Mortgage Dictionary

This is a partial list of terms used in the mortgage industry, in hopes to help "demystify" the mortgage process for you. If you find any additional terms that are unfamiliar, please email me and I will answer whatever questions you may have.

 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

Adjustable Rate Mortgage (ARM):
A mortgage that changes interest rate periodically according to a pre-selected index (over which the lender has no control). Typically, these are based on the London InterBank (LIBOR) index, the 1 Year Treasury Bill, or the Cost of Funds Index (COFI).

Adjustment Period: The time between the adjustment dates for an ARM. There are hybrid ARMs that allow for longer fixed periods. For example a 3/1 ARM is fixed for the first 3 years (3/1), then adjusts yearly (3/1).

Amortization Schedule: A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account

Annual Percentage Rate (APR): A calculated rate of interest for a loan over its projected life (the term of the loan). This rate includes the interest, all points (which are considered prepaid interest), mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower. The APR is calculated by a standard formula that all lenders use.

Application Fee: A fee that some lenders charge to accept an application for a loan.

Appraisal: A written report of the estimated value of a property prepared by a certified real estate expert (a.k.a an appraiser).

Asset: Anything of monetary value that is owned by a person. Assets include real property, personal property (such as cars, boats, etc), cash saving in bank accounts, stocks, bonds, mutual funds, 401(k), IRA, etc.

Assumable Mortgage: A mortgage contract that allows a creditworthy buyer from assuming (taking over) the mortgage contract of the seller. Many loans have a "due-on-sale" clause stipulating that the mortgage must be repaid upon sale of the property, making them non-assumable.

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Balloon Mortgage: A mortgage which is payable in full after a period that is shorter than the term. Ideally, the balance is refinanced with the current or another lender. For example, on a 10 year balloon mortgage, the payment is usually calculated over a 30-year period, and the balance at the end of the 10th year must be paid in full, either by cash payment or refinancing the loan.

Bridge Loan (or Swing Loan): A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds of that sale to be used for payment of the closing costs on a new house before the present home is sold. The mortgage payment on the present property typically is not counted when determining your ratios for your new home.

Buy-Down: A payment to the lender from the seller, buyer, or third party which will cause the lender to reduce the interest rate. Sometimes used synonymously with paying points

Cap: A consumer safeguard 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 principle borrowed on the new loan larger than the total money needed to payoff any existing mortgages, closing costs, points, and any additional requirements (i.e. delinquent taxes, etc). In a cash-out refinance, the additional money can be used for paying off higher rate credit cards, home improvement, investments, or any other use as deemed by the borrower.

Certificate of Title: A statement provided by a title company stating that the current owner legally holds the title to the real estate.

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Chain of Title: The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.

Clear Title: A title that is free of liens or legal questions as to the ownership of the property.

Closing: A meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands. Also called "settlement."

Closing Costs: Expenses (over and above the price of the property) incurred by the buyers and 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 the settlement. The average cost of closing is usually about 1 to 3 percent of the mortgage amount but varies depending on the area of the country.

Closing Statement: Also referred to as the HUD1. This is the final statement showing all itemized costs incurred to close on a mortgage loan.

Co-Borrower: Any additional borrower(s) whose income and credit contributes to qualifying for the loan and whose name(s) appears on the loan documents with equal legal obligations.

Collateral: An asset (typically a house, or car) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid.

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Commitment Fee: Fee paid by a potential borrower to a lender for the guarantee by the lender to lend money at a specified rate within a specified time period.

Community Property WROS (Right of Survivorship): Community property with the common law right of survivorship (ROS), so that if one dies, then the other automatically inherits the property.

Comps: An abbreviation for "comparable properties" which are used for comparison purposes in a property appraisal. Comps give a rough idea of the value of a property, by comparing items such as square footage, amenities, lot size, and condition to other similar properties in the area. Comparables give the appraiser a starting point to appraise a fair market value of the subject property.

Conforming Mortgage Loan: A mortgage loan that conforms to regulatory limits such as loan-to-value ratio, term, and other characteristics.

Construction Loan: A loan for financing the cost of construction, as opposed to purchasing a completed new house from a builder.

Contingency: A condition that must be met before a contract is legally binding.

Conventional Mortgage: A mortgage that is not obtained under a federal government insured program, such as FHA or VA.

Cost of Funds Index (COFI): One of the many different indexes that can be used to determine interest rate changes for certain Adjustable Rate Mortgages (ARMs)

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Credit History: A record of an individual's debts. One of several factors lenders use to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Report: A report detailing an individual's credit history and current status of an individual's current credit standing. These reports detail a FICO score, open and closed credit lines, and repayment history.
Debt-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's total monthly payment obligation on long-term debts is divided by net effective income (FHA and VA) or gross monthly income (for conventional loans).

Deed: The legal document conveying title to a property.

Default: Failure to make mortgage payments in the scheduled, agreed upon time frame, or failure to comply with other requirements of the mortgage. Typically loans more than 90 days late are considered in default
Delinquency: Failure to make mortgage payments by the mortgage due dates, but still within the period allowed before actual default is declared. Sometimes referred to as Mortgage Lates

Department of Veterans Affairs: An independent agency of the federal government, which, among other things, provides VA loans to eligible veterans.

Depreciation: A decline in the value of property brought about by age, physical deterioration, functional or economic obsolescence, etc.

Discount Point: An amount payable to the lending institution by the borrower or seller, typically paid in exchange for a lower interest rate. One point = 1% of the loan amount.

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Discounted Loan: When the note rate on a loan is less than the market rate, the lender requires additional points to be paid in exchange for the lower rate.

Down Payment: The cash that a buyer will pay to the seller, in addition to the money from the mortgage loan. Many lenders will require a minimum down payment of 10% of the purchase price, although some lenders are willing to lend with 5%, 3% or even 0% down.

Due-on-Sale Provision: A provision in a mortgage stipulates the remaining balance on the mortgage must be paid if the borrower sells the property for which the mortgage is secured.

Earnest Deposit: Money given by a buyer to a neutral third party (i.e., title company) as part of the purchase price to show that he or she is serious about buying the house.

Equal Credit Opportunity Act (ECOA): A federal law that requires lenders to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, receipt of income from public assistance programs, or past exercising of rights under the Consumer Credit Protection Act.

Equity: The difference between the fair market value of the property and the amount still owed on its mortgage.

Escrow: Funds that are held in trust by a third party, usually for payment of taxes and insurance on real property. This money is typically collected monthly with your mortgage payment (the TI in PITI payments)_

Escrow Account: The account in which a mortgage servicer holds the borrower's escrow payments prior to paying expenses, such as taxes and insurance.

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Escrow Analysis: The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.
Fair Credit Reporting Act: Law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record. Also, if a lender is rejecting a loan request because of adverse credit information, then the lender must inform the borrower of the source of that information.
Fannie Mae (Federal National Mortgage Association - FNMA): A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds. It purchases and sells residential mortgages insured by FHA or guaranteed by the VA in addition to conventional home mortgages.

Federal Housing Administration (FHA): An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.

FHA Mortgage: A mortgage on which the lender is insured by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The main advantage of an FHA mortgage is a lowed required down payment, but the maximum loan amount is lower than what is available for conventional mortgages. Also known as a government mortgage.

FHA Mortgage Insurance: A required small fee paid at closing or as part of the monthly payment of an FHA loan to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of .5% of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

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First Mortgage:
A mortgage that is the primary lien against a property and has priority over any subsequently recorded mortgages in the event that the borrow defaults on the loan.

Fixed Rate Mortgage (FRM): A mortgage in which the interest rate is specified in the mortgage contract and does not change during the life of the loan.

Foreclosure: The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults on a loan.

Gift Letter: A written explanation signed by the individual giving the gift stating that it is a bona fide gift of money and there is no obligation to repay the money at any time.

Good Faith Estimate (GFE): An estimate of charges that a borrower is likely to incur during settlement. A lender is required to provide you with a GFE within 3 days of completing a loan application.
Gross Monthly Income: Your total monthly income earned before taxes are deducted. Sometimes referred to as pre-tax income.

Hazard Insurance: Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy. Typically required by a lender in order to get a mortgage loan.

Homeowners' Association Dues: Fees imposed by condominium or homeowners' associations for maintenance of common areas, such as sidewalks, parks and other community common areas.

HUD: The U.S. Department of Housing and Urban Development.

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Index: A general interest rate to which the interest rate on an ARM is tied. Some commonly used indices include the 1 Year Treasury Bill and the 6 Month LIBOR.
Insured Loan: A loan that is insured for the lender, typically by the FHA or a private mortgage insurer.

Investment Property: Real estate owned that is not intended for owner occupancy (i.e., rental houses, apartment buildings, etc). Also referred to as non-owner occupied.

Jumbo Mortgage: A loan that is larger than the limits set by Fannie Mae and Freddie Mac for conventional mortgages. Because jumbo loans cannot be funded by these two agencies, they typically carry a higher interest rate.
Lien: A legal claim to a property by the lien holder (for mortgages, the lender) in the event the mortgage or property taxes are in default.

Loan-to-Value Ratio (LTV): The ratio of the amount of a loan to the appraised value of the home.

Lock: An option exercise by the buyer to lock in the rates and terms of a loan for a specified amount of time. For examples, a borrower may get a 30-day lock at a rate of 7%. At this point the borrower and lender are bound by the terms of the lock, regardless of the current market conditions.

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Margin: The number of percentage points a lender adds to the index value to calculate the Adjustable Rate Mortgage (ARM)

Maturity: The period of time until the last payment is due on a mortgage loan.

Mortgage: A legal document that the lender a lien as security for payment of the loan for a property.

Mortgage Broker: An individual who is in the business of assisting in the arranging of funding for clients with lenders. The broker does not loan the money directly.

Mortgagee: The mortgage lender.

Mortgagor: The mortgage borrower.

Net Effective Income: Income after taxes have been deducted.

No Income Verification Loan (NIV): A loan that does not require income verification. These loans typically have higher rates in exchange for not verifying income.

Non-Assumption Clause: A statement in a mortgage contract prohibiting the assumption of the mortgage by a third party, without the prior approval of the lender.

Non-Conforming Loan:. Any loan that does not fall under the guidelines set forth by Fannie Mae or Freddie Mac. Loans for amounts higher than the conforming limits, for unusual parameters (100% or greater loans) or loans for individuals with credit problems fall into this category.

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Origination Fee: Fee imposed by the lender to cover certain costs involved with processing the loan. Typical origination fee is one point (one percent of the loan).

PITI: Principal, interest, taxes and insurance.

Points: Fees charge by the mortgage lender payable at closing. 1 point = 1% of the total amount of the mortgage loan.

Prepaid Expenses: Expenses of property that are paid I;n advance (and placed in escrow accounts) prorated by the date of closing. (i.e. a loan that closes on the 20th of the month will have less in prepaid expenses than one that closes on the 5th).

Prepayment Penalty: A charge imposed by a mortgage lender on a borrower who wants to pay off a mortgage loan in advance of schedule.

Primary Residence: A residence in which the borrower intends to occupy as his or her main residence.

Principal: The amount of debt, not including interest.

Private Mortgage Insurance (PMI): Insurance provided by private insurers that protects a lender in the cause of a mortgage default. Generally required for loans with loan-to-value (LTV) ratio greater than 80%.

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Processing: The preparation of a mortgage loan application and supporting documentation to be delivered to a lender for loan consideration.

Purchase Contract: An agreement between the buyer and the seller of the property, which details the price and terms of the sale. Also known as a sales contract.

Qualifying Ratios: The ratio of a prospective borrowers fixed monthly expenses to their gross monthly income, used in determining the maximum amount the borrower qualifies for. The fixed monthly expenses would include PITI along with other fixed expenses such as student loans, car loans, or minimum credit card payments.

Rate Cap: A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan on Adjustable Rate Mortgages (ARMs).

Real Assets: Real estate or real property owned by an individual or business.

Recision: The right to cancel a mortgage contract (in some cases) 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.

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Refinancing: The process of paying off one loan by securing a new loan using the same property as security.

Second Mortgage: A mortgage made subsequent to the first mortgage and is always subordinate to the first mortgage. Typically caries a higher rate than the first mortgage.

Term: The time limit within which a loan must be repaid.

Title: The document that provides legal evidence that the person has the right to the possession of the land.

Title Insurance: Insurance against loss resulting from defects of title to a specifically described parcel of real property.

Title Search: An investigation of public records into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.

Truth-in-Lending Act: A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

Underwriting: Analysis of risk and setting of an appropriate rate and term for a mortgage on a given property for given borrowers.

VA Mortgage Funding Fee: A premium of up to 3.0% (depends on down payment amount) which is paid on a VA-backed loan.

Zero Point Option: An option which allows the borrower not to pay the points associated with the loan origination fee, but this savings is offset by a slightly higher loan interest rate

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