Mortgage Glossary

A 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.

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

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).

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

A limit to how much a variable interest rate can increase or decrease in a single adjustment period.

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

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

An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

The gradual repayment of a mortgage loan, both principle and interest, by installments.

The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

A limit on how much the variable interest rate on a loan can increase or decrease each year.

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.

Nonrefundable fees paid when you apply for your loan. These fees may include charges for items such as, for example, a credit profile or a property appraisal.

A written analysis prepared by a qualified appraiser and estimating the value of a property.

An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

An increase in the value of property over time. Important factors in a home’s appreciation are its location, condition and the selling price of similar homes in the area. Appreciation increases the amount of equity, which may also increase the amount you can borrow for a home equity line of credit.

The value of a property, established by a public tax assessor. The assessed value is used to determine property taxes.

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

The transfer of a mortgage from one person to another.

An assumable mortgage can be transferred from the seller to the new buyer. Generally, requires a credit review of the new borrower and lenders 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.

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

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

An interest rate that is used as a benchmark, or index, for pricing variable-rate loans such as adjustable-rate mortgages, auto loans, and credit cards.

An amount equal to 1/100th of a percentage point. For example, a fee calculated as 50 basis points of $200,000 would be 0.50% or $1,000.

A plan 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 required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.

A second trust that is collateralized by the 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.”

A third party who arranges funding or negotiates a contract between parties, but does not lend the money.

Fees charged by a real estate broker or a mortgage broker for providing assistance in a real estate transaction.

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. Buy downs can occur in both fixed and adjustable rate mortgages.

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

The amount a homebuyer needs in cash at the closing of the loan. This typically includes down payment and closing costs.

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

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

A statement provided by an abstract company, title company, or attorney stating who holds title to real estate based on the public record.

The Close step is the date you will sign and execute your new loan documents.

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

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 according to the area country.

The date you will sign your new loan documents.

A closing document which provides key information such as interest rate, monthly payments, and costs to close the loan. Consumers are required to receive this form no later than 3 business days before they close on the loan.

An additional person who assumes equal responsibility for repayment of a loan and is fully obligated under the terms of the loan. This person also has equal rights to the proceeds of the loan.

A second person who signs your loan and assumes equal responsibility for payment of the loan but receives no benefit from the loan proceeds.

An asset, such as a car or a home, used for securing the repayment of a loan. The borrower risks losing the asset if the loan is not repaid.

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

A mortgage loan that has the standard features as defined by (and is eligible for sale to) Fannie Mae and Freddie Mac.

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

A home loan that is not insured or guaranteed by the federal government. A conventional loan can be for conforming or non-conforming loan amounts.

A provision in an 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.

A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

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, Issac and Company. 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 risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

A person or business from whom you borrow or to whom you owe money.

A single loan to pay off multiple debts, usually over a longer term. This is a popular use for a home equity line of credit.

A document that legally transfers ownership of real estate from a seller to a buyer and delivered to the buyer at closing. Before making a loan, a lender will usually require a title search or a title report to make sure the borrower legally owns the real estate that is being used to secure the loan.

The document used in some states instead of a mortgage. Title is conveyed to a trustee.

Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Failure to make mortgage payments on time.

This is 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.

In an 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.

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

The process of obtaining an advance against your available line of credit.

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.

Any lien or liability attached to a property that affects or limits the title to that property, for example, unpaid taxes, mortgages, and leases.

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.

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.

The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Typically refers to an account set up by a lender in which funds to pay for real estate taxes and homeowners insurance are deposited as part of the borrower’s monthly mortgage payment, then disbursed as tax and insurance payments come due.

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.

The likely selling price of a home. The fair market value is usually determined by an appraisal.

A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.

An agency of the Department of Housing and Urban Development. The FHA provides mortgage insurance for certain residential mortgages. It also sets standards for underwriting these mortgages and for the construction of homes secured by these mortgages. Visit the FHA website.

A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

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 many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.

The primary lien against a property.

The monthly payment due on a mortgage loan including payment of both principal and interest.

A mortgage interest that are fixed throughout the entire term of the loan.

Insurance that protects against loss due to floods. When available, this type of insurance is required by law when a property is located within a special flood hazard zone.

A period during which your monthly loan payments are temporarily suspended or reduced. You may qualify for forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. During forbearance, principal payments are postponed but interest continues to accrue.

A legal procedure in which property securing a defaulted loan is sold by the lender in order to repay a borrower’s loan. The amount paid by a buyer at the foreclosure may not be enough to fully repay the loan and the borrower may continue to owe the lender the difference.

A legal tax form that reports the amount of interest and points paid during the previous year.

A government-sponsored enterprise that buys and securitizes mortgages for resale in the secondary market. Visit the Freddie Mac website.

The date on which the proceeds from a loan are available to or disbursed for the benefit of the borrowers.

A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.

An itemized, detailed list of certain estimated costs associated with a home loan that the lender is required to provide to the borrower within 3 business days of the application.

Insurance to protect your home against damage from fire, hurricanes, and other catastrophes. Usually, homeowners insurance also covers you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property. A lender will likely require you to name it as a payee under the insurance if you need to make a claim. Also called hazard insurance.

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

A document that provides an itemized listing of the funds that are payable 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.

Regular income from earnings, commissions, investments, rental payments, or other sources.

Real estate developed or improved to produce income.

The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.

The increase in the price of consumer goods usually expressed as a percentage over a specific period of time.

The process of obtaining an advance against available credit under your line of credit.

This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”

A request for your credit report, made by you or a company considering you for an offer of credit.

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

A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium.

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

The fee charged for borrowing money.

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

An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage.

For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

Property that is purchased to generate rental income, or to be sold once it has appreciated in value.

Also known as a non-conforming loan. The amount of the loan exceeds standards that would make it eligible for sale to Fannie Mae and Freddie Mac. Certain geographical areas have temporary conforming loan limits higher than typical conforming limits. Lenders may charge additional fees and place certain restrictions due to the large loan amounts.

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

TA person’s financial obligations. Liabilities include long-term and short-term debt.

The legal claim of a creditor on a borrower’s property, to be used as security for a debt.

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

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

An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.

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

A sum of borrowed money (principal) that is generally repaid with interest.

Disclosure to help consumers understand the key loan terms and estimated costs of a mortgage before they make a complete application. After a consumer submits 6 key elements: name, income, social security number, property address, estimated property value and desired loan amount, the lender is required to provide this form. All lenders are required to use the same standard loan estimate form to make it easier for consumers to compare and shop for a mortgage.

The process by which a mortgage lender makes a home loan and records a mortgage against the borrower’s real property as security for repayment of the loan.

The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

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.

The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

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

A legal document that pledges a property to the lender as security for payment of a debt.

A company that originates mortgages exclusively for resale in the secondary mortgage market.

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.

Generally, there are three basic mortgage programs: Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and conventional mortgage loans. VA loans are only offered to qualifying veterans and surviving spouses, while FHA loans are available to all qualifying borrowers. Both VA and FHA loans are guaranteed/insured by the federal government. This insurance protects the lender (not the borrower) should the borrower default and the lender sustains a loss. Conventional loans are available to all qualifying borrowers and are not insured or guaranteed by the federal government.

The borrower in a mortgage agreement.

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 ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

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

An asset that cannot easily be converted into cash.

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

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.

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

A property that the owner occupies as a principal residence.

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.

Payment of the outstanding balance of a loan in full. Also, the amount required to pay the outstanding balance in full.

A limit on the amount that payments can increase or decrease during any one adjustment period.

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.

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

The process of determining how much money you will be eligible to borrow before you apply for a loan.

An amount paid to reduce the principal balance of a loan before the principal is due.

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

The process of providing financial and other information (such as employment history and proposed collateral) by a prospective borrower in order for the lender to preliminarily estimate how much the borrower may obtain for the purchase of a home. A prequalification is not a commitment to lend.

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

The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

The outstanding balance of principal on a mortgage not including interest or any other charges.

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 homeowner’s insurance, whether these amounts that are paid into an escrow account each month or not.

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) percentage in excess of 80 percent.

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.

The amount of interest on a loan expressed as a percentage.

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.

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

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 Real Estate Agents.

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

The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

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

The amount of savings, separate from the down payment, that a homebuyer sets aside in case of unforeseen events or emergencies. During the loan approval process, many lenders require reserves (typically the equivalent of 2 monthly mortgage payments) to be verified.

A property occupied part-time by a person in addition to his or her primary residence.

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

An organization that collects principle 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.

The completion of a property’s sale or purchase, or the completion of all steps necessary to receive the proceeds of (and create an obligation to repay) a loan.

A detached individual housing unit. The property shares no common ground with neighboring properties and shares no wall or roof, but can be part of a planned unit development (PUD).

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.

The number of years it will take to pay off a loan. The loan term is used to determine the payment amount, repayment schedule and total interest paid over the life of the loan.

Written evidence of ownership in property.

The agency that will investigate a property’s title (or deed) for discrepancies or undiscovered liens and that will issue title insurance to the lender after the title is deemed clear.

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

A fiduciary that holds or controls property for the benefit of another.

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

The person who approves or denies a home loan, based on the lender’s underwriting and approval criteria.

The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.

A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

A vacation home is a single-family property that the borrower occupies in addition to his or her primary residence. The property cannot be considered income-producing and must not be part of a mandatory rental pool, but occasionally may be rented to friends and relatives. When property is classified as a second home, rental income may not be used to qualify the applicant. A 2-unit to 4-unit property is not eligible for second home status. Also known as a second home.

A wage and tax statement provided by your employer annually. The W-2 form details your income and the various local and federal taxes withheld from your income. It is provided to the IRS along with your tax return.

A final inspection shortly before settlement to make sure the property is in the same condition that it was at the time the offer contract was written.

A transfer of money from one person’s bank to another person’s bank account, either domestically or internationally.