Mortgage Glossary

A B C D E F G H I J L M N O P R S T U

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Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)

Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. Appraisals are required to have an "update" after being 4 months old, and are to be completely redone after 6 months with most lenders.

ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender (called a rate adjustment); the Change in monthly -payment amount, however, is usually subject to a Cap (called payment adjustment).

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Balloon Mortgage: Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the "balloon" term, the full amount of the loan is due and can be paid off or refinanced.

Basis Points: A unit that is equal to 1/100th of 1%, and is used in denoting the change in a financial instrument . The basis point is commonly used for calculating changes in yield of a fixed-income security , interest rates and equity indexes. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and  0.01% = 1 basis point. So, a bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points; or interest rates that have increased by 1% are said to have increased by 100 basis points.

Borrower Signature Authorization: A disclosure and necessary document issued to the borrower to sign authorizing the lender to collect data (e.g. to receive mortgage payoffs, communicate with the borrower's employer or banking institutions).

Buydown Option Mortgage: In order to qualify for a loan at a lower rate, sometimes buydown options are the best option. This is done by paying in up front fees or in the extended interest rate to start the first year's interest rate one to two points below the expected fixed interest rate. A 1/1 buydown will lower the first year's interest rate by one full point, thereafter the rate will increase one full point where it will remain for the remainder of the loan's life. A 2/1 buydown will initially start two points lower the first year, then increase one point the following year, and increase one last time for the remainder of the loan after the second year. Likewise a 3/1 will follow the same pattern as the former two with rates adjusting one full point the first three years.

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Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Cash-Out refinance: Where a mortgage is refinanced with the object of getting cash equity out of the home. Lenders require a higher interest rate when doing this as it is considered a higher-risk loan. (see Home Equity )

Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.

Chain of Title: A document prepared by the title company that searches the ownership of the deed of trust to ensure against loan fraud, typically searched for the last 12 months.

Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.

Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application. Also called Non-recurring closing costs; these are fees due to the broker, lender, title company, and local and state taxing agencies.

Commitment to Lend: After a file has been underwritten, the lender will issue a commitment to lend. This Commitment is based on the application and documentation, including the appraisal and title work done on the property, reviewed according to lending guidelines. The Commitment to lend will be conditional based on the borrower's and properties situation does not change from how it was presented at closing. This includes but is not limited to credit worthiness, employment, assets, and condition of the property physically and legally per the title report.

Conforming Loan: Loans given by lenders that follow the underwriting and investor guidelines for Fannie Mae, Freddie Mac, or guidelines similar in substance to those dictated by the lending institution themselves. Guidelines dictate low risk loans for non-investment properties requiring the borrower have excellent credit, ample equity in the home, and stable income and employment. (see also Non-Conforming Loan)

Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Credit history: history of an individual's debt payment; lenders use this information to gouge a potential borrower's ability to repay a loan.

Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.

Credit bureau: See below "credit bureau score."

Credit bureau score: Also known as FICO score, it is a number representing the possibility a borrower may default, the lower the more risky (e.g. on a 600 score it is calculated that lenders will loose money on 1 out of every 8 loans, on a 700 score it is only 1 out of 1,300); it is based upon credit history and is used to determine ability to qualify for a mortgage loan. The three major credit repositories Experian, TransUnion, and Equifax have a score ranking level assigned to each customer in their credit files. This "score" is their version of who's more, and who's a less risky loan candidate. All three are different, different amounts, different numbers, and they are compiled from different ingredients.

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Debt consolidation: The process of using the equity in the home to pay off other consumer debt. The benefits of consolidating allow the borrower to not only have one debt payment instead of many, but give the borrower the advantage of one lower mortgage interest rate (saving thousands in interest payments incurred by high interest loans), and the use of interest rate tax credits not available on other consumer debts (worth thousands of dollars yearly).

Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; Conventional lending policies usually require the-monthly mortgage payment should be no more than 32% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 38% of income; however, our many non-conventional lenders allow the combined back ratio up to 55%.

Discount Points: The cost of buying down an interest rate a lender charges. If it cost 1 point (or 1% of the loan amount) to buy the rate down .25% on a $250,000 loan size, it would cost $2,500 in fee.

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Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.

Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

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FHA: Federal Housing Administration; established in 1934 to advance home ownership opportunities for all Americans; assists home buyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages. Fees associated with FHA backed loans charge an additional 1.5% of the loan amount, fixed into the total amount borrowed, at closing, in addition to the yearly mortgage insurance charged.

Fixed Rate Mortgage (FRM): The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years.

Fixed Rate Adjustable Mortgage (Fixed ARM or Hybrid ARM): The rate remains fixed for an initial 2 or 3 years and then adjusts to whatever market index it is tied to. if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also. The index the loan is tied to is usually the US Treasury Bills or the LIBOR. Added to the index is the lender's margin that will not change during the life of the loan. With each adjustment the loan will encounter after the initial fixed period, adjustment caps are predetermined.

Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

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Good faith estimate (GFE): an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

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Home equity: The amount of cash value remaining in a real estate property. If a home has a market value of $150,000, and currently has a loan against it for $120,000, it is said to have the difference of $30,000 equity untapped. Some high risk lenders will even allow a borrower up to 125% of the value of the property. In the same example this home would have instead of only $30,000 equity, the lender would be willing to make a second mortgage over and above its $150,000 value for an additional $37,500 to the previous $30,000.

Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential home buyer aware of any repairs that may be needed.

Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; overage extends over a specific time period and does not cover the home's structure.

Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence )r inappropriate action that result in someone's injury or )property damage.

HUD1 Statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.

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Initial Loan Package: The initial loan application and disclosures completed (and sent out) for/by the borrower and either electronically emailed, sent by courier through the mail, or done in person face-to-face. The application and disclosures are required to be reviewed, signed, and dated within 3-days of the interview and/or the order of the credit report, which ever comes first, according to federal law.

Interest-Only: A loan that for a period of time (anywhere from 3 months to 10 years) only requires the borrower pay the interest incurred as according to the interest rate. Advantages of such a loan temporarily reduce the monthly payment amount in order to free up cash flow. During the term of interest-only payments the principle balance remains untouched, but is often offset by the increase of the market value of the home due to inflation and the properties location demand and market appeal.

Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium. (See Homeowner's Insurance or Mortgage Insurance)

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Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.

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Lien: a documented recorded on a local county level stating a securitization or collateralization of the property to back or guarantee a debt obligation from a creditor.

Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

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Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. The greater percentage borrowed over 80% the more costly the monthly mortgage insurance becomes.

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Non-recurring closing costs: Also known generically as the closing costs that help make up the total settlement costs; these are fees due to the broker, lender, the title company, and local and state taxing agencies. (See Settlement Costs ).

Negative amortizing: Referred to also as "Neg-Am", Like the interest-only loan, no principle payments are made on the loan for a specified period of time. The term refers to the fact that the monthly payments required are less than the money needed to pay monthly interest. Thus the residual difference is put back into the principle amount, increasing the loan over the period of its availability. Neg-Am loans free up cash monthly even more so than the interest-only loan, and are usually available only on ARM products. Because the principle loan amount increases, lenders usually require that the loan not exceed 115% to 125% of the appraised value.

Non-Conforming Loan: Loans given by lenders that do not follow typical underwriting and investor guidelines for Fannie Mae, Freddie Mac. Circumstantially these types of loans give the borrower freedom to get financing for loan types considered of a higher risk to the investor. Because of the higher risk factor, terms for these types of loans have somewhat higher interest rates, and prepayment penalties as a trade off for more liberal lending.

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One Time Close Construction: The process of getting financing for a construction loan and the long term loan in one transaction (closing). By doing this the borrower saves money in points and fees, and can secure the long term financing before construction begins. One time construction loans generally have a temporary loan for 6 to 18 months while building, and then convert the construction loan to a fixed or adjustable mortgage automatically after the temporary term is up.

Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing, where 1 to 3 points are considered normal.

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PITI: The total monthly mortgage payment: Principle, Interest, Taxes, Insurance (Homeowner's and Mortgage Insurance if applicable).

PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Points: Fees charged by the broker and/or the lender in the form of percentages of the loan amount. These points, often referred to as origination points and/or discount points together range from 1% to as much as 5%. On a $150,000 loan 3 points would equal $4,500 ($150,000 x 3%). These points are charged in addition to all settlement costs (see non-recurring fees and recurring closing costs ).

Pre-approval: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. The information that makes up the pre-approval are the initial application, credit report, and all applicable documentation required for underwriting. A pre-approval can be based on a conditional approval subject to items not reviewed yet, such as an appraisal, title report, and/or the subject property to be determined in a purchase.

Pre-Qualification: a lender informally determines the maximum amount an individual is eligible to borrow based on minimal or unverified information. This process may also include reviewing credit worthiness.

Pre-paid Items and Reserves: see Recurring Closing Costs.

Prepayment: paying off the mortgage loan balance (whether by refinance or sale) before the scheduled due date; may be Subject to a prepayment penalty. Typical prepayment penalties range from 1 to 5 years.

Principal: the amount borrowed from a lender; doesn't include interest or additional fees.

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Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.

Rate Float-Down: This refers to a locked-in interest rate that has the ability to float down to a more desirable interest rate due to improving market conditions. Not all loan programs nor lenders support rate float-downs.

Rate Lock: The process of committing or "locking" in an interest rate for the loan. Rate lock terms usually last a duration of 10 to 60 days, although longer locks may be available. Rate locks are usually initiated by disclosure issued to the borrower indicating they agree with the rate and duration of the rate lock. If the rate duration expires before funding the loan the borrower may have to pay for a rate-lock extent ion to ensure its availability. See also Rate Float Down.

Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

REALTOR: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.

RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

Recurring Closing Costs: The items detailed on the Settlement HUD1 known as "pre-paid items and reserves"; The pre-paid items include monies for taxes, homeowner's insurance, and mortgage insurance (if applicable) to be put in an escrow account by the lender. These escrowed monies are collected monthly and dispersed according to their time of predetermined payments. The reserve items are monies required by the lender to be put in escrow to ensure a future payment (like paying a secured credit card in advance).

Refinance: Often referred to as "rate and term" refinance; it is the process of paying off an existing loan and replacing it with a new one with a new interest rate and loan term. Literally "rate and term" refinance suggests to the lender and underwriter that the borrower's intentions are not to change any of the loan criteria with exception to lower the interest rate and begin again the term (or amortization period) for 15 to 45 years.

Reserves: Money the lender requires in the form of liquid assets (calculated in months) needed in verifiable documentation in order to close. Reserves are calculated by multiplying the total proposed PITI by the required months (i.e. 2 months of reserves times PITI of $1,050 = $2,100).

Right of Rescission: This a legal right to the borrower after signing the note and all final documents at closing to rescind their action and undo the contract. For refinances this can take place during the following 72 hours omitting Sundays and national holidays. For purchases and investment property refinances the time duration is 24 hours following signing excluding Sundays and national holidays. If this right is omitted or cut short the borrower then holds the right to rescind the contract any time during the next 3 calendar years. If the lender omits a legally required document (such as the Notice of Transfer of Servicing Rights) or does not follow regulations required otherwise (such as failing to correctly disclose the Truth in Lending), the borrower may again be eligible to rescind at any time during the following 3 years.

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Settlement Costs: The total costs associated on the Good Faith Estimate and HUD1 Statement comprising of the Non-Recurring Fees , Recurring Fees (Pre Paid Items and lender required Reserves), and points .

Settlement Statement (HUD-1): This is an RESPA required statement in all residential real estate transactions. The settlement statement reviews line item for line item the transaction whether refinance or purchase. It details the final pay-off amounts between the seller and buyer, or the new and existing loans, and delineates the costs and fees. The statement will also break down all fees being charged by the lender, broker (if applicable), all third parties- like the appraiser and title and escrow, and will show the final prepaid items and reserves found under line items 1000 thru 1100's.

Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

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Tax Deductible: Interest paid yearly on a home mortgage are credited back to the home owner in the form of tax deductions.

Truth in Lending (TIL): A federally required disclosure to indicate to the borrower the APR and total costs over the life of the loan, prepayment penalties, late fees and charges, assumption, hazard insurance, and collateralization of the loan.

Title Report (or title search): a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property. (See also Chain of Title)

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Underwriting: The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.