Glossary

Mortgage lending has a language of its own, but you should be familiar with the terminology before signing your contract. Here are some simple explanations for the many mortgage lending terms you will encounter.

Acceleration Clause - allows the lender to speed up the rate at which your loan comes due, or should you default on your loan to demand immediate payment of the entire outstanding loan balance.

Addendum - a supplemental document for borrowers advising them of the characteristics of the mortgage loan they are applying for. This document is often required when applying for a government loan program.

Adjustable Rate Mortgage (ARM) - a mortgage in which the interest rate is adjusted periodically, based on a pre-selected index. It is also sometimes referred to as the renegotiable rate mortgage, variable rate mortgage, or Canadian rollover mortgage.

Adjustment Interval - on an adjustable rate mortgage, it is the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.

Amortization - loan payment by equal periodic payments, calculated to pay off the debt at the end of a fixed period as well as the accrued interest on the outstanding balance.

Annual Percentage Rate (APR) - 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 takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.

Application Fee - a fee charged to cover the lender's out of pocket costs of processing your loan.

Appraisal - an estimate of the value of property, made by a licensed professional called an appraiser.

Assumption - agreement between buyer and seller, where the buyer takes over (assumes) the payments on an existing mortgage from the seller. Assuming a loan usually saves the buyer money because an existing mortgage debt does not require closing costs or new, potentially higher, market-rate interest charges.

Balloon (Payment) Mortgage - usually a short-term, fixed-rate loan that involves small payments for a determined period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Bankruptcy - the legal process in which a person or firm declares the inability to pay debts. Upon a court declaration of bankruptcy, a person or firm surrenders assets to a court-appointed trustee, and is relieved from the payment of previous debts.

Broker - an individual, licensed to assist in arranging funding or negotiating contracts for a client, who does not personally loan the money. Brokers usually charge a fee or receive a commission for their services.

Buy-Down - occurs when the lender, the homebuilder, or both subsidize your mortgage thereby lowering the interest rate during the first few years of the loan. While the payments are initially low, they increase when the subsidy expires.

Cap - see Interest Cap or Payment Cap immediately below.

Interest Cap - a consumer safeguard for adjustable rate mortgages that limits the amount your interest rate may change per year, for the life of the loan, or both.

Payment Cap - a consumer safeguard for adjustable rate mortgages that limits the amount your monthly payments may change.

Cash Out - in a cash out, you receive the difference between the loan amount and the closing costs plus purchase or refinance costs.

Certificate of Eligibility - a document that verifies the eligibility of veterans for a VA guaranteed loan. This certificate is obtained through a local VA office.

Certificate of Title - a document showing ownership of record as reflected in public records.

Closing - is the meeting between you, the seller, and the lender (or their agents), where the property and funds legally change hands. It is often referred to as the settlement.

Closing Costs Expenses - over and above the price of the property, incurred by buyers and sellers in transferring ownership of a property. Usually they include an origination fee, attorney’s fee, appraisal fee, taxes, deed recording fee, credit report charge, and charges for obtaining title insurance and a survey. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing Costs - costs associated with the loan, which are assessed at settlement. When closing costs are included in the loan, they are added to the loan balance instead of being paid by you in one lump sum at the close of escrow. When not include, you pay the costs assessed at settlement in one lump.

Collateral - the property pledged to secure a loan.

Commitment Agreement - often in writing, between a lender and you to loan money at a future date, subject to the completion of paperwork or compliance with stated conditions.

Condominium - a single dwelling unit in a multi-unit structure in which each unit is individually owned. The owner holds legal title to his or her unit and owns the common areas and land jointly with other unit owners. An owner may sell, lease and encumber his unit.

Conforming Loans - a loan that is less than $417,000; the limit is set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Construction Loan - a short term, interim loan used to finance home construction. The lender advances funds to the builder at periodic intervals as the work progresses.

Contributions - the amount other parties may contribute towards allowable closing costs, repairs, and prepaid items for a borrower. Other lender restrictions may apply.

Conventional Loan - a loan used for financing the cost of purchasing or refinancing a home that is insured by the FHA or guaranteed by the VA or Farmers Home Administration (FMHA)..

Co-operative - an apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation that entitles him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.

Covenant - a written agreement that defines or restricts the use of a given property. This may include architectural restrictions or maintenance requirements.

Creditors - companies or individuals who loan money.

Credit Report - a report of an individual’s credit history, obtained from a reputable credit bureau that summarizes their liabilities and verifies any liens or late payments. The report is used by a lender in determining a loan applicant’s creditworthiness.

Dept-To-Income Ratio - the ratio, expressed as a percentage, which results when your housing expenses are divided by your net effective income (FHA/VA loans) or gross monthly income (conventional loans). See housing expense-to-income ratio.

Deed - a written document recorded with the state or local government office that conveys real property.

Deed Of Trust - in many states, this document is used in place of a mortgage to secure the payment of a note.

Default - failure to meet legal obligations in a contract. Specifically, failure to make the monthly payments on a mortgage.

Deferred Interest - when the monthly payment is not sufficient to cover the monthly interest on the loan, the difference is added to the principal balance.

Delinquency - failure to make payments on time. This can lead to foreclosure.

Department Of Veterans Affairs (VA) - independent agency of the federal government that guarantees long-term, low- or no-down payment mortgages to eligible veterans. See VA Loans.

Disclosure - a document that discloses to the customer either all or one of the following: terms, costs, adjustment period, and/or other characteristics of the mortgage.

Discount Points - one-time charge imposed by the lender or broker to lower the rate at which the lender or broker would otherwise offer the loan. It is sometimes referred to as a "loan discount."

Down Payments - money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 to 20 percent of the sales price on conventional loans. They can be as little zero to 5 percent on FHA and VA loans.

Due-On-Sale Clause - provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money - money given by a buyer to a seller, through a Title Company, as part of the purchase price to bind a transaction or assure payment.

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 - difference between the fair market value of the home and current indebtedness, also referred to as the owner’s interest.

Escrow - neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or closing. Escrow may also refer to an account held by the lender into which you pay money for tax or insurance payments.

Fannie Mae 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.

Farmers Home Administration (FMHA) - provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Fee - simple greatest possible interest a person can have in real estate.

Federal Home Loan Mortgage Corporation (FHLMC) - see Freddie Mac.

Federal Housing Administration (FHA) - division of the Department of Housing and Urban Development. Its main activity is insuring residential mortgage loans made by private lenders. The FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA) - see Fannie Mae.

FHA Loan - 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 - small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of which is added to each monthly payment of an FHA loan to insure the loan with FHA. For example, on a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,850 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, for each year the fee must be paid.

First Mortgage - mortgage that is the primary lien against a property.

Fixed-Rate Mortgage - mortgage on which the interest rate does not change for the term of the loan.

Foreclosure - legal procedure in which property securing debt is sold by the lender to pay the defaulting borrower's debt.

Foreclosure Repossession of the Property - a legal proceeding by which a mortgage lender may claim title to mortgaged property if the borrower fails to repay the loan.

Freddie Mac - also known as Federal Home Loan Mortgage Corporation. A credited agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Free and Clear - a term used for a property that does not have any liens or debts recorded on title. That means the owner does not have a mortgage.

Ginnie Mae - also known as Government National Mortgage Association. It provides sources of funds for residential mortgages that are insured or guaranteed by FHA or VA.

Good Faith Estimate (GFE) - estimate of charges you are likely to incur in connection with a settlement.

Government National Mortgage Association (GNMA) - see Ginnie Mae.

Graduated Payment Mortgage (GPM) - 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.

Gross Monthly Income - total amount the borrower earns per month, before any expenses, taxes, and so on are deducted.

Guarantee Promise - by one party to pay a debt, or perform an obligation contracted by another party, if the original party fails to pay or perform according to a contract.

Hazard Insurance - form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm, and so on.

Housing Expense-To-Income Ratio - expressed as a percentage, which results when your housing expenses are divided by your net effective income (FHA/VA loans) or gross monthly income (conventional loans). See debt-to-income ratio.

Impound/Escrow Amount - portion of your monthly payments held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Index - 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, which is then used to adjust the interest rate up or down on an adjustable mortgage. (Investments could include one or more of the following: one, three, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, the monthly average costs-of-funds incurred by savings and loans.)

Initial Rate - a fixed interest rate charged for the first six or twelve months of a variable rate loan. Normally this rate will be lower than the prevailing market rates.

Interest Rate Cap - a safeguard built into a variable rate loan to protect the consumer against dramatic increases in the rate of interest and, consequently, in the monthly payment. For example, a variable rate loan may have a two percentage point limit per year on the amount of increase or decrease, as well as a five percentage point limit (increase or decrease) over the life of the loan.

Investor - money source for a lender.

Jumbo Loan - loan that is larger than $417,000 - the limit is 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.

Lien - claim made on a property in order to satisfy the debt or obligation.

Loan-To-Value Ratio (LTV) - relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Margin (spread) - an amount expressed as a percentage that is added to an index to determine the interest rate on a variable rate loan (e.g. index rate + 2% margin). Different loan programs may use different margins and indexes. With a variable rate loan, this margin (spread) generally does not change once it is established in your documents.

Market Value - highest price that you 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.

Monthly Housing Expense - principal, interest, taxes, and insurance. Also called PITI.

Mortgage - a legal document that pledges a property to the lender as security for payment of a debt, or the deed by which such a transaction is effected.

Mortgage Insurance (MI) - insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. MI is usually required for loans with a loan-to-value ratio of 80.01% or higher and when the down payment is less than 20 percent. See private mortgage insurance and FHA mortgage insurance.

Mortgagee - the mortgage lender.

Mortgagor - the borrower or homeowner.

Negative Amortization - Negative Amortization occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.

Net Effective Income - the borrower's gross income less federal income tax.

No Cost Loan - a loan that has no points or closing costs. The interest rate will be higher than the interest rate on loans that assess points and closing costs.

No Points Loan - a loan that does not charge any points, but does assess closing costs. Often referred to as a zero point loan.

Non-Assumption Clause - a statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

Non-Owner Occupied - a property used as a rental, which is not a vacation home or primary residence of the borrower.

Origination Fee or Points - the fee or points charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan.

Payment Cap - limits the amount by which the payment on a variable rate loan can increase or decrease at each payment adjustment interval (typically one year). A payment cap ensures that the payment changes occur at a gradual pace.

PITI - Principal, Interest, Taxes, and Insurance. Also called monthly housing expense.

Points and Fees - a point is a loan charge equal to one percent of the principal amount of the loan. Points are payable at the close of escrow and may be paid by the buyer or seller, or split between them. (E.g. Two points charged on a $100,000 loan would equal $2,000.) In addition, a flat dollar amount fee may also be charged. Under some lending programs, a buyer may be allowed to include these points and fees as part of the total amount financed.

Points (Loan Discount Points) - prepaid interest assessed at closing by the lender. It is the percentage of the loan amount that is credited to you. Each point is equal to 1 percent of the loan amount. For example, two points on a $100,000 mortgage is $2,000.

Power Of Attorney - a legal document authorizing one person to act on behalf of another.

Pre-Approval - an analysis of the borrower’s position without a specific property identified.

Prepaids - expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Prepaids can include taxes, hazard insurance, private mortgage insurance, and special assessments.

Prepayment - a privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty - money charged for an early repayment of debt. Prepayment penalties are legal in some form in 36 states and the District of Columbia.

Pre-Qualification - a general analysis of your financial position, with a specific property identified, compared to the Lender’s established guidelines.

Principal - the amount of debt, excluding the interest, left on a loan.

Private Mortgage Insurance (PMI) - in the event that the borrower does not have a twenty percent (20%) down payment, lenders will allow a smaller down payment, sometimes as low as 5 percent. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. As an example, a $75,000 house with a ten percent (10%) down payment would require either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

PUD (Planned Unit Development) - a type of development that provides more planning flexibility than traditional zoning. Buildings are often clustered on smaller lots, permitting the presence of natural features in common areas or park areas. Individual properties are owned in fee with the common areas owned jointly or deeded to the local government.

Qualifying Ratio - the ratio of your fixed monthly expenses to your gross monthly income. It is used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.

Rate Lock - a written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

Ratios - a ratio used as an underwriting guideline to determine the amount of debt a borrower may have compared to their income (e.g. Borrower's house payment divided by gross income). A ratio may be used to calculate the total allowable debt or the monthly housing portion. It is expressed as a percent.

Realtor - a real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Rebate - compensation from the lender, which can be used to cover closing costs, or received as a cash refund to you. A rebate occurs when the rate is high enough such that the lender credits points as a percentage of the loan amount. Loans with rebates often carry higher interest rates than loans with points

Rescission - the cancellation of a contract. With respect to mortgage refinancing, the law gives homeowners three days to cancel a contract, once it is signed, if the transaction uses equity in the home as security.

Recording Fees - money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinance - negotiation of a new loan in order to pay off an existing loan. Homes are usually refinanced in order to (a) take advantage of lower interest rates, (b) switch from one loan type to another (e.g. from variable to fixed), or (c) generate cash from built-up equity. Since refinancing generally involves new loans costs, these costs must be weighed against the benefits to be gained.

Renegotiable Rate Mortgage (RRM) - a loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

Reserves - the amount of liquid assets that the lender needs to verify in the borrower's account above and beyond the funds required to close the transaction. This amount is expressed as a multiple of the total monthly payment (i.e. if PITI is $1200 per month, 2 months reserves would be $2400.) Reserves remain in the borrowers account.

RESPA - acronym for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs one time after application and one time prior to or at settlement. The law requires lenders to furnish information after application only.

Reverse Annuity Mortgage (RAM) - a form of mortgage in which the lender makes periodic payments to using your home equity as security.

Second Mortgage - a lien on the property in second position, utilizing the available equity, purchased to avoid paying private mortgage insurance. Often used for home improvements, debt consolidation, and so on.

Self-Employed - a borrower is typically considered self employed if they own 25% or more of the company by which they are employed.

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.

Settlement - the meeting between you, the seller, and the lender (or their agents), where the property and funds legally change hands. It is often referred to as the closing.

Settlement 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 settlement costs are usually about 3 to 6 percent of the mortgage amount.

Shared Appreciation Mortgage (SAM) - mortgage in which you receive a below-market interest rate in return for which a lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgages where you share the monthly principal and interest payments with another party in exchange for a part of the appreciation.

Survey - measurement of land, prepared by a registers land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

Term - the number of years before your loan is scheduled to be paid off. 15-year and 30-year terms are most common.

Term Mortgage - usually a short-term, fixed-rate loan which involves small payments for a determined period of time and one large payment for the remaining amount of the principal at a time specified in the contract. Sometimes referred to as a balloon payment mortgage.

Title - document that gives evidence of an individual's ownership of property.

Title Insurance - a policy, usually issued by a title insurance company, which insures you against errors in the title search. The cost of the policy is usually a function of the value of the property, and can be paid by the purchaser, the seller, or both.

Title Search - examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Truth-In-Lending - federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

Two-Step Mortgage - mortgage in which you receive a below-market interest rate for a specified number of years (most often seven or 10 years), and then receive a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan, due within 30 days notice, at the end of seven or 10 years. It is also referred to as a Super Seven or Premier mortgage.

Underwriting decision made by an Underwriter - 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.

Veterans Administration (VA) - a government agency providing guarantees for lenders on approved loans to qualifying veterans.

VA Loan - 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.

VA Mortgage Funding Fee - premium of up to 1 7/9 percent (depending on the size of the down payment) paid on a VA backed loan. For example, on a $75,000, 30-year fixed-rate mortgage with no down payments, $1,406 would either be required at closing or added to the amount financed.

Variable Rate Mortgage (VRM) - mortgage in which the interest rate is adjusted periodically, based on a pre-selected index. It is also sometimes referred to as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage. Sometimes referred to as an adjustable rate mortgage.

Verification Of Deposit (VOD) - document signed by your financial institution verifying the status and balance of your financial accounts.

Verification of Documents - most loan programs require the mortgage company to verify information on loan applications such as the borrower's employment, bank account balances, and credit references. Often, these verifications are referred to as VOE's (verification of employment), VOD's (verification of deposits) and VOM's (verification of mortgage).

Verification Of Employment - document signed by your employer verifying your position, date of hire, and salary.

Wraparound - Wraparound results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after keeping the additional amount.