Glossary of Mortgage Terms

Accrued Interest – Interest earned but not yet paid.

Adjustable Rate Mortgage Loans (ARM) - Loans with an interest rate that fluctuates in relation to an index (e.g., treasury bill rates). Due to this fluctuation in the interest rate, the payment on the loan will rise and fall. An interest rate “cap” will limit the amount by which the rate can move.

Agreement of Sale – Contract signed by buyer and seller that outlines the terms under which a property is sold. Also referred to as a sales contract or purchase agreement.

Alternative Documentation – A process by which a loan is documented using documents/information that a borrower is more likely to have immediately available vs. waiting for traditional verification documents. Example using pay-stubs instead of sending a verification form to an employer.

Amortization – Repayment of a loan with periodic payments of both principal and interest calculated to payoff the loan at the end of a fixed period of time.

Annual Percentage Rate (APR) – The cost of borrowing expressed as a yearly percentage. The APR is usually a different percentage than the interest rate on the loan because it considers the amount financed, the finance charges and the loan term.

Application - See loan application.

Appraisal – A written evaluation of the property’s current market value completed by an individual with strong knowledge of real estate markets/values (“the appraiser”).

Appraisal Fee – The fee charged by the appraiser to complete the evaluation of property and assign a market value.

B

Balloon Mortgage - Loans that have fixed monthly payments for a set number of years (e.g., 5, 7 or 10 years) followed by one large payment to pay off the remaining balance (the “balloon”).

B & C Paper Loans - Mortgage loans that do not meet Fannie Mae or Freddie Mac credit standards. These loans will carry a higher interest rate than conforming loans.

Borrower – The individual who receives the loan. In a mortgage transaction, this person is also referred to as the “mortgagor”.

Buy-Down Mortgage – A mortgage loan with a below-market rate for a period of time.

C

Caps (Interest) - Limits on the amount that an adjustable rate mortgage can change. There are period caps and lifetime caps. A period cap limits the amount the rate can change during an adjustment interval; a lifetime cap limits the amount it can change over the life of the loan.

Caps (Payment) - Limits on the amount the monthly payment on an adjustable rate mortgage arm can change. Unlike an interest rate cap these caps do not limit the amount of interest and can result in an increase in the loan amount owed. (see negative amortization)

Cash Out - The cash back to the borrower if they refinance their current mortgage for a higher loan amount than currently owed based on the equity built up in the house. The cash out amount is calculated by subtracting the sum of the remaining old loan and fees from the new mortgage loan. Example: new loan amount $140,000 – owed on old loan $120,000 ­ loan fees $2,000= cash out of $18,000

Certificate of Eligibility - The Veterans Administration issues these to qualified veterans who are eligible for a VA guaranteed loan.

Certificate of Title – A title company’s or attorney’s written opinion of the status of title to a property. The certificate does not serve as insurance.

Certificate of Veteran Status – Form filled out by the Veterans Administration to establish a borrower’s eligibility for a FHA vet loan.

Chain of Title – The chronological order of conveyance of a property from the original owner to the present owner.

Closing (or Settlement) – The final step in the mortgage process. It includes the signing of the legal documents, distribution of funds and, in the case of a home purchase, transfer of ownership.

Closing Costs – Costs, paid at closing/settlement, for services completed to finalize your loan. Examples include title fees, and recording fees.

Collateral - Assets (such as your home) pledged as security for the debt (money owed on the home).

Commitment – A promise by a lender to loan the money under certain terms and conditions.

Conforming Loan – A mortgage loan that can be purchased by the Fannie Mae and Freddie Mac, government sponsored agencies. The agencies are currently allowed to buy loans with a maximum loan amount of $240,000 for a one-unit property.

Contingency – A condition of a contract that must be satisfied before it can become legally binding.

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

Conventional Loan – A mortgage not insured or guaranteed byFHA and VA which conforms to the guidelines established by Fannie Mae or Freddie Mac.

Conversion Clause – A provision that allows a borrower to convert an adjustable mortgage (ARM) to a fixed-rate loan. This provision is usually not allowed until the first adjustment period. The new rate will be set at the current rate for fixed loans.

Convertible Arms – An adjustable rate mortgage (ARM) that has the option to change to a fixed rate loan during a specific time period.

Conveyance - The document used to effect a transfer, such as a deed, or mortgage.

Cost of Funds Index (COFI) – An index of the weighted-average interest rate paid by savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District. COFI can be an index used for arm loans.

Credit Report – A report that outlines the potential borrowers credit history. This history helps the mortgage lender determine the likelihood the borrower will re-pay the mortgage.

D

Deed – Legal document by which title to real property is transferred from one owner to another. The deed contains a description of the property, and is signed, witnessed, and delivered to the buyer at closing. Sometimes called the warranty deed.

Deed of Trust – The legal document that conveys title to real property to a third party. The third party holds title until the owner of the property has repaid the debt in full. Sometimes called a mortgage.

Default – Failure to meet legal obligations in a contract, including failure to make payments on a loan.

Delinquency – Failure to make payments as stated in the loan agreement.

Discount Points (or Points) – Fee paid at closing to the lender in exchange for a lower interest rate. A point is equal to one percent of the loan amount.

Down Payment – The amount of your home’s price that you pay in cash up-front. The loan amount is the difference between the home price and the down payment and is usually expressed as a percentage. (e.g., a $100,000 home with 20% down would mean a $80,000 loan amount).

E

Earnest Money – The money deposit that a buyer puts down when the purchase agreement is signed to show good faith. This money goes towards the down payment on the house.

Effective Rate - The effective rate, like the APR, takes into account the costs and fees along with the interest on a loan. However, unlike the APR, the effective rate only takes into consideration the time you expect to be in the house (the APR factors in the whole life of the loan.)

Equal Credit Opportunity Act (ECOA) - Federal law requiring creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity - The difference between the current market value of a property and the outstanding loan amount. On a new mortgage loan, the down payment would be the equity.

Escrow – A transaction in which an independent third party acts as the agent for seller and buyer, or for borrower and lender, in handling legal documents and disbursement of funds.

Escrow Account – An account (often required by mortgage lenders) used to pay taxes, hazard insurance, and mortgage insurance premiums. The amount of escrow paid monthly is determined by taking the yearly bill for taxes and insurance and dividing by 12. This monthly escrow amount is then added to your monthly principal and interest payment to create your total mortgage payment. Also known as impound account.

Escrow Agent – A person with fiduciary responsibility to the buyer and seller, or the borrower and lender, to ensure that the terms of the purchase/sale or loan are carried out. Often the escrow agent is from the title company.

F

Freddie Mac – This government-sponsored agency buys loans that are underwritten to its specific guidelines. These guidelines are an industry standard for residential conventional lending.

Federal Housing Administration (FHA) – A federal agency within the Department of Housing and Urban Development (HUD), which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.

Fannie Mae – This government-sponsored agency buys loans that are underwritten to its specific guidelines. These guidelines are an industry standard for residential conventional lending.

Fee Simple - Absolute ownership of real property.

First Mortgage – A mortgage which has priority over all other liens. In the case of a foreclosure, the first mortgage will be repaid before any other mortgages.

Fixed-Rate Loans – Fixed-rate loans have interest rates that do not change. This results in the monthly payments remaining constant over the life of the loan. As the loan amount pays down, more of the monthly payment will got to repay the loan; less will go to make the interest payment. Fixed-rate loans typically have 15-year or 30-year terms.

Flood Insurance – Insurance that compensates for physical damage to a property by flood. Typically not covered under standard hazard insurance and required in flood areas.

Forbearance - The act by the lender of refraining from taking legal action on a mortgage loan that is delinquent. Foreclosure

G

Good Faith Estimate - A written estimate of the settlement costs the borrower will likely have to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), borrower must receive the estimate from the lender within three days of loan application.

Grace Period – Period of time during which a loan payment may be made after its due date without incurring a late penalty. The grace period is specified as part of the terms of the loan in the note. (e.g., by the 16th of the month)

Gross Income - Total income before taxes or expenses are deducted.

H

Hazard Insurance – Insurance that protects the homeowner from losses due to fire or other natural disaster.

Housing and Urban Development (HUD) – A U.S. Government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration (FHA).

Hud-1 Uniform Settlement Statement – A standard form which breaks down the closing costs associated with purchasing a home or refinancing a loan.

I

Impound Account – See escrow account.

Index – A published rate used by lenders that serves as the basis for determining interest rate changes on ARM loans.

Initial Rate – The rate charged during the first interval of an ARM loan.

Interest – Charge paid for borrowing money, calculated as a percentage of the remaining balance of the amount borrowed.

Interest Rate – The annual rate of interest on the loan, expressed as a percentage of 100.

Interest Rate Cap – A limit on the amount an interest rate on an ARM loan can change over an interval or the life-of-the loan.

Investment Property - A home that you purchase as an investment. You will not live in this house but instead rent it out to others.

J

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

Joint Tenancy - A form of ownership of property giving each person equal interest in the property, including rights of survivorship.

Jumbo Loan – A mortgage larger than the $240,000 limit set by Fannie Mae and Freddie Mac.

K

none

L

LIBOR (London Interbank Offered Rate) - The interest rate charged among banks in the foreign market for short-term loans to one another. A common index for ARM loans.

Lien – A legal claim by one person on another person’s property for security for payment of a debt. (e.g., to put a “lien against a house”.)

Loan Application - An initial statement of personal and financial information required to apply for a loan. Commonly referred to as the 1003.

Loan Application Fee – Fee charged by a lender to cover the initial costs of processing a loan application.

Loan Origination Fee – Fee charged by a lender to cover administrative costs of processing a loan.

Loan-to-Value Ratio (LTV) – The percentage of the loan amount to the appraised value (or the sales price, whichever is less) of the property. (e.g., an $80,000 loan on a home worth $100,000 would have an 80% LTV)

Lock or Lock-In – A lender’s guarantee of an interest rate for a set period of time (e.g., 60 days). The time period is usually that between loan application approval and loan closing. The lock-in protects you against rate increases during that time.

M

Margin – A set percentage that is added to your chosen financial index (on an ARM loan) to determine your new interest rate at the time of adjustment. (e.g., 1.5% over COFI)

Mortgage – See deed of trust.

Mortgage Banker – The person/company that originates and/or services mortgage loans.

Mortgage Broker – The person/company that arranges financing for borrowers but does not typically close or service the loan.

Mortgage Insurance – Insurance, paid by the borrower, that protects the lender if the borrower does not re-pay. With conventional loans, mortgage insurance is typically not required if you make a down payment of at least 20% of the home’s appraised value. (Different rules apply for FHA and VA loans.)

Mortgage Loan – A loan for which real estate (the house/property) serves as collateral to provide for repayment in case of default.

Mortgage Note - Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The note is secured by a mortgage or deed of trust or other security instrument. Also called the note.

Mortgagee – The lender in a mortgage loan transaction.

Mortgagor - The borrower in a mortgage loan transaction.

N

Negative Amortization – A loan payment schedule in which the amount owed on the loan actually increases instead of decreases because the payments do not cover the full amount of interest due. The shortfall in payment is added to the unpaid principal balance of the loan. Negative amortization can occur on ARM loans with payment caps.

No Income Verification Loan – This is a loan not requiring any type of income verification. Typically, these loans require the borrower to have excellent credit and strong reserves. These loans carry a slightly higher interest rate, and are especially useful for people who are self-employed, are commissioned, or receive unearned income (i.e. investments).

No Ratio Loans – For a higher interest rate, no ratio loans are available which require no documentation of income or monthly debt. These loans do require excellent credit and substantial cash reserves/assets.

Note Modification - Changing the original terms of the mortgage note in any way. Note modification is frequently associated with ARMs and one-time close (construction) loans when they are converted to fixed rate loans.

Notice of Default – Written notice to a borrower that a default has occurred and that legal action, including foreclosure, may be taken.

O

One-Time Close Construction Loan – A type of loan that combines the traditional construction loan needed to build a house and the permanent financing into one loan with one set of closing costs.

Origination Fee – Fee charged by a lender to cover administrative costs of processing a loan.

P

Payment Cap – See cap

Per Diem Interest – Per day interest. Depending on the day of the month on which you close your loan, you will have to pay interest from the date of closing to the end of the month. Your first mortgage payment will probably be due the first day of the following month. (e.g., if you close july 22, you will pay 9 days of per diem interest. Your first mortgage payment (interest & principal) will be september 1).

PITI - Acronym for principal, interest, taxes and insurance, the components of a monthly mortgage payment. pronounced P-I-T-I.

Points – See discount points.

Power of Attorney – Legal document authorizing one person to act on behalf of another. For a mortgage closing, a borrower who can not attend the closing could give the other borrower a “power of attorney” to close on their behalf.

Pre-Approval - The process of determining how much money a prospective homebuyer or refinancer will be eligible to borrow prior to application for a loan. A pre-approval includes a preliminary screening of a borrower’s credit history. Information submitted during pre-approval is subject to verification at application. A pre-approval is more comprehensives than a pre-qualification since it does review credit.

Prepaid Expenses – Taxes, insurance and assessments paid in advance of their due dates. These expenses are included at closing.

Prepaid Interest - Interest that is paid in advance of when it is due. Typically charged to a borrower at closing to cover interest on the loan between the closing date and the first payment date.

Prepayment – Full or partial repayment of the principal before the end of the mortgage term.

Prepayment Penalty – Fee charged by a lender for a loan paid off in advance of the mortgage term. It is important to determine if your loan has such a penalty.

Pre-Qualification – The process of determining how much money a prospective homebuyer will be eligible to borrow prior to application for a loan without pulling and reviewing credit. Information submitted during pre-qualification is subject to verification at application.

Primary Residence – The home you live in.

Principal – The amount owed on a loan, not counting interest.

Private Mortgage Insurance (PMI) - See mortgage insurance. “Private” means that it is insurance on a conventional (non-government) mortgage loan.

Purchase Agreement - Contract signed by buyer and seller stating the terms and conditions under which a property will be sold. Also known as sales contract.

Q

none

R

Ratios – Measurement (expressed as a percentage) that compares your monthly liabilities to your gross income. The housing ratio is your proposed mortgage payment divided by your gross monthly income. The debt ratio is all you monthly liabilities (including your mortgage) divided by your gross monthly income. Underwriters will use these ratios to see if your income supports the mortgage payment. Underwriters are usually more flexible on loans with higher down payments and less flexible on low down payment loans.

Real Property – Land and any improvements permanently affixed to it, such as buildings.

Reconveyance - The transfer of property back to the owner when a mortgage loan is fully repaid.

Recording - The act of entering documents concerning title to a property into the public records. The deed of trust/mortgage is typically recorded in order to establish lien position.

Recording Fee – The fee for recording the sale of a property into the public records. Refinancing

Reserves – The amount of money you have after closing to cover your mortgage payments. Reserves are often expressed as “months of payments”. For example, if you had $10,000 after closing and your mortgage payment was $1,000 a month then you would have 10 months of reserves. Some loan programs require a minimum number of months’ reserves.

RESPA – The Real Estate Settlement Procedures Act. RESPA is a federal law that gives consumers the right to review information about loan settlement costs once a borrower has applied. The borrower can review this info after application and again at closing. RESPA also makes it illegal for a business to give “kick-backs” to another business in exchange for a referral of business.

Right to Rescission – Under the provisions of the truth-in-lending act, the borrower’s right, on certain kinds of loans, to cancel the loan within three days of signing a mortgage.

S

Second Home – A home that is not your primary residence. Second homes could be homes that you vacation at or that you bought for someone but don’t rent. If you rent the home, then it is an investment property.

Second Mortgage – An additional mortgage placed on a property that has rights that are subordinate to the first mortgage.

Settlement – See closing

Settlement Costs – See closing costs

Settlement Cost (HUD guide) - Booklet published by HUD that provides an overview of the lending process, and that is given to consumers after completing loan application.

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

T

Tax Impound – Money paid to and held by a lender for annual tax payments.

Tax Lien – Claim against a property for unpaid taxes.

Tax Sale – Public sale of property by the government due to delinquent taxes.

Term – The period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due. (e.g., a 30 year mortgage term)

Title - Document showing evidence of ownership of a property. Also indicates the rights of ownership and possession of the property.

Title Company - A company that insures title to property.

Title Insurance – Insurance which protects the lender (lender’s policy) or the buyer (owner’s policy) against loss due to disputes over ownership of a property.

Title Search – Examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens or other claims against the property. The goal of this search is to have “clear title”.

Transfer Tax - Tax paid when title passes from one owner to another.

Truth-in-Lending Act - Federal law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after application. Also requires the right to rescission period.

U

Underwriting - Process the lender does to determine the likelihood that a borrower will repay on a mortgage and whether to lend the money.

Usury – Interest charged in excess of the legal rate established by law.

V

VA Loans – Fixed-rate loans guaranteed by the U.S. Department of Veterans Affairs. They are designed to make housing affordable for eligible U.S. veterans. VA loans are available to veterans, reservists, active-duty personnel, and surviving spouses of veterans with 100% entitlement. Eligible veterans may be able to purchase a home with no down payment, no cash reserve, no application fee, and lower closing costs than other financing options.

Verification of Deposit (VOD) – Document signed by the borrower’s bank or other financial institution verifying the borrower’s account balance and history. VODs are considered traditional documentation. (Bank statements would be alternative documentation in lieu of the VOD.)

Verification of Employment (VOE) – Document signed by the borrower’s employer verifying the borrower’s position and salary. VOEs are considered traditional documentation. (Paystubs would be alternative documentation in lieu of the VOE.)

W

Walk-Through - A final inspection of a home to check for problems that may need to be corrected before closing.