, the trustee acts as a neutral party who advertises the foreclosure property for sale and conducts the auction to sell said property to the highest bidder.
Underwriter
A company or person undertaking the responsibility for issuing a mortgage. The underwriter is responsible for reviewing and verifying all loan documents and information and submitting it to a credit officer.
Underwriting
Risk assessment; the decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
Unsecured Loan
Other than the signature, the person or institution lending the money has no additional security for the recovery of money lent.
VA Mortgage
A long-term, low or no-down payment loan guaranteed by the Department of Veterans Affairs restricted to individuals qualified by military service or other entitlements.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower's employer verifying his/her position and salary.
Warranty Deed
A deed that proclaims that the grantor warranties/guarantees that the property has clear title and is being conveyed free of liens and encumbrances.
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