Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
Adjustable-Rate Mortgage (ARM)
A type of mortgage (commonly called an ARM) in which the interest rate is tied to a certain economic index and may adjust at certain times. The initial interest rate is usually lower than that offered with a fixed-rate mortgage (also known as a teaser rate). This means that the monthly repayment amount will also be lower. However, your monthly payment may go up or down at intervals specified in the ARM product disclosure, depending on the current interest rate. Most adjustable-rate mortgage programs offer the protection of a rate cap, which limits the amount the rate can be increased each year, as well as over the life of the loan. The lower initial rate of an ARM can increase purchasing power and enable a buyer to purchase a more expensive home than may be possible with a fixed-rate mortgage. Keep in mind that the interest rate may increase in future years, making future monthly payments higher.
Adjustment Date
The date the interest rate changes for an adjustable-rate mortgage. To change to another type of loan, such as a fixed-rate loan, contact your lender at least three months before this adjustment date, but know that not all ARMs have a conversion option.
Adjustment Period
The amount of time between the adjustment dates for an adjustable-rate mortgage. For example, the interest rate for a six-month ARM will go up, down, or stay the same every six months.
Amortization
The periodic repayment of the loan balance. As you pay each month, a portion goes to the loan principal and a portion goes to the interest. An amortization schedule shows the balance after each payment is made.
Amortization Term
The amount of time you have to repay the mortgage loan. It’s usually shown as a number of months. For example, the amortization term for a 30-year mortgage is 360 months (30 years x 12 months).
Annual percentage rate (APR)
The APR is a measure of the cost of credit, expressed as a nominal, yearly rate. It relates the amount and timing of value received by the consumer to the amount and timing of payments made.
Application
The process of supplying a lender with personal information such as income, assets, and financial obligations. The lender evaluates and verifies this information, while keeping in mind the type of mortgage loan the borrower wants.
Appraisal
A professional, written opinion of a property’s estimated market value by an impartial party. The value is estimated based on the property’s style and appearance, construction quality, usefulness, and the value of similar properties in the same or nearby community that recently have been sold. An appraisal is NOT a warranty of value and does not indicate that a property is a habitable, sound, etc.
Appreciation
An increase in the value of a property due to market conditions or other causes. Of course, market conditions can also cause depreciation in a property.
Asset
Anything of monetary value owned by a borrower, including real property, personal property, bank accounts, stocks, mutual funds, etc. A review of assets is a basic part of the mortgage application process.
B
Balloon Mortgage
A short-term, fixed-rate mortgage loan with fixed monthly payments followed by one large final payment to pay off the loan balance (the ‘balloon’). The mortgage is amortized over the full term of the loan repayment period resulting in lower monthly payments, but at the end of a specified period the balance of the mortgage comes due. For example, with a 7-year balloon you would make monthly payments for seven years that have been calculated based on a 30-year mortgage payment. At the end of the seven years, the remaining principal balance is due and payable in full.
Balloon Payment
The final lump sum payment made at the maturity date of a balloon mortgage. You may be able to refinance the loan when this payment is due. Check with your lender for this possibility.
Borrower
The person applying for the mortgage loan and who will be responsible for repaying the loan. There may be more than one borrower on a loan.
Bridge Loan
A mortgage loan which enables a borrower to obtain financing for a new house before their present house is sold. The present home is used as collateral. Also known as a swing loan.
C
Cap (Interest Rate)
A limit on how much the interest rate on an ARM loan can change in an adjustment period or over the life of the loan. For example, if your adjustment cap is 1% and your current interest rate is 6%, then your newly adjusted rate will be between 5% and 7%. A lender will provide this information for each of its ARM products.
Cap (Payment)
A limit to how much monthly payments on an ARM can change at each adjustment period. This type of cap does not limit the amount of interest a lender is earning and may cause negative amortization.
Cash-Out Refinance
A refinance transaction in which the new loan amount is greater than the remaining balance of all current mortgages. Many homeowners use this option to finance home improvements, debt consolidation or take needed cash from the equity built up in the property.
Closing
Also called settlement. Closing is the conclusion of a real estate transaction. Documents that transfer legal ownership of the property are signed and closing costs are paid at this time.
Closing Costs
Costs necessary to transfer ownership of a property and to close your mortgage loan. These may be paid by the buyer and/or the seller and may include an origination fee, attorney’s fee, taxes, and charges for obtaining title insurance and a survey. Closing costs will vary according to geographic location.
Closing Statement
A disclosure listing that itemizes all charges imposed upon parties to a real estate closing, including escrow deposits for taxes, homeowner’s insurance, and mortgage insurance. Also referred to as the HUD-1, it is prepared by the closing agent.
Co-Borrower
If more than one person will be responsible for repaying the loan, they are co-borrowers.
Commitment Fee
A fee imposed by a lender to cover certain expenses in connection with making a real estate loan. Usually a percentage of the loan amount.
Commitment Letter
A statement by a lender detailing the terms and conditions under which it agrees to lend money to a consumer. Also known as a loan commitment.
Community Property
In some states, property acquired during a marriage is considered jointly owned or community property, unless it is acquired as separate property of either spouse prior to the marriage.
Comparables
Recently sold properties with similar characteristics to the property being appraised. Comparables help the appraiser determine the approximate fair market value of the subject property. They have reasonably the same size, location, and amenities.
Condominium
A form of homeownership in which the owner owns the airspace within the walls, but doesn’t own the actual walls, ceilings or floors of his home. The owner also may own a percentage of the common areas such as a swimming pool.
Conforming Loan
A mortgage loan that meets all the requirements to be eligible for purchase by federal agencies, such as Fannie Mae and Freddie Mac. The maximum conforming loan amount is $424,100 for a one-unit property.
Construction Loan
A short-term, interim loan for financing the cost of construction. The lender makes payments directly to the builder or contractors at periodic intervals as the home is built.
Consumer Credit Reporting Agency (or Bureau)
A credit bureau gathers, records, updates, and stores financial and public record information about the payment records of individuals. A potential borrower must give a lender permission to access their credit history during the qualification process. The lender receives reports from these agencies to evaluate credit.
Contingency
A condition that must be met before a sales contract is legally binding. For example, when buying a home, the contract may not be binding until a satisfactory home inspection report is obtained from a qualified home inspector.
Conventional Mortgage
Loans that are not part of a government-housing program and are not insured or guaranteed by the federal government.
Conversion Clause
A provision in some adjustable-rate mortgages that allows you to change the ARM to a fixed-rate mortgage.
Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions, either by refinancing or a conversion option.
Co-op or Cooperative
A form of multiple ownership in which a corporation or business trust entity holds title to a property (usually an apartment complex) and grants occupancy rights to shareholder tenants through proprietary leases.
Corporate Relocation
Arrangements under which an employer moves an employee to another area of the country is considered a corporate relocation. As part of the relocation agreement, the employer may pay a portion of the mortgage-related expenses.
Credit
The exchange of something of value in exchange for a promise to repay the lender at a later date.
Credit History
The recorded information concerning an individual’s debt and repayment history.
Credit Report
A report, which verifies credit standing, based on an individual’s repayment and debt history.
Credit Repository
Also known as a credit reporting agency or bureau, a credit repository gathers, records, updates, and stores financial and public record information about the payment records of individuals. Potential borrower must give a lender permission to access their credit history during the qualification process. The lender receives reports from these agencies to evaluate credit.
D
Debt
An amount owed to another. Debt is one area of financial information that lenders review carefully during the mortgage lending process. It is also referred to as liability.
Debt-to-Income Ratio
A borrower’s total monthly debt divided by gross monthly income and shown as a percentage. (Example: If debt = $1,200 and gross monthly income = $5,000, then the Debt-to-Income Ratio would equal $1,200 divided by $5,000 or 24%). Total monthly debt includes monthly mortgage payments as well as student loans, car loans, and credit card payments. Also called the back-end ratio or total debt ratio.
Default
The failure to make loan payments on time, in the amount specified, or as required in the terms of the obligation or note.
Depreciation
A decrease in the value of a property due to market conditions or other causes.
Discount Points
Points are a percentage of the loan amount paid at closing that may affect the interest rate. For instance, on a $90,000 loan amount, 1 point = 1% or $900. Points are typically paid to buy down the rate. Alternatively, in exchange for a higher rate, the lender may pay points to offset a borrower’s closing costs. These are considered negative points.
Down payment
The part of the purchase price of a property that you pay in cash up-front and do not finance with a mortgage.
E
Earnest money
A deposit made in good faith, when an offer is made on a home. Typically, this money is not refundable, unless the terms of the contract are not met.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available to all applicants without discrimination based on race, color, religion, national origin, age, sex, marital status, or that the applicant’s income is derived from public assistance programs or has in good faith exercised any right under the Consumer Credit Protection Act.
Equity
A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and all amounts owed on the property. On a new mortgage purchase loan, the down payment represents the initial equity in the property.
Equity Line of Credit
An open-ended loan, usually recorded as a second mortgage, that permits borrowers to obtain cash advances based on an approved line of credit.
Escrow
A transaction in which a third party holds money for the seller or buyer, or for the borrower and lender, in order to handle legal documents and disbursement of funds.
Escrow account
A trust account created by a third party to hold money. A mortgage escrow account is an account set-up to pay taxes and insurance. Monthly mortgage payments may include 1/12 of annual property taxes and insurance. When the bills come due, lenders use the money in the escrow account to pay them.
Escrow analysis
The periodic examination of escrow accounts to determine if current monthly deposits are enough to pay taxes, insurance, and other bills when due. Lenders are required to review escrow accounts annually, and provide the borrower with the analysis.
Escrow payment
The portion of the monthly mortgage payment that is held in an escrow account to pay for taxes and homeowner’s insurance. This is known as impounds or reserves in some states.
Estate
The total of real property and personal property owned by an individual at time of death.
Estimated Gross Costs of Buying
Total principal and interest payments over the number of years that you plan to own your home.
Estimated Increase in Equity
A specified property value increased by a selected rate of appreciation for a specific number of years.
Estimated Net Costs of Buying
The estimated gross costs of buying minus estimated tax savings and the estimated increase in equity.
Estimated Tax Savings
The amount of tax a renter would save instead of owning a home based on property taxes and interest paid.
Estimated Total Costs of Renting
The total current rental payments for the same number of years you would plan to own a home increased by a yearly rental increase adjustment.
Estimated Total Savings
The estimated net costs of renting minus the lower net cost of buying.
F
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on an individual’s credit record.
Fannie Mae
Fannie Mae is an agency chartered by the U.S. Congress and is the nation’s largest supplier of home mortgage funds. In other words, it buys mortgages from lenders. This is known as the secondary market.
Federal Home Loan Mortgage Corporation – Freddie Mac
Created by Congress, this stockholder-owned corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential and multifamily properties with mortgage purchase and securitization programs.
Federal Housing Administration (FHA)
An agency within the U.S. Department of Housing and Urban Development (HUD), the FHA insures residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money, plan housing or construct housing.
FHA Mortgage
An FHA mortgage is insured and guaranteed by the Federal Housing Administration (FHA) and requires little or no down payment. These loans are designed to make a home purchase more affordable than with a conventional loan, especially for the first-time home buyer. Be aware that FHA loans are subject to limitations on the amount of money that can be borrowed for an FHA loan. These limits vary throughout the country.
First Mortgage
A first mortgage is a mortgage that is the primary lien against a property and takes priority over all other liens.
Fixed-rate mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan. This means that the monthly payments for principal and interest are also fixed for the life of the loan.
Float Rate
(See Rate Float)
Flood Insurance
Special hazard coverage from a reputable flood insurance provider that is recommended on all properties and required if a property is located in a special flood hazard area.
Funding
Funding is the actual date that funds are disbursed to the seller of a property or a borrower on a refinance. In some cases, this happens simultaneous with closing.
G
Good Faith Estimate
Required by federal law, a Good Faith Estimate (GFE) is a written list of the estimated closing costs associated with a mortgage transaction, including the lender’s charges along with the local closing agent’s charges and fees. It also includes estimated amounts for real estate property tax and homeowner’s insurance.
Gross Monthly Rental Income
The amount of money received each month for rent on property that is owned and used for investment purposes. This income will need to be verified through a lease or through tax returns.
H
HELOC
A secure line of credit using the available equity in the applicant’s residence as collateral. HELOC stands for Home Equity line of credit.
Homeowner’s Insurance or Hazard Insurance
Insurance protecting against loss to real estate (caused by fire, other natural causes, vandalism, etc.), depending upon the terms of the policy. You must have this type of insurance to close on a loan. This may not cover flood or wind damage.
Housing Ratio
A borrower’s total monthly housing payment (PITI – Principal, Interest, Taxes, and Insurance) divided by gross monthly income and shown as a percentage. For example, if PITI = $1,500 and gross monthly income = $6,000, then the Housing Ratio would equal $1,500 divided by $6,000 or 25%. Sometimes referred to as the front ratio.
HUD
Stands for the U.S. Department of Housing and Urban Development. This government agency is responsible for implementing and overseeing federal housing and community development programs. It also oversees the Federal Housing Administration.
I
Income
Sources of revenue including your salary, bonuses, interest, and investment income. Income is one area of financial information that lenders review during the mortgage lending process.
Index
A published rate used by lenders that serves as the basis for determining interest rate changes on ARM loans. Some commonly used indices include the 1-Year Treasury Bill, 6-Month LIBOR, and the 11th District Cost of Funds (COFI).
Interest Rate
The fee paid to a lender to borrow money expressed as a percentage.
Investment Related Savings
The estimated total savings of buying invested at a rate of 8% for the number of years that a borrower would plan to own a home.
J
Jumbo Loan
A mortgage loan that exceeds the conforming loan amount. Jumbo loans usually command higher interest rates.
L
LIBOR (London Interbank Offered Rate)
The rate at which banks in the foreign market lend money to one another. One of the more dependable barometers for the international cost of money, the LIBOR is one of many indices used for setting interest rates for ARM loans.
Lien
A legal claim against a property.
Lifetime cap
A provision of an ARM that limits the highest interest rate that can occur over the life of the loan. These caps vary with each ARM and can be used as a point of comparison when shopping for a loan.
Loan Amount
The amount a consumer borrows from a lender to purchase a home.
Loan Programs
The type of loan as defined by term and repayment features. Examples include: 30-year fixed-rate mortgage and 10/1 ARM mortgage.
Loan-to-Value Ratio (LTV)
The loan amount expressed as a percentage of the lower of the appraised value or purchase price of the property. For example, a 90% LTV loan means a 10% down payment or financing 90% of the sales price or appraised value of the property. There are often different maximum LTV limitations for different loan programs.
Lock Rate
See Rate Lock.
M
Manufactured Housing
Factory-built or prefabricated housing, including mobile homes.
Mortgage
A legal document that pledges a property as security for repayment of a loan.
Mortgage Insurance (MI)
Insurance paid by the borrower that protects the lender in case the borrower defaults on a loan. With conventional loans, mortgage insurance is not required if your down payment is at least 20%. Also known as private mortgage insurance.
Mortgage Insurance Premium (MIP)
The up-front insurance premium you must pay if you get an FHA loan. The insurance helps cover the cost of reselling your home if you default on the loan.
Mortgagee
The company or person in a mortgage loan transaction that holds the mortgage note as a pledge for repayment of the loan.
Mortgage Note
A written, legal document that binds the borrower to repay a loan at a stated interest rate, during a specified period of time.
Mortgagor
The borrower in a mortgage loan transaction.
Multi-family
A building with more than four residential units.
N
Negative Amortization
When monthly mortgage payments do not cover the principal or interest due, rather than declining, the balance on the loan will actual increase.
Nonconforming Mortgage Loan
See Jumbo Loan.
O
Origination Fee
A fee imposed by a lender to cover certain expenses in connection with making a real estate loan. Usually a percentage of the loan amount.
P
P & I
See Principal and Interest.
Payment Cap
See Rate Cap.
PITI
PITI is an abbreviation for Principal, Interest, Taxes, and Insurance.
Points
Points are a percentage of the loan amount paid at closing that may affect your interest rate. For instance, on a $90,000 loan amount, 1 point = 1% or $900. If you pay points, you may buy down the rate. Alternatively, in exchange for a higher rate, the lender may pay points to offset your closing costs. These are considered negative points.
Prepayment
Paying off an entire mortgage before it is due. Many mortgage loans offer prepayment without penalty. This may be important to keep in mind when comparing loan programs.
Prepayment Penalty
A charge a borrower pays a lender when the borrower wants to pay off a mortgage loan in advance of the agreed payment schedule. Not all loan programs have a prepayment penalty.
Pre-qualification
A preliminary evaluation of your financial status by a lender to estimate the amount and type of loans available to you. This evaluation does not include a 3rd party credit report, and the lender does not formally commit to giving you a loan.
Principal
The outstanding balance of a loan, excluding interest is known as the principal.
Principal & Interest (P&I)
Principal is the portion of the mortgage payment that goes to reduce the outstanding balance of the loan. Interest is the portion of the mortgage payment that goes to pay the finance charge on the outstanding balance of the loan. You pay a portion of these each month as part of your monthly mortgage payment.
Private Mortgage Insurance (PMI)
Insurance paid by the borrower that protects the lender in case of default on a loan. With conventional loans, mortgage insurance is generally not required with a down payment of at least 20%. Also known as mortgage insurance.
Property Type
See Condominium, Co-op, Manufactured Housing, Planned Unit Development, Multi-family, Single Family Attached Home, or Single Family Detached Home.
Planned Unit Development (PUD)
Subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately owned lots. Also, a comprehensive development plan for a large land area. A PUD usually includes residences, roads, schools, recreational facilities, commercial, office, and industrial areas.
Purchase Price
The price a buyer pays to purchase a home.
Q
Qualify
The ability to meet a loan program’s predetermined guidelines such as income, assets, credit history, and debt.
Qualifying Ratios
The percentages that a lender will compare to see whether you qualify for a loan. This is made up of the debt-to-income ratio and the housing ratio.
Rate Cap
A limit on how much the interest rate on an ARM loan can change in an adjustment period or over the life of the loan. For example, if your adjustment cap is 1% and your current interest rate is 6%, then your newly adjusted rate will be between 5% and 7%. A lender will provide this information for each of its ARM products.
Rate Float
The rate has not been secured and will fluctuate with the current market until protected by either a rate lock or rate protection.
Rate Lock
A lender’s commitment to lend money at a particular interest rate as long as the loan closes and funds within a specified time period. The lock protects against rate increases during that time.
Rate Protection
A lender adds a cap to the current interest rate, which represents the maximum interest rate you will pay as long as the loan closes and funds before the rate expiration, even if rates increase. If rates drop, you will have a one-time option to lock in at a lower rate.
Refinancing
The process of paying off one loan with the proceeds from a new loan, using the same property as security. Homeowners may refinance to lower their interest rate, shorten the term of their loan or to get cash out of the property’s equity.
S
Second Mortgage
A second mortgage is a mortgage that has rights subordinate to a first mortgage. Also called second trust.
Settlement Statement
See Closing Statement.
Single Family Attached Home
A home where the customer owns the dwelling and lot but shares common wall(s) with another structure.
Single Family Detached Home
A free-standing home without any homeowner’s association dues. If you pay homeowner’s association dues your property would be considered a detached home in a planned unit development.
Subject Property
The property to be secured by the mortgage loan.
Survey
A measurement of land, prepared by a licensed surveyor, showing a property’s boundaries, elevations, improvements, and relationship to surrounding tracts. The buyer typically pays for the survey of the property.
T
Term of Loan
The amount of time you have to repay the mortgage loan. It’s usually expressed as a number of months. For example, the term for a 30-year fixed-rate mortgage is 360 months (30 years X 12 months).
Title
Document that gives evidence of ownership of a property.
Title Insurance
Insurance that protects the lender or buyer against losses resulting from disputes over the title of a property. Lender Title Insurance is required to close a loan and is typically paid for by the buyer. A buyer must purchase their own separate title insurance policy to protect their interests.
Title Search
Examination of public records, laws, and court decisions to ensure that no one except the seller has a valid claim to the property. A title search is required by the lender and is a standard part of closing costs paid for by the buyer.
Transfer Tax
Depending on the location, tax levied by state or local governments when property passes from one owner to another.
Total Monthly Payment
The sum of the loan principal, interest, taxes, and insurance (PITI) that you pay the lender monthly.
Truth-in-Lending Act
A federal law requiring disclosure of credit terms in a standard format known as the truth-in-lending statement. With these statements, you can better compare the lending terms of different financial institutions.
U
Underwriting
In mortgage lending, the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report and of the borrower’s ability and willingness to repay the loan.
V
VA Mortgage
A mortgage guaranteed by the Department of Veteran Affairs and only available for military personnel, veterans or spouses of veterans who died of service-related injuries. Because the loan is guaranteed, it requires little or no down payment.
Veterans Administration (VA)
A government agency that administers benefit programs to help veterans return to civilian life, including guaranteed mortgage loans with little or no down payment.