Mortgage Terminology and Meaning
So many words are used in the mortgage business so here is a list of terms that will help you understand what everything means:
A legal term referring to the acceptance of an offer. A buyer offers to buy and the seller accepts the offer.
A running record of business transactions showing the amount of money owed. They are considered liabilities by lenders.
Latin for, “according to value.” It is a method of imposing a tax on the ownership of real estate property.
Adjustable-Rate Mortgage (ARM):
A home loan that permits the lender to adjust its interest rate periodically during the life of the loan on the basis of changes in a specified financial index. ARMs typically start with a lower interest rate that gradually rises over time. If the financial index to which the loan is tied decreases, the interest rate of your ARM follows suit. Similarly, if financial index rate rises, so does your loan’s interest rate and monthly payment. The amount that the interest can fluctuate is limited by caps.
Adjusted Gross Income:
Total income including your salary and bonuses, and any rental or seasonal income.
TA person appointed by the probate court to administer the estate of a deceased person.
Agreement of Sale:
A written document in which a purchaser agrees to buy property under certain given conditions and the seller agrees to sell under certain given conditions. Also known as a ‘Sales Contract.’
The process of gradually paying down the principal balance of the loan over the stated term of the loan. As each monthly loan payment is made, a portion of the payment is credited to pay the interest costs of the loan and the remaining portion of the payment is applied to reduce the principal balance of the loan.This is in contrast to an interest-only payment where the principal balance is never reduced.
Annual Percentage Rate (APR):
This is a measure of the cost of credit, expressed as a yearly rate. The APR takes into account the amount financed, the loan interest rate, and the finance charges (fees and points) and the amounts and timing of the payments.
A sum of money received at fixed intervals, such as series of equal or nearly equal payments to be made over a period of time, or it may be a lump sum payment to be made at some time in the future. The installment payments due to a landlord under the terms of a lease are an example of an annuity. The installment payments due to a lender on a note are another such example.
The fee to be paid to the appraiser providing the appraisal service.
A professional estimate of your property’s current market value at a given point in time.
The amount by which the value of a piece of property increases over time.
See Annual Percentage Rate.
See Adjustable Rate Mortgage.
A value placed upon property by a tax assessor.
Determining the value of property for the purpose of imposing a tax, or the amount of the tax imposed.
Anything of monetary value that is owned by a person. Assets include real estate property, personal property, bank accounts, stocks, mutual funds, vehicles, stamp collections, and even enforceable claims against others.
When a buyer takes over the loan payments and obligations of the seller. If the buyer defaults, however, both the buyer and seller are responsible for the debt.
See Total Debt Ratio.
A financial statement that shows the overall assets, liabilities, and net worth of an individual or entity as of a specific date.
A balloon mortgage is a loan typically used for short-term financing and which offers lower interest rates for usually five, seven or ten years. At the end of this term, the borrower must pay off the entire outstanding balance in a lump-sum (balloon) payment, or refinance the balance. During the initial term, the regular monthly payments made, when aggregated, do not fully amortize (pay off) the outstanding principal balance.
A court action under the United States Federal Bankruptcy Code by which a debtor’s debts may be excused or rescheduled under specified circumstances.
(1) A person entitled to the proceeds of a trust; (2) A person who receives profit from an estate, the title of which is entrusted to a trustee; (3) The lender on a deed of trust.
Bill of Sale:
A written document that serves as evidence of the transfer of title to personal property.
An independent middleman who arranges deals between borrowers and lenders. A broker is compensated for his services by the borrower and/or by the lender.
A line set by law or deed restriction a certain distance from the street line, in front of which an owner cannot build on his lot. Also called a setback line.
A limit on how much the loan interest rate may increase or decrease per adjustment and/or over the term of the loan for an adjustable-rate mortgage.
Income from the sale of an asset rather than from the general business activity. Capital gains are generally taxed at a lower rate then ordinary income.
IAny structure or component erected as a permanent improvement to real estate property.
Income generated by a rental property. It is determined by subtracting vacancy allowances and collection costs, operating expenses and debt-servicing costs from the property ’s scheduled gross income.
Certificate of Eligibility:
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs mortgage.
Certificate of Reasonable Value (CRV):
IA document issued by the Department of Veterans Affairs that establishes the maximum value and loan amount for a Veterans Affairs mortgage.
Certificate of Title:
A statement usually provided by a title company or attorney stating that the title to a piece of real property is legally held by the current owner.
A title that is free of liens or legal questions regarding ownership of the property.
Closed-End Home Equity Loan:
A loan which is to be repaid in full (along with any interest and finance charges) by a specified future date.
Costs paid by the borrower in addition to the down payment to close a loan, including title insurance premiums, appraisal fees, lender fees, closing agent fees, recording fees, etc.
For a home purchase, the time when loan documents are signed, legal title is transferred from the seller to the buyer, and funds are dispersed from the buyer and the lender to the seller. For a refinance, there is no transfer of ownership, but the closing includes repayment in full of all sums owed the old lender.
A written offer by a lender, which states the terms under which it agrees to lend money to a home buyer. Also known as a ‘loan commitment.’
Portions of a building, land and amenities owned (or managed) by a planned unit development (PUD) or condominium project’s homeowners’ association. Common areas are used by a group of the unit owners, who share in the common expenses of their operation and maintenance. They include swimming pools, tennis courts and other recreational facilities, as well as common corridors of buildings or parking areas.
An abbreviation for “comparable properties,” in the appraisal process. Comparables are properties similar to the one under consideration for appraisal.
Interest charged on interest not paid when due that is added to principal and thereafter bears interest at the contracted for interest rate. Conforming Home Loan The current confirming loan limit as of December 2005 is $417,000 and below.
Conforming Home Loan:
The current confirming loan limit as of December 2005 is $417,000 and below.
A short-term interim loan for financing the cost of construction. Consumer Reporting AgencyAn organization that creates reports used by lenders to help determine a potential borrower’s credit history.
Consumer Reporting Agency:
An organization that creates reports used by lenders to help determine a potential borrower’s credit history.
A clause in a contract stating that the buyer or seller must meet a given condition before the purchase can be completed.
A home loan other than those insured or guaranteed by a government agency such as the Federal Housing Administration (FHA) or Department of Veterans’ Affairs (VA).
The history of whether the borrower has met financial obligations on time in the past.
Credit Life Insurance:
A type of insurance, often offered by lenders in which the amount of the policy matches the loan balance at any given time, designed so that the loan will be paid off in full in the event of the death of the borrower. No one is required to buy credit life insurance.
A rating given to a person by credit bureaus (ex. Trans Union or Experian) based on experience managing credit (credit cards, mortgage, loans, etc.), reliability making loan payments current financial condition (income, savings, outstanding debt, etc.) and other factors. People with strong credit ratings tend to qualify for lower-cost loans, while people with weaker ratings might have to pay a higher interest rate. Credit Report-A report put together by one of the three major independent credit agencies that shows your credit history. You can get copies of your credit report by contacting the three agencies: Experian (888-397-3742), Equifax (800-997-2493) and Trans Union (800-888-4213).
See Certificate of Reasonable Value.
The combined principal and interest due on your loan each month over a period of time.
Lenders use this ratio to determine how much of a loan a borrower is qualified for. Debt-to-income ratio is the total amount of monthly debt payments, including credit cards and other loans, divided by total gross monthly income.
Deed of Trust
An document that transfers the bare legal title of a property to a trustee to be held pending fulfillment of an obligation, usually the repayment of a loan to athe beneficiary (the lender). Some states use a deed of trust in lieu of a mortgage. (A ‘mortgage’ is loan used to finance the purchase of real estate whereby the borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.)
The legal document conveying title to a property.
Failure to pay loan payments when due.
Being late with loan payments.
Loss of value in real property brought about by age, physical deterioration, economic conditions, functional or economic obsolescence.
A bank or lending institution that deals directly with its customers. Mortgage brokers or other middlemen are not involved.
Fees paid to the lender for the loan
One point equals one percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.
The portion of the purchase price that a buyer pays up front, in cash, which reduces the amount of the loan needed to purchase the property.
A provision in a loan that allows the lender to demand repayment of the loan amount in full if a borrower sells, transfers or otherwise impairs legal title to the property that serves as security for the loan.
Earned and Unearned Income:
Income derived from an individual’s personal efforts, from work, from services rendered or from goods produced and sold. It also includes pension and annuity income, which is based on income that was previously earned, income that is derived from sources not involving the individual’s direct personal efforts such as interest, dividends, rental income, pension benefits, and the like.
A sum of money given as evidence of one’s good faith, used to bind or secure a real estate sale. Also known as a ‘Binder.’
The right, privilege or interest that one party has in the land of another, created by grant or agreement for a specific purpose. An example would be a right of way.
Effective Gross Income:
Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source.
The signature on the back of a check, bill, note or similar document. It is required on negotiable documents.
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.
The difference between the market value of a house and the amount still owed on the mortgage. It’s value of a property minus outstanding mortgage debt and other liens. Increased equity positions you as a safer risk to lenders and enhances your financial position by lowering or eliminating some expenses, such as insurance and rates.
An item of value, money, or documents deposited with a neutral, third party to be delivered to another party to a transaction upon the fulfillment of a condition. For example, a buyer’s earnest money deposit is put into escrow and is not delivered to the seller until the seller performs concurrent obligations such as transferring legal title into the buyer’s name and placing the deed into escrow.
Exclusive Agency Listing:
A written document giving one agent the right for a specified time to sell a property, but reserving the right of the owner to sell the property himself or herself without payment of a commission to the agent.
Exclusive Right to Sell Listing:
A written agreement between an owner and an agent giving the agent the right to collect a commission if the property is sold by anyone during the term of his or her agreement.
Fair Credit Reporting Act:
A consumer protection law that regulates the disclosures of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit report.
Fair Market Value:
The highest price that a willing buyer would pay and the lowest the willing seller willing would accept. Neither party is compelled to buy or sell in this situation.
A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds. Also known as Federal National Mortgage Association (FNMA).
Also known as a “government loan”,” an FHA loan is guaranteed by the Federal Housing Administration. FHA issues specific guidelines for mortgages
See Freddie Mac.
A person in a position of trust and confidence, for instance a principal and broker. A broker as a fiduciary owes certain loyalty that cannot be breached.
A fee paid to a mortgage broker for finding a mortgage loan for a prospective borrower.
In a home purchase transaction, a lien is a legal claim held by the lender against the property being purchased that must be paid off when the property is sold. A first lien is a claim holding the highest priority, usually in favor of the lender, which must be paid first, ahead of other liens against the same property, when the property is sold.
A loan with an interest rate and monthly payment that stays the same over the entire term of the loan.
Insurance that would provide reimbursement for physical property damage resulting from flooding. It is required for properties that are located in federally designated flood areas.
See Fannie Mae.
The legal process by which a borrower in default under a loan is deprived of his or her right to ownership in the property used as collateral for the loan. This usually involves a sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
A major secondary mortgage market investor. It is a government sponsored,privately owned corporation that is a major purchaser of mortgages from lenders. Also known as ‘Federal Home Loan Mortgage Corporation’ (FHLMC).
Also called a Top Ratio. This is a calculation of your total monthly housing expenses (principal, interest, taxes and insurance payments) divided by your monthly gross income. Lenders use a front-end ratio as a guideline to see if you qualify for a loan.
Fully Amortized ARM:
An adjustable-rate mortgage (ARM) with a monthly payment of principal and interest that is sufficient to pay off the entire principal and interest over the term of the loan.
Good Faith Estimate:
A disclosure that must be given by the lender to all mortgage loan applicants within three business days of an application. It is an estimate of all settlement charges likely to be incurred at closing.
Home Equity Lines of Credit (HELOC):
A mortgage, usually secured as a second or junior lien against the property, 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, 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, using a special credit card, or in other ways permitted by the lender.
Home Equity Loan:
A loan secured by a second deed of trust on a house, typically used as a home improvement loan.
An owner’s financial interest in a property at a specific moment in time. Equity is calculated by subtracting the amount still owed on all outstanding loans against the property from the then fair market value of the property.
Home Improvement Loan:
A loan made for the purpose of paying for improvements to your home such as remodeling a kitchen or bathroom. This loan may or may not be secured the property
Acronym for the U.S. Department of Housing and Urban Development.
A document that gives a breakdown of costs that the seller and buyer may pay at closing.
Property that produces income from residential or commercial rentals.
The base rate used by a lender to measure the difference between the current interest rate charged on an adjustable-rate mortgage (ARM) and that earned by other types of investments. This difference is then used to adjust the interest rate a lender will charge on an ARM. The base rate is externally set. Examples include LIBOR, the Prime Rate and Treasury indices.
Interest Rate Cap:
A limit on the amount that the interest rate can rise or fall during a specified period of time on an adjustable-rate mortgage.
The amount of money you are being charged to borrow money expressed as an annual percentage. When you make your loan payments every month, you are paying back the amount you borrowed (the principal) plus interest. For example, if you borrow $1,000 for one year and have a 10 percent simple interest rate, you will end up repaying your lender $1,100.
A lien or charge imposed against property without consent of owner. Examples: taxes, assessments, federal income tax liens, judgments, etc.
Also known as a ‘non-conforming’ mortgage. Non-conforming loans usually incur a rate and origination fee premium. The current conforming loan limit for a one-unit property in the continental US is $417,000. Multiple conforming loan limits are as follows: on a two- unit property the limit is $533,850, three-unit $645,300 and four-unit is $801,950. In Hawaii conforming loan limits are: one-unit $625,500, two-unit $800,775, three-unit $967,950, and on a four-unit property the limit is $1,202,925. Loan amounts greater than this are considered non-conforming or jumbo mortgages.Note: We do not lend in Alaska, Guam, and the U.S. Virgin Islands.
The bank or mortgage company offering the loan.
A legal hold or claim of a creditor on the property of another.
A limit on how high the interest rate on an adjustable-rate mortgage can rise over the lifetime of the loan.
Loan-to-Value Ratio (LTV):
A percentage computed by dividing the loan amount by the lesser of the selling price or the appraised value of the property. It is the percentage that shows how much equity a borrower will have in a home. Lock- in A written agreement guaranteeing a home buyer a specific interest rate on a home loan provide that the loan is closed within a certain period of time , such as 30 or 60 days. Lock-in agreements may or may not involve paying a fee to the lender.
Some loan products require only that applicants state the source of their income without providing supporting documentation such as tax returns.
See Loan-to-Value Ratio.
The number of percentage points a lender adds to the index rate to determine the interest rate applicable for an ARM.
A person who, for a fee, brings together a borrower and lender and handles the necessary applications for the borrower to obtain a loan against real estate property by giving a mortgage or deed of trust as security. Also called loan broker.
Also known as ‘Private Mortgage Insurance’ (PMI). Insurance that protects mortgage lenders against loss in the event of default by the borrower.
A loan used to finance the purchase of real estate whereby the borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
A person or organization that lends money for a home.
A person who borrows money for a home.
Value remaining after subtracting the liabilities from the assets of a company or an individual.
Non-Conforming or “Subprime” Loan:
See ‘Jumbo Mortgage’
See Total Debt Ratio.
The date on which the loan is initiated or funded.
Origination Fees or Points:
The fees or points a lender charges to set-up and process a loan and which is usually paid at closing. Usually based on the amount of the loan, one point equals one percent of the loan amount.
The complete repayment of loan principal, interest and any other sums due; payoffs occur either over the full term of the loan through monthly amortization or through prepayments.
Principal, interest, taxes and insurance-the components of a monthly mortgage payment.
See Private Mortgage Insurance.
See “Discount Points’
A process that lenders use to determine how much money they would lend you based on a thorough review of your financial situation. Lenders issue a pre-approval letter, which strengthens your position when bidding on a home, as it shows sellers that you will be able to raise the funds needed to purchase the home.
Preliminary Title Report:
A report made by a title company stating whether there are any other claims to ownership of a property. It is a necessary step before a mortgage loan can be approved.
Those expenses of property that are paid in advance of their due date and will usually be prorated upon sale, such as taxes, insurance, rent, etc.
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.
An informal process in which a lender offers an opinion on how much money you may be able to borrow. This opinion is based entirely on the financial information you provide and is neither binding nor necessarily accurate because lenders have not yet verified your financial information.
The amount of money you are borrowing, not including any fees, costs or interest.
Private Mortgage Insurance (PMI):
A type of insurance which protects the lender in the event the borrower defaults on the loan. PMI is generally required where a borrower is unable to produce a down payment equal to at least 20% of the total purchase price. The premium for PMI is paid by the borrower and is included in each monthly mortgage payment. In a refinancing scenario, PMI is typically required when the amount financed is greater than 80 percent of the appraised value of the property.
The document signed by a borrower promising repayment of a loan. It shows the amount of monthly payments, interest rate, first payment date, last payment date, and the late charge and prepayment provisions.
A written promise to pay a specific amount for a property at a specified time. The purchase contract is a written statement of the offer, which both the borrower and the seller will sign if the offer is accepted.
A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.
The process of obtaining a new loan to pay off an existing loan. Refinancing is done for many reasons including, but not limited to: replacing higher-interest debt with a loan that has a lower interest rate; to switch from a fixed to variable rate loan, or vice versa; or to eliminate a balloon payment. A cash-out refinancing is one that involves you paying off your loan and borrowing an additional amount which you actually receive in hand to spend as you deem fit. In a refinance, the entire new loan amount is usually always secured by a lien on your home.
An additional loan on a property which is secured by a lien junior to the senior loan. which is . These loans often carry a shorter term and a higher interest rate than the original first or senior loan.
Secondary Mortgage Market:
A market in which existing mortgages and mortgage backed securities are traded.
When the current owner of a house holds the mortgage loan for the buyer.
Servicing (or Loan Servicing):
Supervising and administering a loan after it has been made. This involves such things as collecting the payments, keeping accounting records, computing interest and principal, etc.
The period of time which covers the life of the loan. TILA See Truth-in-Lending Act.
A company that searches for titles and insures title claims.
An insurance policy that protects the owner of a title from loss resulting from disputes over ownership claims.
Evidence of a person’s right to possession and ownership of a property.
Also called a Front-End Ratio.
Total Debt Ratio
A ratio that indicates what portion of a person’s monthly income goes toward paying debts. It is calculated as an individual’s total monthly debt divided by gross monthly income and expressed as a percentage. Total monthly debt includes such expenses as home loan payments (made up of PITI), credit card payments, child support and other loan payments.
A Federal law that requires lenders to fully disclose, in writing, the terms and conditions of a home loan, including the annual percentage rate (APR) and other charges.
The analysis of risk involved in making a loan to determine whether the risk is acceptable to the lender. Underwriting involves evaluating the property as outlined in the appraisal, and also evaluating the borrower’s ability and propensity to repay the loan.
A loan guaranteed by the Department of Veterans Affairs.
The estimation of a property’s value typically gathered by conducting an appraisal.
Variable Interest Rate:
An interest rate that fluctuates as the prevailing rate moves up or down. In mortgages there are usually maximums regarding the frequency and the amount of fluctuation.