Mortgage Specific Terms and Definitions
-A-
- adjustable-rate mortgage (ARM) A mortgage that changes interest
rate periodically based upon the changes in a specified index.
- adjustment date The date on which the interest rate changes for an
adjustable-rate mortgage (ARM).
- adjustment period The period that elapses between the adjustment
dates for an adjustable-rate mortgage (ARM).
- amortization The repayment of a mortgage loan by installments with
regular payments to cover the principal and interest.
- amortization term The amount of time required to amortize the
mortgage loan. The amortization term is expressed as a number of months. For
example, for a 30-year fixed-rate mortgage, the amortization term is 360
months.
- annual percentage rate (APR) The cost of a mortgage stated as a
yearly rate; includes such items as interest, mortgage insurance, and loan
origination fee (points).
- application A form, commonly referred to as a 1003 form, used to
apply for a mortgage and to provide information regarding a prospective
mortgagor and the proposed security.
- appraisal A written analysis of the estimated value of a property
prepared by a qualified appraiser.
- appraiser A person qualified by education, training, and
experience to estimate the value of real property and personal
property.
- appreciation An increase in the value of a property due to changes
in market conditions or other causes. The opposite of depreciation.
- asset Anything of monetary value that is owned by a person. Assets
include real property, personal property, and enforceable claims against
others (including bank accounts, stocks, mutual funds, and so on).
- assignment The transfer of a mortgage from one person to another.
- assumable mortgage A mortgage that can be taken over
("assumed") by the buyer when a home is sold.
- assumption The transfer of the seller's existing mortgage to the
buyer.
- assumption clause A provision in an assumable mortgage that allows
a buyer to assume responsibility for the mortgage from the seller. The loan
does not need to be paid in full by the original borrower upon sale or
transfer of the property.
- assumption fee The fee paid to a lender (usually by the purchaser
of real property) resulting from the assumption of an existing mortgage. (Return
to Top)
-B-
- balance sheet A financial statement that shows assets,
liabilities, and net worth as of a specific date.
- balloon mortgage A mortgage that has level monthly payments that
will amortize it over a stated term but that provides for a lump sum payment
to be due at the end of an earlier specified term.
- balloon payment The final lump sum payment that is made at the
maturity date of a balloon mortgage.
- bankrupt A person, firm, or corporation that, through a court
proceeding, is relieved from the payment of all debts after the surrender of
all assets to a court-appointed trustee.
- bankruptcy A proceeding in a federal court in which a debtor who
owes more than his or her assets can relieve the debts by transferring his
or her assets to a trustee.
- before-tax income Income before taxes are deducted.
- beneficiary The person designated to receive the income from a
trust, estate, or a deed of trust.
- biweekly payment mortgage A mortgage that requires payments to
reduce the debt every two weeks (instead of the standard monthly payment
schedule). The 26 (or possibly 27) biweekly payments are each equal to
one-half of the monthly payment that would be required if the loan were a
standard 30-year fixed-rate mortgage, and they are usually drafted from the
borrower's bank account. The result for the borrower is a substantial
savings in interest.
- blanket mortgage The mortgage that is secured by a cooperative
project, as opposed to the share loans on individual units within the
project.
- bond An interest-bearing certificate of debt with a maturity date.
An obligation of a government or business corporation. A real estate bond is
a written obligation usually secured by a mortgage or a deed of trust.
- breach A violation of any legal obligation.
- bridge 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 to be used for closing on a new house before the present home
is sold. Also known as "swing loan."
- broker (mortgage) A lender who, for a commission or a fee, places a
loan with any possible number of investors, the investor becoming the actual
lender.
- buydown mortgage A temporary buydown is a mortgage on which an
initial lump sum payment is made by any party to reduce a borrower's monthly
payments during the first few years of a mortgage. A permanent buydown
reduces the interest rate over the entire life of a mortgage. (Return
to Top)
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- call option A provision in the mortgage that gives the mortgagee
the right to call the mortgage due and payable at the end of a specified
period for whatever reason.
- cap A provision of an adjustable-rate mortgage (ARM) that limits
how much the interest rate or mortgage payments may increase or
decrease.
- capital improvement Any structure or component erected as a
permanent improvement to real property that adds to its value and useful
life.
- cash-out refinance A refinance transaction in which the amount of
money received from the new loan exceeds the total of the money needed to
repay the existing first mortgage, closing costs, points, and the amount
required to satisfy any outstanding subordinate mortgage liens. In other
words, a refinance transaction in which the borrower receives additional
cash that can be used for any purpose.
- Certificate of Eligibility A document issued by the federal
government certifying a veteran's eligibility for a Department of Veterans
Affairs (VA) mortgage.
- Certificate of Reasonable Value (CRV) A document issued by the
Department of Veterans Affairs (VA) that establishes the maximum value and
loan amount for a VA mortgage.
- certificate of title A statement provided by an abstract company,
title company, or attorney stating that the title to real estate is legally
held by the current owner.
- 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.
- change frequency The frequency (in months) of payment and/or
interest rate changes in an adjustable-rate mortgage (ARM).
- clear title A title that is free of liens or legal questions as to
ownership of the property.
- closing A meeting at which a sale of a property is finalized by the
buyer signing the loan documents, deed of trust, and paying for the
property. Also called "settlement."
- closing cost item A fee or amount that a home buyer must pay
at closing for a single service, tax, or product. Closing costs are made up
of individual closing cost items such as origination fees and attorney's
fees. Many closing cost items are included as numbered items on the HUD-1
statement.
- closing costs Expenses (over and above the price of the property)
incurred by buyers and sellers in transferring ownership of a property.
Closing costs normally include an origination fee, an attorney's fee, taxes,
an amount placed in escrow, and charges for obtaining title insurance and a
survey. Closing costs percentage will vary according to the area of the
country.
- closing statement Also referred to as the HUD1. The final statement
of costs incurred to close on a loan or to purchase a home.
- cloud on title Any conditions revealed by a title search that
adversely affect the title to real estate. Usually clouds on title cannot be
removed except by a quitclaim deed, release, or court action.
- collateral An asset (such as a car or a home) that guarantees the
repayment of a loan. The borrower risks losing the asset if the loan is not
repaid according to the terms of the loan contract.
- collection The efforts used to bring a delinquent mortgage current
and to file the necessary notices to proceed with foreclosure when
necessary.
- co-maker A person who signs a promissory note along with the
borrower. A co-maker's signature guarantees that the loan will be repaid,
because the borrower and the co-maker are equally responsible for the
repayment. See endorser.
- commission The fee charged by a broker for negotiating a loan
transaction. A commission is generally a percentage of the loan.
- commitment letter A formal offer by a lender stating the terms
under which it agrees to lend money to a home buyer. Also known as a
"loan commitment."
- common areas Those portions of a building, land, and amenities
owned (or managed) by a planned unit development (PUD) or condominium
project's homeowners' association (or a cooperative project's cooperative
corporation) that are used by all of the unit owners, who share in the
common expenses of their operation and maintenance. Common areas include
swimming pools, tennis courts, and other recreational facilities, as well as
common corridors of buildings, parking areas, means of ingress and egress,
etc.
- Community Home Improvement Mortgage Loan An alternative financing
option that allows low- and moderate-income home buyers to obtain 95 percent
financing for the purchase and improvement of a home in need of modest
repairs. The repair work can account for as much as 30 percent of the
appraised value.
- community property A form of ownership under which property
acquired during a marriage is presumed to be owned jointly unless acquired
as separate property of either spouse. Texas is a community property state.
- comparables An abbreviation for "comparable properties";
used for comparative purposes in the appraisal process. Comparables are
properties like the property under consideration; they have reasonably the
same size, location , and amenities and have recently been sold. Comparables
help the appraiser determine the approximate fair market value of the
subject property.
- condominium A real estate project in which each unit owner has
title to a unit in a building, an undivided interest in the common areas of
the project, and sometimes the exclusive use of certain limited common
areas.
- condominium conversion Changing the ownership of an existing
building (usually a rental project) to the condominium form of
ownership.
- construction loan A short-term, interim loan for financing the cost
of construction. The lender makes payments to the builder at periodic
intervals as the work progresses.
- consumer reporting agency (or bureau) An organization that prepares
reports that are used by lenders to determine a potential borrower's credit
history. The agency obtains data for these reports from a credit repository
as well as from other sources.
- contingency A condition that must be met before a contract is
legally binding. For example, home purchasers often include a contingency
that specifies that the contract is voidable if the purchaser cannot obtain
financing per the terms of the contract.
- contract An oral or written agreement to do or not to do a certain
thing.
- conventional mortgage A mortgage that is not insured or guaranteed
by the federal government.
- convertibility clause A provision in some adjustable-rate mortgages
(ARMs) that allows the borrower to change the ARM to a fixed-rate mortgage
at specified timeframes after loan origination.
- convertible ARM An adjustable-rate mortgage (ARM) that can be
converted to a fixed-rate mortgage under specified conditions.
- cooperative (co-op) A type of multiple ownership in which the
residents of a multiunit housing complex own shares in the cooperative
corporation that owns the property, giving each resident the right to occupy
a specific apartment or unit.
- corporate relocation Arrangements under which an employer moves an
employee to another area as part of the employer's normal course of business
or under which it transfers a substantial part or all of its operations and
employees to another area because it is relocating its headquarters or
expanding its office capacity.
- cost of funds index (COFI) An index that is used to determine
interest rate changes for certain adjustable-rate mortgage (ARM) plans. It
represents the weighted-average cost of savings, borrowings, and
advances.
- covenant A clause in a mortgage that obligates or restricts the
borrower and that, if violated, can result in foreclosure.
- credit An agreement in which a borrower receives something of value
in exchange for a promise to repay the lender at a later date.
- credit history A record of an individual's open and fully
repaid debts. A credit history helps a lender to determine whether a
potential borrower has a history of repaying debts in a timely manner.
- credit report A report of an individual's credit history prepared
by a credit bureau and used by a lender in determining a loan applicant's
creditworthiness. See merged credit report.
- credit repository An organization that gathers, records, updates,
and stores financial and public records information about the payment
records of individuals who are being considered for credit. (Return
to Top)
-D-
- debt An amount owed to another.
- deed The legal document conveying title to a property.
- deed-in-lieu A deed given by a mortgagor to the mortgagee to
satisfy a debt and avoid foreclosure.
- deed of trust The document used in some states instead of a
mortgage; title is conveyed to a trustee.
- default Failure to make mortgage payments on a timely basis or to
comply with other requirements of a mortgage.
- delinquency Failure to make mortgage payments when mortgage
payments are due.
- deposit A sum of money given to bind the sale of real estate, or a
sum of money given to ensure payment or an advance of funds in the
processing of a loan.
- depreciation A decline in the value of property; the opposite of
appreciation.
- down payment The part of the purchase price of a property that the
buyer pays in cash and does not finance with a mortgage.
- due-on-sale clause A provision in a mortgage that allows the lender
to demand repayment in full if the borrower sells or transfers the property
that serves as security for the mortgage. (Return to Top)
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- earnest money deposit A deposit made by the potential home buyer to
show that he or she is serious about buying the house.
- easement A right of way giving persons other than the owner access
to or over a property.
- effective age An appraiser's estimate of the physical condition of
a building. The actual age of a building may be shorter or longer than its
effective age.
- 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, but other income may qualify if it
is significant and stable.
- encumbrance Anything that affects or limits the fee simple title to
a property, such as mortgages, leases, easements, or restrictions.
- endorser A person who signs ownership interest over to another
party. Contrast with co-maker.
- 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.
- equity A homeowner's financial interest in a property. Equity is
the difference between the fair market value of the property and the amount
still owed on its mortgage.
- escrow An item of value, money, or documents deposited with a third
party to be delivered upon the fulfillment of a condition. For example, the
deposit by a borrower with the lender of funds to pay taxes and insurance
premiums when they become due, or the deposit of funds or documents with an
attorney or escrow agent to be disbursed upon the closing of a sale of real
estate.
- escrow account The account in which a mortgage servicer holds the
borrower's escrow payments prior to paying property expenses.
- 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.
- escrow collections Funds collected by the servicer and set
aside in an escrow account to pay the borrower's property taxes, mortgage
insurance, and hazard insurance.
- escrow disbursements The use of escrow funds to pay real estate
taxes, hazard insurance, mortgage insurance, and other property expenses as
they become due.
- escrow payment The portion of a mortgagor's monthly payment that is
held by the servicer to pay for taxes, hazard insurance, mortgage insurance,
lease payments, and other items as they become due. Known as
"impounds" or "reserves" in some states.
- estate The ownership interest of an individual in real property.
The sum total of all the real property and personal property owned by an
individual at time of death.
- eviction The lawful expulsion of an occupant from real property. (Return
to Top)
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- 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
one's credit record.
- fair market value The highest price that a buyer, willing but not
compelled to buy, would pay, and the lowest a seller, willing but not
compelled to sell, would accept.
- Fannie Mae A congressionally chartered, shareholder-owned company
that is the nation's largest supplier of home mortgage funds. Fannie Mae's
Community Home Buyer's Program An income-based community lending model,
under which mortgage insurers and Fannie Mae offer flexible underwriting
guidelines to increase a low- or moderate-income family's buying power and
to decrease the total amount of cash needed to purchase a home. Borrowers
who participate in this model are required to attend pre-purchase home-buyer
education sessions.
- 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.
- fee simple The greatest possible interest a person can have in real
estate.
- FHA mortgage A mortgage that is insured by the Federal Housing
Administration (FHA). Also known as a government mortgage.
- finder's fee A fee or commission paid to a mortgage broker for
finding a mortgage loan for a prospective borrower.
- first mortgage A mortgage that is the primary lien against a
property.
- fixed-rate mortgage (FRM) A mortgage in which the interest rate
does not change during the entire term of the loan.
- flood insurance Insurance that compensates for physical property
damage resulting from flooding. It is required for properties located in
federally designated flood areas.
- foreclosure The legal process by which a borrower in default
under a mortgage is deprived of his or her interest in the mortgaged
property. This usually involves a forced sale of the property at public
auction with the proceeds of the sale being applied to the mortgage
debt.
- fully amortized ARM An adjustable-rate mortgage (ARM) with a
monthly payment that is sufficient to amortize the remaining balance, at the
interest accrual rate, over the amortization term. (Return to
Top)
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- good faith estimate An estimate of charges which a borrower is
likely to incur in connection with a settlement.
-H-
- hazard insurance Insurance protecting against loss to real
estate caused by fire, some natural causes, vandalism, etc., depending upon
the terms of the policy.
- housing ratio The ratio of the monthly housing payment in total
(PITI - Principal, Interest, Taxes, and Insurance) divided by the gross
monthly income. This ratio is sometimes referred to as the top ratio or
front end ratio.
- HUD The U.S. Department of Housing and Urban Development.
-I-
- index A published interest rate to which the interest rate on
an Adjustable Rate Mortgage (ARM) is tied. Some commonly used indexes
include the 1 Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost
of Funds (COFI). (Return to Top)
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-K-
-L-
- lien An encumbrance against property for money due, either
voluntary or involuntary.
- lifetime cap A provision of an ARM that limits the highest rate
that can occur over the life of the loan.
- loan to value ratio (LTV) The ratio of the amount of your loan to
the appraised value of the home. The LTV will affect programs available to
the borrower and generally, the lower the LTV the more favorable the terms
of the programs offered by lenders.
- lock-in A written agreement guaranteeing the home buyer a specified
interest rate provided the loan is closed within a set period of time. The
lock-in also usually specifies the number of points to be paid at closing. (Return
to Top)
-M-
- margin The number of percentage points a lender adds to the
index value to calculate the ARM interest rate at each adjustment
period.
- mortgage A legal document that pledges a property to the lender as
security for payment of a debt
- mortgage disability insurance A disability insurance policy which
will pay the monthly mortgage payment in the event of a covered disability
of an insured borrower for a specified period of time.
- mortgage insurance (MI) Insurance written by an independent
mortgage insurance company protecting the mortgage lender against loss
incurred by a mortgage default. Usually required for loans with an LTV of
80.01% or higher.
- mortgagee The person or company who receives the mortgage as a
pledge for repayment of the loan. The mortgage lender.
- mortgagor The mortgage borrower who gives the mortgage as a pledge
to repay.
-N-
- non-conforming loan Also called a jumbo loan. Conventional
home mortgages not eligible for sale and delivery to either Fannie Mae
(FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan
amount, loan characteristics or underwriting guidelines. Non-conforming
loans usually incur a rate and origination fee premium. The current
non-conforming loan limit is $322,701 and above.
- note A written agreement containing a promise of the signer to pay
to a named person, or order, or bearer, a definite sum of money at a
specified date or on demand. (Return to Top)
-O-
- origination fee A fee imposed by a lender to cover certain
processing expenses in connection with making a real estate loan. Usually a
percentage of the amount loaned, such as one percent.
- owner financing A property purchase transaction in which the
property seller provides all or part of the financing. (Return
to Top)
-P-
- Planned Unit Developments (PUD) A subdivision of five or more
individually owned lots with one or more other parcels owned in common or
with reciprocal rights in one or more other parcels.
- PITI Principal, interest, taxes and insurance--the components of a
monthly mortgage payment.
- points Charges levied by the mortgage lender and usually payable at
closing. One point represents 1% of the face value of the mortgage
loan.
- prepaids Those expenses of property which are paid in advance of
their due date and will usually be prorated upon sale, such as taxes,
insurance, rent, etc.
- prepayment penalty A charge imposed by a mortgage lender on a
borrower who wants to pay off part or all of a mortgage loan in advance of
schedule.
- principal Amount of debt, not including interest. The face value of
a note or mortgage.
- private mortgage insurance (PMI) Insurance provided by nongovernmental
insurers that protects lenders against loss if a borrower defaults. Fannie
Mae generally requires private mortgage insurance for loans with
loan-to-value (LTV) percentages greater than 80%. (Return to
Top)
-Q-
- qualifying ratios The ratio of your fixed monthly expenses to your
gross monthly income, used to determine how much you can afford to borrow.
The fixed monthly expenses would include PITI along with other obligations
such as student loans, car loans, or credit card payments. (Return
to Top)
-R-
- rate cap A limit on how much the interest rate can change, either
at each adjustment period or over the life of the loan.
- rate lock-in A written agreement in which the lender
guarantees the borrower a specified interest rate, provided the loan closes
within a set period of time.
- rebate Compensation received from a wholesale lender which can be
used to cover closing costs or as a refund to the borrower. Loans with
rebates often carry higher interest rates than loans with "points"
(see above).
- refinancing The process of paying off one loan with the proceeds
from a new loan using the same property as security.
- residential mortgage credit report (RMCR) A report requested by
your lender that utilizes information from at least two of the three
national credit bureaus and information provided on your loan application. (Return
to Top)
-S-
- seller carry back An agreement in which the owner of a
property provides financing, often in combination with an assumed
mortgage.
- survey A print showing the measurements of the boundaries of a
parcel of land, together with the location of all improvements on the land
and sometimes its area and topography. (Return to Top)
-T-
- tenants-in-common An undivided interest in property taken by
two or more persons. The interest need not be equal. Upon death of one or
more persons, there is no right of survivorship.
- title The evidence one has of right to possession of land.
- title insurance Insurance against loss resulting from defects of
title to a specifically described parcel of real property.
- title search An investigation 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.
- total debt ratio Monthly debt and housing payments divided by gross
monthly income. Also known as Obligations-to-Income Ratio or Back-End
Ratio.
- 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. (Return
to Top)
-U-
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underwriter A person that works for the
investor making the loan. They ensure that the borrower, the property,
the appraisal, the survey, the title commitment, and all of the
documentation satisfy the criteria for the loan program, and issue a clear
to close to their document department to produce the loan package for
closing.
-V-
- Veterans Administration (VA) A government agency guaranteeing
mortgage loans often with no down payment to qualified veterans. (Return
to Top)
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