Definitions of common mortgage related terms
Adjustable Rate Mortgage
A variable or flexible rate mortgage with an interest rate that adjusts periodically according to the financial index it is based upon plus a margin. To limit the borrower's risk, the ARM may have a payment or rate cap.
See also: CapAmortization
The reduction of a debt by regular, usually monthly, installments of principal and interest. An amortization schedule is a table showing the payment, the amounts applied to interest and principal and the unpaid balance.
Annual Percentage Rate (APR)
The cost of credit expressed as a yearly rate, taking into account interest, points, and other finance charges. Disclosure of the APR is required by the federal Truth-in-Lending Act.
Appraisal
An estimate of a property's value as of a given date, determined by a qualified professional appraiser. The value may be based on replacement cost the sales of comparable properties or the property's ability to produce income.
Appreciation
A property's increase in value due to inflation or economic factors or payoff of principal.
Balloon Mortgage
A mortgage that has level monthly payments which are insufficient to amortize the loan so that a balloon, or lump sum payment is due at the end of the term. Frequently, balloon mortgages contain an opportunity to refinance when the balloon payment is due.
Biweekly Mortgage
A loan requiring payments of principal and interest at two week intervals. Each biweekly payment is half the amount of a monthly payment. The borrower makes the equivalent of 13 monthly payments each year. As a result, this type of loan amortizes much faster than monthly payment loans.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Bridge Loan
A loan, usually a second mortgage, that is collateralized by another piece of property.
Cap
A limit on how much an adjustable rate mortgage's monthly payment or annual interest rate can increase. A cap is meant to protect the borrower from large increases and may be a payment cap, an interest cap, a life-of- loan cap or periodic cap. A payment cap is a limit on the monthly payment. An interest cap is a limit on the amount of the interest rate. A life-a-loan cap restricts the amount the interest rate can increase over entire term of the loan. A periodic cap limits the amount the interest rate can change each interest rate adjustment date.
Certificate of Occupancy (CO)
Written authorization given by a local municipality that allows a newly completed or substantially completed structure to be inhabited; not to be confused with "Notice of Completion."
Certificate of Reasonable Value (CRV)
A Veteran's Administration appraisal that establishes the maximum VA mortgage loan amount for a specified property.
Certificate of Title
Document rendering an opinion on the status of a property's title based on public records.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally changes hands. Also called settlement.
Closing Costs
Costs payable by either the something of value pledged as security for a loan, seller or buyer at the time of settlement when the purchase of a property is finalized, or by the borrower when a loan is refinanced. They include expenses such as points, taxes, title insurance, mortgage insurance and attorneys' fees. You will receive more specific information about types and amounts of closing costs applicable to your transaction and the state where your property is located when you apply for a loan.
Cloud
A claim to the title of a property that, if valid, would prevent a purchaser from obtaining a clear title.
Co-Borrower
One who is individually and jointly obligated to repay a mortgage loan and share ownership of the property with one or more of the borrowers.
Collateral
Something of value pledged as security for a loan. In mortgage lending, the property itself serves as collateral for a mortgage loan.
Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder.
Commitment Fee
A fee charged when an agreement is reached between a lender and a borrower for a loan on specific terms and conditions. Rate and points may be locked-in or may be "floating".
Common elements/areas/ground
Those portions of a building, land, and amenities of a PUD, condo or co-op that are used by all the unit owners, who share in the common expense of their operation and maintenance. Common areas usually include swimming pools, tennis courts, or other recreational facilities, as well as common corridors of buildings, parking lots, etc.
Condominium
A form of ownership where the dwelling units are individually owned and home owners share ownership of common areas such as grounds, the parking facilities and the tennis courts.
Conforming loan
A loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
See also: non-conforming loan.
Construction loan
A short-term loan financing improvements to real estate, such as the building of a new home. The lender advances funds to borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.
Conventional loan
A mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA), or Rural Economic Community Development (RECD), (formerly Farmers Home Administration).
Covenants
Rules and restrictions governing the use of property.
Credit bureau repositories
An organization that complies credit history data directly from lenders and creditors to build in-file credit reports for individuals; the main repositories are Experian, TransUnion, & Equifax.
Debt-To-Income Ratio
The ratio of the borrower's total monthly obligations, including housing expenses and recurring debts, to monthly income. It is used to determine the borrower's capacity to repay the mortgage and all other debts.
Deed of Trust
A document used in many states in place of a mortgage, whereby title to the property is held by a trustee pending repayment of the loan.
Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Delinquency
Failure to make payments on time. This can lead to foreclosure.
Department of Housing and Urban Development
The U.S. government agency that administers FHA, GNMA and other housing programs.
Down payment The difference between the purchase price and mortgage amount. The down payment becomes your property equity. Typically it should be cash savings, but it can also be a gift that is not to be repaid or a borrowed amount secured by assets.Earnest money
Cash given to a seller by a buyer as good faith assurance that the buyer intends to go through with the purchase of a property.
Equal Credit Opportunity Act
A federal law prohibiting lenders and other creditors from discriminating based on race, color, sex, religion, national origin, age, martial status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.
Equity
The value of a property beyond any liens against it. Also referred to as owner's interest.
In certain regions, an escrow agent holds in escrow funds as well as documents to be signed by both buyer and seller. Once all conditions of the closing have been satisfied, the documents and the funds are distributed by the escrow agent to the interested parties.
Escrow funds
Money held by the lender for payment of the taxes and insurance on your home.
Fannie Mae
Nickname for Federal National Mortgage Association (FNMA).
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
A quasi-governmental, federally sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.
Federal Housing Administration (FHA)
An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential mortgage loans made by private lenders. One of FHA's objectives is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount. FHA mortgage insurance requires a fee of up to 2.25 percent of the loan amount to be paid either at closing or added to each monthly payment, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.
Federal National Mortgage Association (FNMA or Fannie Mae)
A private corporation that acts as a secondary market investor to buy and sell mortgage loans. FNMA sets many of the guidelines for conventional mortgage loans, as does FHLMC. The major purpose of this organization is to make mortgage money more affordable and more available.
FHA
See: Federal Housing Administration.
FHLMC
See: Federal Home Loan Mortgage Corporation.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages through out the term of the mortgage for the original borrower.
FNMA
See: Federal National Mortgage Association.
Foreclosure
The legal process by which a borrower in default under a mortgage or deed of trust, loses his/her interest in the mortgaged property; this process usually involves a forced sale of property at public auction with the proceeds of the sale being applied to the mortgage debt.
Freddie Mac
Nickname for Federal Home Loan Mortgage Corporation.
Gift Funds
Funds donated to the borrower from certain eligible sources to assist the borrower in meeting closing costs. Generally, eligible sources are: a relative, church, municipality, or nonprofit organization.
Hazard Insurance
A form of insurance that protects the insured property against physical damage such as fires, tornadoes, earthquakes, etc. Mortgage lenders often require a borrower to maintain an amount of the mortgage loan.
Home equity loan
A mortgage on the borrower's principal residence, usually for the purpose of making home improvements or debt consolidation. This is closed-end loan repayable in accordance with a fixed schedule.
Homeowner's Association (HOA)
A non-profit association, whose directors and officers are elected by the unit owners of a condominium or PUD project; primary responsibilities are to manage the common areas, expenses and services of the project.
Housing and Urban Development (HUD)
The U.S. government agency that administers FHA, GNMA and other housing programs.
Housing debt-to-income ratio
The sum of all monthly housing mortgage expenses such as principal, interest, taxes and insurance (PITI), Homeowners dues, private mortgage insurance and any special assessments as a percentage of gross qualifying income.
HUD
See: Housing and Urban Development
Impound
That portion of a borrower's monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Index
A published interest rate complied from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index figure to establish rates on adjustable rate mortgages (ARM's).
Interest Rate
The simple interest rate, stated as a percentage, charged by a lender on the principal amount of borrowed money.
Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Jumbo loan
A loan that is for a larger dollar amount than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
Liquidity
Cash or cash equilvents that a borrower has accumulated or the ability to readily convert other assets or investments into cash; a.k.a. cash reserves.
Loan-to-value ratio
The relationship, expressed as a percentage, between the amount of the proposed loan and a property's appraised value or purchase price. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value.
Lock-in
The guarantee of a specific interest rate and/or points for a specific period of time. Some lenders will charge a fee for locking in an interest rate.
Margin
The amount a lender adds to the index of an adjustable rate mortgage to establish an interest rate. For example, a margin of 1.50 added to a 7 percent index establishes an interest rate of 8.50 percent. The margin remains the same throughout the loan.
Market Value
The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.
Mortgage
A legal instrument in which a lien on real property is granted as security for the repayment of a loan. In some states, a deed of trust is used rather than a mortgage.
Mortgage Insurance (MI)
Insurance that protects a mortgage lender against loss in the event of default by the borrower. This insurance allows lenders to make loans with lower down payments (LTVs above 80%, in most cases). The cost is usually borne by the borrower.
Mortgagee
The lender.
Mortgagor
The borrower.
Net rental income
The remaining income generated by an investment property after deducting all mortgage related expenses, including HOA fees (if applicable) and operating expenses from the gross rental income.
Net worth
The amount by which an individual's assets (or assets of a business) exceed total liabilities.
Non-conforming loan
A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines because the loan amount is too high or FNMA/FHLMC underwriting or other criteria are not met. Jumbo loans are non-conforming. Also called sub-prime or BCD.
See also: conforming loan
Non-permanent resident alien
A non-U.S citizen who resides in the United States on a temporary basis on a government-issued work visa.
Non-resident Alien
A non-U.S. citizen who resides outside of the United States.
Note
A signed document that acknowledges a debt and shows the borrower is obligated to pay it.
Origination Fee
The amount charged by a lender to originate and close a mortgage loan.
Permanent Buydown
A permanent reduction to the interest rate for the life of the loan. The funds for the buydown may come from the borrower, lender, seller or a third party.
PITI
Abbreviation for principal, interest, taxes, and insurance.
Planned Unit Development (PUD)
A real estate project in which each unit owner has title to a residential lot and building and a non-exclusive easement on the common areas of the project.
Points
Charges levied by the lender based on the loan amount. Each point is one percent of the loan amount; for example, two points of a $100,000 mortgage is $2,000. Discount points are used to buy down the interest rate.
Prepaid items
Items that generally must be paid for at the time of closing and are generally recurring charges. Prepaid items may include interest, insurance and taxes.
Prepayment
The borrower's ability to make full or partial payments on a loan's principal before they are due.
Pre-qualification
Tentative establishment of a borrower's qualification for a mortgage loan amount of a specific amount or ability to make monthly payments at a certain level, based solely on debt-to-income ratios. Pre-qualification is an estimate only is subject to debt and income verification, credit history, property appraisal and other factors.
Principal
The amount of the mortgage loan, not counting interest.
Private mortgage insurance
Insurance coverage that many lenders, investors, and government agencies require the borrower to obtain to protect the lender against loss in event of a mortgage default for higher LTV mortgages.
Qualification
As determined by a lender, the ability of the borrower to repay a mortgage loan based on the borrower's credit history, employment history, assets, debts, income and other factors.
Qualifying ratios
The percentage of payment to income (P/I) and debt-to-income (D/I) that is used to measure the borrower's capacity to repay the mortgage debt.
Refinance
Retirement of an existing debt from the proceeds of a new loan, using the same collateral as security.
Rental income
Income generated by renting property to a tenant.
Reserves
Sometimes referred to as "cash reserves" or "post closing reserves"; this is the amount of liquid assets the borrower has remaining after completion of the mortgage loan transaction and payment of any other debt(s) that had to be satisfied in order for the borrower to qualify for the loan.
See also: liquidity
Resident alien
A non-U.S. citizen who is granted most of the rights of an U.S. citizen, including permanent residency in the United States. Resident Alien status is usually evidenced by a "Green Card."
RESPA
Abbreviation for the federal Real Estate Settlement Procedures Act, which requires lenders to disclose information on the nature and costs of the real estate settlement process, limits certain fees and charges, and regulates the amount home buyers are required to place in escrow.
Second iortgage
A loan that is junior to a primary or first mortgage and often has a higher interest rate and a shorter term.
Second/vacation home
A second home/vacation home that is occupied by the borrower for some portion of the year for his/her exclusive use and enjoyment but which is suitable for year-round occupancy. It cannot be subject to a mandatory rental pool and the borrower does not intend to use the property for income purposes.
Secondary market
A market in which investors like GNMA, FHLMC, FNMA and private organizations buy large numbers of mortgages from the primary lenders and either hold them in a portfolio or package them for sale to others. By selling loan in secondary market, lenders obtain the funds needed to make new loans.
Settlement
The closing of a mortgage loan.
Subdivision
An area of land that is platted and subdivided into individual lots.
Survey
A physical measurement of the property done by registered professional showing the boundaries, dimensions and location of any buildings as well as easements, rights of way, roads, etc.
Temporary buydown
A loan on which the interest rate has been "bought down" for a temporary period of time at the beginning of the loan by escrowing funds at the time of closing, which can be applied to the total monthly mortgage payment as each becomes due.
Title
A formal document establishing ownership of property.
Title Search
An examination of municipal records to determine the legal ownership of the property. Usually is performed by a title company.
VA loan
Variable Rate Mortgage
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his or her financial accounts.
Verification of Employment (VOE)
A document signed by borrower's employer verifying his or her position and salary.
Veteran's Administration (VA)
The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a mortgage insurance premium of 1 percent of the loan amount.
Walk-through
An inspection of a property by the prospective buyer prior to closing on a mortgage.