Mortgage Glossary
A & D Loan
Acquisition and development loan- a loan for the purchase of raw land for the purpose development.
Abstract Title
A written history of the ownership of a parcel of land.
Acceleration Clause
Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should your default on you loan.
Acknowledgment
A declaration by a notary, certifying, by way of personal knowledge or written identification, the identity of the signer.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. In other words, it has an interest rate that changes (which affects your mortgage payments).
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.
Affidavit
A sworn statement in writing.
American Land Title Association (ALTA)
An organization of title companies specializing in Real Property Law which has standardized forms and coverage on a national basis. This is standardized coverage.
Amortization
Amortization refers to the process of paying off a loan with regular payments over time. In the mortgage world (on a fully amortizing loan), these payments cover the principal and interest and ensure that your loan balance is paid in full at the end of the amortization term. Typical amortization terms are 15, 20 and 30 years.
Annual Percentage Rate (APR)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. (APR)
Appraisal
An estimate of the value of real property, made by a qualified professional called an “appraiser.” An appraisal will be needed to determine the value of your property.
Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. This must be approved by the lender and be allowed by the note, which was originally signed by the seller.
Back End Ratio
This refers to the debt-to-income ratio calculated using principal, interest, taxes, insurance and consumer credit obligations divided by gross monthly income. It is expressed as a percentage.
Balloon
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Beneficiary
The entity funding the loan. This is the entity to which the loan is owed.
Bankruptcy (BK)
BK / Bankruptcy A reorganization or discharge of debts. Could also be referred to as Chapter 7, 11 or 13.
Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Buy Down
When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Cap
The highest rate that an adjustable rate mortgage may reach. It can be expressed as the actual rate or as the amount of change allowed above the start rate. For example, a 7.99 % start rate with a 6% rate change cap would have a maximum interest rate cap of 13.99%.
Cash Out
Any funds disbursed directly to the borrower.
Certificate of Occupancy
A certificate issued by local city government to a builder, stating that the building is in proper condition to be occupied.
Certified Copy
A true copy, attested to be true by the officer holding the original. It should have a stamp and signature stating that it is a true copy.
Clear-To-Close
The loan is ready to be closed with no additional conditions.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
Closing Costs
Commitment
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Community Property
A property owned in common by a husband and wife, which was not acquired as separate property. A classification of property peculiar to certain states. In community property states, assets may be owned in part by a spouse even if their name does not appear on the title.
Comparable (Comp.)
A property with the same basic characteristics as the property you are attempting to find the value of (usually a real estate appraisal.) It should have been sold recently and be as similar as possible.
Condominium
A property owned as a group, with rights to occupy specific units of the structure. An overseeing board, often referred to as a Homeowners Association, governs the property.
Construction Loan
A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Consumer Credit
Credit owed by the individual, not secured by real estate.
Conventional Loan
A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FMHA).
Conversion Clause
A provision in some ARMS (Adjustable Rate Mortgage) that allows you to change the loan to a fixed-rate loan at some point during the loan term.
Credit Ratio
The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (Conventional loans).
Credit Report
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Credit Score
The score given to an individual to determine the credit worthiness. These scores come from TRW, Equifax and Trans Union.
Debt Ratio (DR)
The customer’s monthly obligations divided by their monthly gross income. (See also Back End.)
Deed
A legal document which conveys the title to a property.
Deed of Trust
A document used which pledges real property to secure a debt. In some cases a deed of trust can replace a mortgage.
Deferred Interest
See Negative Amortization.
Delinquency
Failure to make payments on time, which can lead to foreclosure.
Department of Veterans Affairs
An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans.
Derog
This is short for derogatory and refers to negative credit items.
Derog Letter
A letter written by the borrower giving an explanation for any derogatory credit.
Discharge
Following a completed bankruptcy proceeding, discharged debts are no longer owed or collectible. We will require copies of the discharge papers on any prior bankruptcy filings.
Discount Points
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).
Dismissal
If a bankruptcy is dropped without being completed, a Bankruptcy Dismissal document will be needed to proceed with the loan. Either the court or the debtor can prompt the dismissal.
Down Payment
The initial payment made on a property purchase that determines how much you’ll need to borrow and what loans you qualify for. Conventional mortgages, for example, require 10-20% for a down payment, while other loans (like FHA or VA) require less.
Due-On-Sale Clause
Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Easements
An interest in property, owned by another that entitles the holder to a specific limited use or privilege, such as the right to cross or to build adjoining structures on the property.
Encroachment
A fixture of a piece of property which intrudes on another’s property.
Equal Credit Opportunity Act (ECOA)
Is 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
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Escrow
Escrow Instructions
Instructions to the escrow agent giving the parameters and contingencies involved in the transaction and agreed upon by both parties.
Escrow Waiver
The Request for a borrower to pay their own taxes and insurance.
Fannie Mae
Another name for the Federal National Mortgage Association (see below).
Federal Home Loan Mortgage Corporation (FHLMC)
Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
A division of the U.S. Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.
Federal National Mortgage Association (FNMA)
Commonly known as Fannie Mae, the Federal National Mortgage Association is a tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
Fee Simple
The most common form of ownership where the vestee owns both the land and the structures.
FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
Fixed-Rate Mortgage
A mortgage on which the interest rate is fixed for the term of the loan. That means mortgage payments are always the same.
Flood Insurance
A mandatory insurance for some homeowners whose property is located in a designated flood zone.
Foreclosure
A legal process when the lender forces the sale of a property to recover losses due to the borrower’s failure to make their mortgage payments.
Free and Clear
This means the property is paid in full (no mortgage loan).
Functional Obsolescence
A detraction from the property value due to the design or material being less functional than the norm.
Good Faith Estimate (GFE)
A document that includes the basic terms and estimated payments due upon the closing of a mortgage loan.
Ginnie Mae
Government National Mortgage Association (GNMA)
Also known as Ginnie Mae, this association provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Grant Deed
The most common form of title transfer deed which contains warranties against prior conveyances or encumbrances.
Gross Monthly Income
The total amount of money the borrower earns per month, before any taxes or other deductions.
Guarantee
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hazard Insurance
Homestead
The dwelling (house and contiguous land) of the head of the family. Some states grant statutory exemptions, protecting homestead property (usually to a set maximum amount) against the rights of the creditors. Property tax exemptions are also available in some states.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by their net effective income (FHA/VA loans) or gross monthly income (Conventional loans).
Impound
Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Interest Bearing
Investor
Money source for a lender.
Joint Tenants
Jumbo Loan
Land Contract
Leasehold Estate
Legal Description
Lien
Loan Risk
Loan-To-Value Ratio (LTV)
Margin
Market Value
Mortgage Escrow Accounts
Mortgage Insurance Premium (MIP)
Mortgagee
Mortgagor
Negative Amortization
Net Effective Income
Non-Assumption Clause
Statements in the mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
Non-Owner Occupied
A property not used as a residence by the owner of the property.
Notary Public
A person, designated by the state, which can certify the identity of a person when signing various documents.
Note
Short for promissory note. This document gives the parameters of the loan and legally obligates the borrower to pay back the debt.
Obligations
Origination Fee
Owner Occupied
Owners Policy
A policy of the title insurance which protects the buyer against problems with the title.
P&I
This refers to the principal and interest portions of the monthly mortgage payment.
P&L
Profit and Loss. A statement of a businesses gross income, cost of goods, operating costs and net profit or loss..
PITI
Principal, interest, taxes and insurance. The complete monthly cost associated with financing a property.
PUD
Planned Unit Development. Property owned as a group, where individuals own the specific piece of land and structure they occupy, but also have a divided interest in a common area. A board, often referred to as a Homeowners Association, will govern the development.
Piggy Back Loan
Financing obtained, subordinate to the first mortgage, to facilitate closing the first mortgage. Also known as a Secondary Financing.
Private Mortgage Insurance (PMI)
A way for lenders and the buyers to insure their exposure on the loan to no less than 20% equity in a property.
Points
A point is equal to one percent of the principal amount of a mortgage. See Discount Points.
Power of Attorney
An authority by which one person enables another to act on his or her behalf. Power of attorney can be limited to specific areas or be general in some cases.
Pre-Approval
The Buyer has actually begun the application process and an underwriter has approved their income, funds and credit. Beware of any conditions on the approval.
Preliminary Title Report
The title report generated at the beginning of the application process. It tells the mortgage company what liens are on the property and gives advice as to what will need to be done to gain clear title prior to recording the trust deed.
Prepaids
Expenses necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Pre-Qualified
Principal
The amount of debt, not counting interest, left on a loan.
Purchase Agreement
The agreement made between the buyer and seller of a property, containing the purchase price and contingencies of the sale.
Quit Claim
A deed operating as a release intended to pass any title, interest or claim, which the grantor may have in the property, but not containing any warranty of a valid interest or title in the grantor.
Rate Float
Assuming market risk on an interest rate in the hopes that it will go lower prior to closing.
Rate Lock
Choosing to have no change to a rate for a specific length of time.
Ratios
How a buyers housing expense and debt picture relates to their income.
Real Estate Settlement Procedures Act (RESPA)
RESPA is a federal law that allows consumers to review information on know future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.
Realtor
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Submission
This refers to a complete loan application package submitted for approval to the underwriting department.
Subordination Agreement
A legal document used to make the claim of one party junior to (or inferior to) a claim in favor of another. It is generally used to grant first lien status to a lienholder who would otherwise be secondary to another party, with the approval of the party that would otherwise have first lien.
Title
A document that gives evidence of an individual’s ownership of property.
Underwriting
Verification of Deposit (VOD) Underwriting is the final step in the mortgage process when the lender assesses the risk of a borrower by reviewing credit, capacity, and collateral.
VA Loan
A home-mortgage option available to U.S. Veterans with low-or no-down and is guaranteed by the Department of Veterans Affairs.
Variable Rate Mortgage (VRM)
See Adjustable Rate Mortgage.
Verification of Deposit (VOD)
A document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower’s employer verifying his/her position and salary.
Wraparound
Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.
Zoning
The division of a city or county by legislative regulations into areas (zones) specifying the uses allowable for the real property in these areas.