Glossary

A
  • ACCELERATION CLAUSE

    Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.

  • ADDITIONAL PRINCIPAL PAYMENT

    A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

  • ADJUSTABLE-RATE MORTGAGE (ARM)

    A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

  • ADJUSTED BASIS

    The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.

  • ADJUSTMENT DATE

    The date that the interest rate changes on an adjustable-rate mortgage (ARM).

  • ADJUSTMENT PERIOD

    The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).

  • AFFORDABILITY ANALYSIS

    An analysis of a buyer’s ability to afford the purchase of a home. The analysis reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the location of the home, and the likely closing costs.

  • AMORTIZATION

    The gradual repayment of a mortgage loan, both principal and interest, by installments. (see also AMORTIZATION TERM)

  • AMORTIZATION TERM

    The length of time required to amortize the mortgage loan, expressed as a number of months. (see also AMORTIZATION)

  • ANNUAL PERCENTAGE RATE (APR)

    The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.

  • APPRAISAL

    A written analysis prepared by a qualified appraiser and estimating the value of a property. (see also APPRAISED VALUE)

  • APPRAISED VALUE

    An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. (see also APPRAISAL)

  • ASSET

    Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

  • ASSIGNMENT

    The transfer of a mortgage from one person to another.

  • ASSUMABILITY

    An assumable mortgage can be transferred from the seller to a new buyer. Generally this requires a credit review of the new borrower and the lender may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

  • ASSUMPTION FEE

    The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place. (see also, ASSUMABILITY)

B
  • BALANCE SHEET

    A financial statement that shows assets, liabilities, and net worth as of a specific date.

  • BALLOON MORTGAGE

    A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment is paid at the end of an earlier specified term.

  • BALLOON PAYMENT

    The final lump sum paid at the maturity date of a balloon mortgage.

  • BEFORE-TAX INCOME

    Income before taxes are deducted.

  • BRIDGE LOAN

    A second trust that is collateralized by a borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."

  • BROKER

    An individual or company that brings borrowers and lenders together for the purpose of loan origination.

  • BUYDOWN

    When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.

C
  • CAP

    Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of an adjustable rate mortgage (ARM). Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.

  • CERTIFICATE OF ELIGIBILITY

    A document issued by the federal government certifying a veteran’s eligibility for a U.S. Department of Veterans Affairs (VA) guaranteed mortgage.

  • CERTIFICATE OF REASONABLE VALUE (CRV)

    A document issued by the U.S. Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

  • CHANGE FREQUENCY

    The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).

  • CLOSING

    A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."

  • CLOSING COSTS

    These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary depending on the state in which the property is located, the loan type, and the mortgage lender.

  • COMPOUND INTEREST

    Interest paid on the original principal balance and on the accrued and unpaid interest.

  • CONSUMER REPORTING AGENCY (OR BUREAU)

    An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.

  • CONVERSION CLAUSE

    A provision in an adjustable-rate mortgage (ARM) allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

  • CREDIT REPORT

    A report detailing an individual's credit history that is prepared by a credit reporting agency (or bureau) and used by a lender to determine a loan applicant's creditworthiness.

  • CREDIT RISK SCORE

    A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair Isaac Corporation. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risk, which typically equates to better loan terms. In general, credit scores are crucial in the mortgage loan underwriting process. (see also FICO SCORE)

D
  • 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 agreement.

  • DELINQUENCY

    Failure to make mortgage payments on time.

  • DEPOSIT

    This is a sum of money given to bind the sale of real estate, also known as earnest money deposit; may also be a sum of money given to ensure payment or an advance of funds in the processing of a loan.

  • DISCOUNT

    In an adjustable-rate mortgage (ARM) with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.

  • DOWN PAYMENT

    Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

E
  • EFFECTIVE GROSS INCOME

    A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

  • EQUITY

    The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the 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 of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate. (see also ESCROW DISBURSEMENTS and ESCROW PAYMENT)

  • ESCROW DISBURSEMENTS

    The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. (see also ESCROW and ESCROW PAYMENT)

  • ESCROW PAYMENT

    The part 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. (see also ESCROW and ESCROW DISBURSEMENT)

F
  • FANNIE MAE

    Federal National Mortgage Association (FNMA) is a government sponsored enterprise (GSE) that purchases mortgages from mortgage lending institutions and then sells mortgage-backed securities to investors.

  • FHA MORTGAGE

    A mortgage that is insured by the Federal Housing Administration (FHA) and issued by an FHA-approved lender. FHA loans typically require a lower down payment and lower minimum credit score than conventional loans and are designed for low-to-moderate-income borrowers. Also known as a government mortgage.

  • FICO SCORE

    FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates information that is on a consumer credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms. (see also CREDIT RISK SCORE)

  • FIRST MORTGAGE

    The primary lien against a property.

  • FIXED INSTALLMENT

    The monthly payment due on a fixed-rate mortgage (FRM) loan, including payment of both principal and interest; while the amount that is applied to principal will change (increase) over time while the amount applied to interest decreases, the installment (payment) amount will remain the same.

  • FIXED-RATE MORTGAGE (FRM)

    A mortgage that has a fixed interest rate for the entire term of the loan.

  • 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.

G
  • GINNIE MAE

    The Government National Mortgage Association (GNMA) is a wholly-owned government corporation that guarantees principal and interest payments on mortgage-backed securities (MBS) issued by program participants. The securities are collateralized by the cash flows from loans insured or guaranteed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), Office of Public and Indian Housing (PIH), and the U.S. Department of Agriculture (USDA) Rural Development (RD). GNMA is the only MBS backed by the full faith and credit of the United States Government.

  • GROWING-EQUITY MORTGAGE (GEM)

    A mortgage that is guaranteed by a third party.

  • GUARANTEE MORTGAGE

    A mortgage that is guaranteed by a third party.

H
  • HOUSING EXPENSE RATIO

    The percentage of gross monthly income budgeted to pay housing expenses.

  • HUD-1 STATEMENT

    For some mortgage loans, a document that provides an itemized listing of the funds that are disbursed at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.

  • HYBRID ARM

    A combination fixed rate and adjustable rate loan has a fixed rate for a certain period of time and then converts into an adjustable-rate mortgage (ARM).

I
  • INDEX

    A published interest rate compiled from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index to establish rates on an adjustable rate mortgage (ARM). (see also MARGIN)

  • INITIAL INTEREST RATE

    This refers to the original interest rate of a mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as the "start rate."

  • INSTALLMENT

    The regular periodic payment that a borrower agrees to make to a lender.

  • INSURED MORTGAGE

    A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

  • INTEREST

    The fee charged for borrowing money.

  • INTEREST ACCRUAL RATE

    The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.

  • INTEREST RATE CEILING

    For an adjustable-rate mortgage (ARM), the maximum interest rate that will be applied to the loan, as specified in the mortgage Note.

  • INTEREST RATE FLOOR

    For an adjustable-rate mortgage (ARM), the minimum interest rate that will be applied to the loan, as specified in the mortgage Note.

L
  • LATE CHARGE

    The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

  • LEASE-PURCHASE MORTGAGE LOAN

    An alternative financing option that allows low- and moderate-income homebuyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.

  • LIABILITIES

    A person's financial obligations. Liabilities include long-term and short-term debt.

  • LIFETIME PAYMENT CAP

    For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage. (see also CAP)

  • LIFETIME RATE CAP

    For an adjustable-rate mortgage (ARM), a limit on the amount the interest rate can increase or decrease over the life of the loan. (see also CAP)

  • LINE OF CREDIT

    A preset amount of money a lender (i.e. bank, credit union, mortgage lender) agrees to lend to a consumer. Funds may be drawn from the line of credit as needed, up to the maximum amount, and interest is only paid on the amount used.

  • LIQUID ASSET

    A cash asset or an asset that is easily converted into cash.

  • LOAN

    A sum of money (principal) that is borrowed and then generally repaid to the lender with interest.

  • LOAN-TO-VALUE (LTV) RATIO

    LTV is the amount of the mortgage compared to the value of the property, expressed as a percentage. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

  • LOCK-IN PERIOD

    The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

M
  • MARGIN

    The number of percentage points the lender adds to the index rate to calculate the adjustable-rate mortgage (ARM) interest rate at each adjustment. (see also INDEX)

  • MATURITY

    The date on which the remaining principal balance of a loan becomes due and payable.

  • MONTHLY FIXED INSTALLMENT

    That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing.

  • MORTGAGE

    A legal instrument (document) in which real property serves as security for the repayment of a loan. In some states, a Deed of Trust is used rather than a Mortgage document.

  • MORTGAGE BANKER

    A lender that originates, closes, services, and or sells mortgage loans on the secondary market.

  • MORTGAGE BROKER

    An individual or company that brings borrowers and lenders together for the purpose of loan origination.

  • MORTGAGE INSURANCE

    A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency. (see also MORTGAGE INSURANCE PREMIUM)

  • MORTGAGE INSURANCE PREMIUM (MIP)

    The amount paid by a mortgagor for mortgage insurance. (see also MORTGAGE INSURANCE)

  • MORTGAGE LIFE INSURANCE

    A type of term life insurance that, in the event the borrower dies while the policy is in force, the Mortgage debt is automatically paid by insurance proceeds.

  • MORTGAGOR

    The borrower in a mortgage agreement.

N
  • NEGATIVE AMORTIZATION

    Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an adjustable-rate mortgage (ARM) has a payment cap that results in monthly payments not high enough to cover the interest due.

  • NET WORTH

    The value of all of a person's assets, including cash.

  • NON-LIQUID ASSET

    An asset that cannot easily be converted into cash.

  • NOTE

    A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

O
  • ORIGINATION FEE

    A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

  • OWNER FINANCING

    A property purchase transaction in which the party selling the property provides all or part of the financing.

P
  • PAYMENT CHANGE DATE

    The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

  • PERIODIC PAYMENT CAP

    A limit on the amount that payments can increase or decrease during any one adjustment period. (see also ADJUSTABLE RATE MORTGAGE and CAP)

  • PERIODIC RATE CAP

    A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be. (see also ADJUSTABLE RATE MORTGAGE and CAP)

  • PITI RESERVES

    A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

  • POINTS

    A point is equal to one percent of the principal amount of a mortgage loan. For example, if the loan is $165,000, one point means $1,650. Points are usually collected at closing and may be paid by the borrower or the home seller, or may be split between them.

  • PRE-APPROVAL

    The process of determining how much money a homebuyer is eligible to borrow before the loan application is processed and underwritten.

  • PREPAYMENT PENALTY

    A fee that may be charged to a borrower who pays off a loan before it is due.

  • PRIME RATE

    The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

  • PRINCIPAL

    The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. (see also PRINCIPAL BALANCE)

  • PRINCIPAL BALANCE

    The outstanding balance of principal on a mortgage not including interest or any other charges. (see also PRINCIPAL)

  • PRINCIPAL, INTEREST, TAXES, AND INSURANCE (PITI)

    The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

  • PRIVATE MORTGAGE INSURANCE (PMI)

    Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) ratio in excess of 80 percent.

Q
  • QUALIFYING RATIO

    Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio. Sometimes this is referred to as Debt-to-Income Ratio (DTI).

R
  • RATE LOCK

    A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

  • REAL ESTATE AGENT

    A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

  • REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

    A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

  • REALTOR

    A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Realtors and subscribes to its strict Code of Ethics.

  • RECORDING

    The noting in the registrar’s office of the details of a properly executed legal document, such as a Deed of Trust, a Mortgage Note, a satisfaction of Mortgage, or an Extension of Mortgage, thereby making it a part of the public record.

  • REFINANCE

    Paying off one loan with the proceeds from a new loan using the same property as security.

  • REVOLVING LIABILITY

    A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

S
  • SECONDARY MORTGAGE MARKET

    Where existing mortgages are bought and sold.

  • SECURITY

    The property that will be pledged as collateral for a loan.

  • SELLER CARRY-BACK

    An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. (see also OWNER FINANCING)

  • SERVICER

    An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

  • STANDARD PAYMENT CALCULATION

    The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

  • STEP-RATE MORTGAGE

    A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.

T
  • THIRD-PARTY ORIGINATION

    When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.