Mortgage Glossary
Adjustable Rate Mortgage (ARM) A mortgage with an interest rate and payment that changes periodically over the life of the loan based on the change in the specific index. Adjustable rate mortgages may have features that allow for the interest rate and payments to be fixed for an initial period (3 years, 5 years, 10 years) and thereafter adjusting periodically based on the specific index.
Adjustment Date The date on which the interest rate changes for an adjustable-rate mortgage (ARM).
Amount financed On the Truth in Lending form, the loan amount less "prepaid finance charges", which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000.
Annual Percentage Rate (APR) The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance and loan origination fee (points).
Appraisal A written analysis of the estimated value of a property prepared by a qualified appraiser.
APR The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers.
Approval Acceptance of the borrower's loan application. Approval means that the borrower meets the lender's qualification requirements and also its underwriting requirements. In some cases, especially where approval is provided quickly as with automated underwriting systems, the approval may be conditional on further verification of information provided by the borrower.
Automated underwriting A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved, or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower's credit history and the subject property. The most widely used systems are Freddie Mac’s Loan Prospector and Fannie Mae’s Desktop Underwriter.
Balloon (Payment) Mortgage Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Bridge loan A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. Normally secured with the currently owned property that is being sold.
Cap A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease.
Cash-out Refinance A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points and the amount required to satisfy any outstanding subordinate mortgage liens.
Closing Costs Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, discount points, an attorney's fee, taxes, title insurance, survey and any other costs assessed at settlement.
Closing On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.
Conventional Loan A mortgage loan that is not insured or guaranteed by the federal government. The maximum mortgage amount for a conventional conforming loan is $417,000.
Construction to Permanent A mortgage loan which provides funds for the construction or renovation of a residential property. During the construction/renovation phase, funds are disbursed based on completion of the construction. The construction phase may be up to twelve months in duration and requires payment of interest only on the outstanding balance. Upon completion, the mortgage is modified to a fixed rate or adjustable rate mortgage amortized for 30 or 15 years. A benefit of this product is that only one closing is required, therefore eliminating the cost of duplicate closings.
Credit Report A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
Deed in lieu of foreclosure Deeding the property over to the lender as an alternative to having the lender foreclose on the property.
Default Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default.
Delinquency A mortgage payment that is more than 30 days late
Down Payment The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Due-on-sale clause A provision of a loan contract that stipulates that if the property is sold the loan balance must be repaid. This bars the seller from transferring responsibility for an existing loan to the buyer when the interest rate on the old loan is below the current market. A mortgage containing a due-on-sale clause is not an assumable mortgage.
Earnest Money A deposit given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Equity A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.
Escrow An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.
Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal National Mortgage Association (Fannie Mae or FNMA) Also known as Fannie Mae. 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.
FHA Mortgage A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
First mortgage A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.
Fixed-rate mortgage (FRM) A mortgage in which the interest rate does not change during the entire term of the loan.
Float Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk.
Forbearance agreement An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency.
Foreclosure The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.
Gift of equity A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.
Good Faith Estimate An estimate of charges which a borrower is likely to incur in connection with a settlement.
Government National Mortgage Association (GNMA) Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
Grace period The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily.
Hazard insurance Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as "homeowner insurance", it is the second "I" in PITI.
Home equity line of credit (HELOC) A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check.
Home Valuation Code of Conduct (HVCC) A rule issued by Fannie Mae and Freddie Mac, effective May 1, 2009, that the agencies thenceforth would only purchase mortgages that were supported by an “independent” appraisal.
Housing expense The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and "monthly housing expense."
Housing expense ratio The ratio of housing expense to borrower income which is used (along with the total expense ratio and other factors) in qualifying borrowers.
HUD1 form The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.
Index A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used include the 1 Year Treasury Bill, 6 Month LIBOR and the 11th District Cost of Funds (COFI).
Interest due The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period.
Interest Only Loan A mortgage is considered “interest only” if the monthly payment does not include any repayment of principal – the mortgage payment covers only the interest and the actual loan balance remains unchanged.
Interest rate decrease cap The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted.
Interest rate floor The lowest interest rate possible under an ARM contract.
Interest rate increase cap The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted.
Jumbo Loan A loan which is larger (more than $417,000 in 2010) than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Late fees Fees that lenders are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later.
Lien The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
Lifetime Cap A provision of an ARM that limits the highest rate that can occur over the life of the loan.
Loan to Value Ratio (LTV) The ratio of the amount of your loan to the appraised value of the home. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered by lenders.
Lock An option exercised by the borrower, at the time of the loan application or later, to "lock in" the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
Lock period The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
Manufactured housing A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD. Interest rates may be higher on loans secured by these homes, and borrower qualification more difficult.
Margin The number of percentage points added to the index value to calculate the ARM interest rate at each adjustment period.
Mortgage A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
Mortgage Insurance (MI) Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.
Non-conforming mortgage A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.
Origination Fee A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan.
PITI Principal, interest, taxes and insurance--the components of a monthly mortgage payment.
Power of Attorney (POA) A legal document authorizing one person to act on behalf of another.
Prepaids Those expenses of property which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, hazard insurance, private mortgage insurance and special assessments.
Prequalification A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Credit is checked, but income and assets are not verified.
Prepayment A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment."
Primary residence The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.
Processing Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on.
Rate Cap A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.
Refinancing The process of paying off one loan with the proceeds from a new loan using the same property as security.
RESPA The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.
Right of rescission The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing.
Second mortgage A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
Servicing Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.
Subordinate financing
A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.
Survey A 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.
Tax service fee A fee charged by some lenders at closing to cover the cost of paying taxes on the borrower's property when they come due, or (if the borrower is paying the taxes), verifying that the payment has been made.
Title A document that gives evidence of an individual's ownership of property.
Title insurance Insurance against loss arising from problems connected to the title to property.
Total expense ratio The ratio of housing expense plus current debt service payments to borrower income, which is used (along with the housing expense ratio and other factors) in qualifying borrowers.
Truth in Lending (TIL) The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.
Underwriting The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.
VA Loan A long-term, low or no-down payment loan guaranteed by the Department of Veterans Affairs (VA). Restricted to individuals qualified by military service or other entitlements.
Waive escrows Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.