Mortgage Glossary

For your convenience, we have included the definitions to some of the most common, and often confusing, mortgage terms.

100% loan

A loan with no down payment. The loan amount equals the property value.

Adjustable-rate mortgage (ARM)

A mortgage with an interest rate that adjusts periodically based on a preselected index, causing interest rates and payments to rise and fall with the market.

Adjustment interval

The time between changes in the interest rate and monthly payments on an ARM.

Agreement of sale

Also known as a "sales contract," a written document in which a purchaser agrees to buy property under certain given conditions, and the seller agrees to sell under certain given conditions.

Amortization

A monthly repayment schedule in which a loan is repaid in fixed payments of principal and interest.

Annual percentage rate (APR)

The annual cost of a loan, expressed as a yearly rate. APR takes into account interest, discount points, lender fees and mortgage insurance, so it will be slightly higher than the interest rate on the loan.

Application

Often referred to as a 1003, an initial statement of personal and financial information required to approve your loan.

Appraisal

A written estimate of a property's current market value, based on recent sales information for similar properties, the current condition of the property and how the neighborhood might affect future property value.

ARM disclosure

An additional disclosure specific to adjustable-rate mortgages that must be prepared and presented to the consumer at application whenever an adjustable-rate mortgage transaction is contemplated (Note: home equity lines have their own unique disclosure).

ARM handbook

The Consumer Handbook to Adjustable-Rate Mortgages ("CHARM" booklet) must be presented to the consumer when applying for an ARM loan (in addition to the ARM disclosure referenced above).

Assessment

A local tax levied against properties that have benefited from civil improvements such as road or sidewalk construction, a sewer or street lights.

Asset

Anything of monetary value that a person owns. Assets include real property, personal property and enforceable claims against others (including bank accounts, stocks, mutual funds and so on).

Bankruptcy

Proclamation by a court of an individual's (or organization's) state of insolvency, or inability, to pay debts. Petition may be brought by an individual or his creditors, with a goal of orderly and equitable settlement of obligations.

Basis point

A unit of measure: 1/100th of one percent. For example, the difference between a 9.0 percent loan and a 9.5 percent loan is 50 basis points.

Biweekly mortgage

A payment plan under which one pays one-half of a monthly payment every two weeks, saving interest substantially over the life of the loan.

Borrower (Mortgagor)

An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Broker

An individual who assists in arranging funding or negotiating contracts for a client, but does not loan money himself.

Buy-down

A situation in which the seller contributes money that allows the lender to give the buyer a lower rate and payment, usually in exchange for an increase in sales price. With a refinance, this could be paid by the borrower.

Caps

Limits on changes in ARM interest rates or monthly payments, either in an adjustment period or over the life of the loan.

Cash-out

A refinance for more than the balance of the original mortgage, with the extra money is taken out of the equity in the property.

Certificate of title

Written opinion of the status of title to a property, given by an attorney or title company. This certificate does not offer the protection given by title insurance.

Closing (or settlement)

Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.

Closing costs

Fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during a mortgage loan closing. These typically include a loan origination fee, discount points, attorney's fees, title insurance, appraisal, survey and any items that must be prepaid, such as taxes and insurance escrow payments. The cost of closing is usually about 3 to 6 percent of the mortgage amount.

Closing disclosure

This disclosure replaced the HUD1 Settlement Statement and the final Truth-in-Lending disclosure. The disclosure reflects the actual terms and costs associated with the loan transaction and must be provided to the borrower three business days before consummation of the loan.

Closing statement

A financial disclosure statement that lists the funds received and expected at the closing.

Collateral

Assets that back a mortgage loan.

Commitment

A formal offer by a lender to make a loan under certain terms or conditions to a borrower.

Consumer Financial Protection Bureau (CFPB)

A federal agency that enforces laws that protect consumers of financial products and services such as mortgages, credit cards and deposit accounts.

Contingency

A condition that must be satisfied before a contract is legally binding before a sale can close.

Contract of sale

The agreement between the buyer and seller on the purchase price, terms and conditions of a sale.

Conventional loan

A mortgage not insured by the FHA or guaranteed by the VA.

Credit report

A report detailing the credit history of a prospective borrower, used when determining creditworthiness.

Debt-to-income ratio

The ratio, expressed as a percentage, that results when a borrower's monthly payment obligation on long-term debts is divided by monthly income.

Deed

A legal document that transfers a property from one owner to another. The deed contains a description of the property, and is signed, witnessed and delivered to the buyer at closing.

Deed of trust

Agreement to pledge property as security for a loan, used in many states in place of a mortgage. In this arrangement, the borrower transfers legal title to a trustee who holds the property in trust as security for the repayment of the debt. The deed of trust becomes void if the debt is repaid, but if the borrower defaults on the loan, the trustee may sell the property to pay the debt.

Deposit

Cash paid when a formal sales contract is signed. The deposit is usually held by a third party until the sale is complete.

Depreciation

When the value of property declines.

Discount points (or Points)

Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1 percent of the loan amount.

Down payment

Money paid for a house from one's own funds at closing. The down payment will be the difference between the purchase price and mortgage amount.

Earnest money

Deposit made by a buyer in evidence of good faith when the purchase agreement is signed.

Equal Credit Opportunity Act (ECOA)

Federal law requiring 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 percentage of property value held by the owner; the difference between the current market value of a property and the outstanding mortgage balance.

Equity loan

A loan based on the borrower's equity in his home.

Escrow

The neutral third party that holds money and/or documents until the escrow instructions are fulfilled and escrow can be a title company or an attorney, depending on state regulations.

Escrow account

Account held by a lender containing funds collected as part of mortgage payments for annual expenses such as taxes and insurance, so that the homeowner does not have to pay a large sum when these fall due.

Escrow waiver

Escrow Waiver is waiver of the requirement to fund an escrow account with lender and instead pay insurance and taxes separately. This waiver may require a fee and is not available with all loan programs.

Fair Housing Act

Prohibits discrimination in real estate transactions because of race, color, religion, sex, handicap, familial status (families with children), or national origin. It applies to mortgage lending as well as other aspects of real estate transactions, including sales and rentals, real estate brokerage, and appraisals.

Farmer's Home Administration (FMHA)

An agency within the U.S. Department of Agriculture that provides financing for homes and farms in small towns and rural areas.

Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)

Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA)

A government agency, division of the Department of Housing and Urban Development, that insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.

Federal National Mortgage Association (FNMA or Fannie Mae)

A quasi government agency created by Congress that buys and sells residential loans.

Federal Reserve

The central bank of the United States and major regulatory agency for many commercial banks.

Fee simple

Absolute ownership of real property.

First mortgage

A mortgage that is in first lien position, taking priority over all other liens. In the case of foreclosure, the first mortgage will be repaid before any other mortgages.

Fixed rate

An interest rate that is fixed for the term of the loan.

Fixed-rate mortgage

A mortgage with an interest rate that doesn't change for the life of the loan, guaranteeing fixed payments.

Flood insurance

A form of hazard insurance required by lenders to cover properties in flood zones.

Foreclosure (or repossession)

Legal process by which the lender forces the sale of a property because the borrower has not met the mortgage terms.

Government National Mortgage Association (GNMA or Ginnie Mae)

A government agency that provides funds for VA and FHA loans.

Graduated Payment Mortgage (GPM)

A mortgage with initial low payments (with potential negative amortization) that increase regularly for several years and then level off.

Gross income

Total income before taxes or expenses are deducted.

Hazard insurance

Protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.

Home equity loan

A loan secured by equity in a property. These are sought for a variety of purposes, including home improvements, major purchases or expenses and debt consolidation.

Homeowners warranty

A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Housing and Urban Development (HUD)

A U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.

Initial rate

The rate charged during the first interval of an ARM.

Interest

Charge paid for borrowing money, calculated as a percentage of the amount borrowed.

Interest rate

The periodic charge, expressed as a percentage, for use of credit.

Interest rate cap

A safeguard built into ARMs to prevent drastic changes in interest rates.

Joint liability

Liability shared among two or more people, each of whom is liable for the full debt.

Joint tenancy

The ownership of property by two or more persons with the survivor taking the share of the deceased.

Jumbo loan

A mortgage larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Lender

The bank, mortgage company or mortgage broker offering a loan.

Lien

A claim by one person on the property of another for payment of a debt.

Loan estimate

An estimate of all closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower within three days after submission of a loan application.

Loan origination fee

A fee a lender charges to process a mortgage, usually expressed as a percentage of the loan (or points), which pays for the work in evaluating and processing the loan.

Loan to value ratio (LTV)

The percentage of the property value borrowed. (Loan amount/property value=LTV)

Lock or lock-in

A lender's guarantee of an interest rate for a set period of time, usually between loan application and loan closing. This protects borrowers against rate increases during that time.

Margin

The number of percentage points added to an index to calculate the interest rate on an ARM at each adjustment.

Marketable title

A title free and clear of liens, clouds or other defects that would prevent the sale of the property.

Mortgage

A document that creates a lien on a property as security for the payment of a debt.

MIP (Mortgage insurance premium)

Insurance purchased by borrower to insure against default on a FHA loans.

Mortgage loan

A loan for which real estate serves as collateral to provide for repayment in case of default.

Mortgage note

A legal document that obligates a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage.

Non-conforming loan

A conventional loan that cannot be sold to Fannie and Freddie Mac. Often, these loans are larger than the conforming loan amount.

Non-dischargeable debt

Debt, such as taxes, that cannot be forgiven in a bankruptcy liquidation.

Note

Legal document stating the terms of a debt and a promise to repay it.

Notice of default

Written notice to a borrower that a default has occurred and that legal action may be taken.

Payment cap

Limit on the amount by which a borrower's ARM payments may increase, regardless of rise in interest rates. This may result in negative amortization.

Payment cap (ARM)

A pre-determined amount that establishes the maximum by which the payment can increase, irrespective of increases to the interest rate.

Payment change date

Dates upon which the payment amount is subject to change. Products featuring "negative amortization" typically will include a payment change date which differs from the interest rate change date in frequency.

Permanent loan

A long-term mortgage of 10 years or more.

Piggyback mortgage

A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.

PITI

Also called "monthly housing expenses," principal, interest, taxes and insurance are the components of a monthly mortgage payment.

Prepayment

A full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property or refinances the existing loan.

Pre-payment penalty

Some ARM loans contain a provision against pre-payment without penalty. Terms of pre-payment penalty clauses vary from product to product, investor to investor, and state to state. Many states and even local municipalities have, or are contemplating, enacting legislation against pre-payment penalties.

Pre-qualification

The process of determining how much money a prospective homebuyer may borrow, prior to application for a loan.

Principal

The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

Insurance purchased by a buyer on a conventional loan when a down payment is less than 20 percent of the purchase price to protect the lender against default.

Profit and loss statement

A financial statement showing revenue, expenses and profits over a period of time.

Property tax

A government tax based on the market value of a property.

Purchase agreement

A contract signed by buyer and seller stating the terms and conditions of a home sale.

Real Estate Agent

A real estate professional who is a member of the National Association of Realtors.

Real estate broker

An agent representing a buyer or seller in a real estate transaction.

Refinancing

The process of paying off one loan with the proceeds from a new loan secured by the same property.

Rescission

The cancellation of a contract, permitted by law within three business days of signing a mortgage not used to purchase a home.

Secondary mortgage market

The market into which primary mortgage lenders sell the mortgages they make to obtain funds to originate more new loans. This includes investors such as Fannie Mae and Freddie Mac.

Second mortgage

A subordinate mortgage made in addition to a first mortgage.

Settlement (or Closing)

A meeting between the buyer, seller and lender (or their agents) where property and funds legally change hands.

Settlement cost (HUD guide)

A booklet given to consumers after applying for a loan that provides an overview of the lending process.

Survey

A measurement of land, prepared by a licensed surveyor, showing a property's boundaries, elevations, improvements and relationship to surrounding tracts.

Tax lien

Claim against a property for unpaid taxes.

Term

The number of years until a loan is due to be paid in full.

Title

A document that gives evidence of ownership of a property, as well as rights of ownership and possession.

Title company

A company that insures the title to a property.

Title insurance

Insurance that protects the lender (lender's policy) or buyer (owner's policy) against loss due to disputes over property ownership.

Title search

Examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens other claims against the property.

Trustee

Someone given legal responsibility to hold property in the best interest of another.

Truth-in-Lending Act (TIL)

A federal law requiring written disclosure of the terms of a mortgage (including APR and other charges) by a lender to a borrower after application.

Underwriting

The process of verifying data and evaluating a loan application. The underwriter gives the final loan approval.

VA Loan

A home loan available to veterans with little or no down payment and guaranteed by the U.S. Veterans' Administration.

Verification of deposit (VOD)

A document signed by the borrower's bank or other financial institution that verifies the borrower's account balance and history.

Verification of employment (VOE)

A document signed by the borrower's employer that verifies the borrower's position and salary.

W-2

The form you get from your employer every year and used for filing your income tax returns.

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