Mortgage terms
To help assist you, we have put together common mortgage terms with their definitions. They are listed below. Just read below for the a further understand of our termology.
Acceleration
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause. Top
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as a renegotiable rate mortgage, variable rate mortgage or as a rollover mortgage. Top
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. Top
Amortization
Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Top
Annual Percentage Rate (A.P.R.)
APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a basis for comparing the cost of loans. Top
Appraisal
An estimate of the value of property, made by a qualified professional called an "appraiser". Top
Assessment
A local tax levied against a property for a specific purpose, such as for a sewer or street lights. Top
Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan may save the buyer money since assuming an existing mortgage debt forgoes new mortgage closing costs and new market-rate interest charges. Top
Balloon Mortgage
A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty-year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment. Top
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage. Top
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full. Top
Broker
Brokers assist in arranging funding and negotiating contracts for a client. Brokers charge a fee or receive a commission for their services. Top
Buy-down
When the lender and/or the home builder subsidize 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. Top
Cash Flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.). Top
Caps (Interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change per year and/or the life of the loan. Top
Caps (Payment)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Top
Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed loans for homes, businesses and/or mobile homes. Certificates of eligibility may be obtained by sending form DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility). Top
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing the property's current market value. Top
Certificate of veteran status
The document given to veterans or reservists who have served 90 days of continuous active duty (including training time) It may be obtained by sending DD 214 to the local VA office with form 26-8261a (request for certificate of veteran status. This document enables veterans to obtain lower down payments on certain FHA insured loans). Top
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 usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount. Top
COFI
Adjustable-rate mortgage with rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds. Top
Construction Loan
A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses. Top
Contract sale or deed
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of an installment sale. Top
Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA. Top
Credit Report
A report documenting the credit history and current status of a borrower's credit standing. Top
Debt-to-Income 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 gross monthly income. See housing expenses-to-income ratio. Top
Deed of trust
In many states, this document is used in place of a mortgage to secure the payment of a note. Top
Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. Top
Deferred interest
When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization. Top
Delinquency
Failure to make payments on time. This can lead to foreclosure. Top
Department of Veterans Affairs (VA)
An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans. Top
Discount Point
See points. Top
Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount. Top
Due-on-Sale-Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home. Top
Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment. Top
Entitlement
The VA home loan benefit is called entitlement. This is also known as eligibility. Top
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, sex, religion, national origin, age, marital status or receipt of income from public assistance programs. Top
Equity
The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property. Top
Escrow
An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing. Top
Fannie Mae
See Federal National Mortgage Association. Top
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere. Top
Federal Home Loan Bank Board (FHLBB)
The former name for the regulatory and supervisory agency for federally chartered savings institutions. Agency is now called the Office of Thrift Supervision. Top
Federal Home Loan Mortgage Corporation (FHLMC)
Also called "Freddie Mac", is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers. Top
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages. Top
Federal National Mortgage Association (FNMA)
Also know as "Fannie Mae." 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. Top
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 can handle moderately-priced homes almost anywhere in the country. Top
FHA Mortgage Insurance
Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid. Top
FHLMC
The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac". Top
Firm Commitment
A promise by FHA to insure a mortgage loam for a specified property and borrower. A promise from a lender to make a mortgage loan. Top
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower. Top
FNMA
The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae". Top
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property. Top
Freddie Mac
See Federal Home Loan Mortgage Corporation. Top
Ginnie Mae
See Government National Mortgage Association. Top
Government National Mortgage Association (GNMA)
Also known as "Ginnie Mae," provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Top
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. Top
Guaranty
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
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. Top
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio. Top
Impound
That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves. Top
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. Top
Indexed rate
The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage. Top
Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion. Top
Investor
A money source for a lender. Top
Jumbo Loan
A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate. Top
Lien
A claim upon a piece of property for the payment or satisfaction of a debt or obligation. Top
Loan-to-Value Ratio (LTV)
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. Top
Lock
Lender's guarantee that the mortgage rate quoted will be good for a specific number of days from day of application. Once a rate is locked, it cannot be decreased, even if market rates decrease. Top
Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate. Top
Market Value
The highest price that a buyer would pay for a property. Market value may be different from the price a property could actually be sold for at a given time. Top
MIP (Mortgage Insurance Premium)
MIP is insurance from FHA to the lender against incurring a loss due to the borrower's default. Top
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance, FHA Mortgage Insurance. Top
Mortgagee
The Mortgagee is the lender. Top
Mortgagor
The Mortgagor is the borrower or homeowner. Top
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan. Top
Net Effective Income
The borrower's gross income minus federal income tax. Top
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note. Top
Nonconforming Mortgage Loan
Mortgage loan not guaranteed to the lender by FNMA or FHLMC. Therefore, the loan program is not required to abide by the strict guidelines of FNMA/FHLMC. Nonconforming loans are much easier for borrowers to qualify for. Top
Office of Thrift Supervision (OTS)
The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board. Top
One-year adjustable
Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender. Top
Origination Fee
The fee charged by a lender to prepare loan documents, perform credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan. Top
Permanent Loan
A long term mortgage, usually ten years or more. Also called an "end loan". Top
PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense. Top
Pledged Account Mortgage (PAM)
Money is placed in a pledged savings account and this fund, plus earned interest, is gradually used to reduce mortgage payments. Top
Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (i.e. two points on a $100,000 mortgage would cost $2,000). Top
Power of Attorney
A legal document authorizing one person to act on behalf of another. Top
Prepaid 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. Top
Prepayment
A privilege in a mortgage agreement permitting the borrower to make payments in advance of their due date. Top
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states. Top
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc. Top
Principal
The amount of debt, not counting interest, left on a loan. Top
Private Mortgage Insurance (PMI)
Lenders will sometimes allow a small down payment if borrowers carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on you loan's structure. Top
Realtor
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors. Keep in mind that Realtors are Real Estate specialists and not Mortgage specialists. Top
Recision
The cancellation of a contract. With respect to mortgage refinancing, the law gives a homeowner three days to cancel a contract if the transaction uses equity in the home as security. Top
Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. Top
Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property. Top
Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. See Adjustable Rate Mortgage. Top
RESPA
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only. Top
Reverse Annuity Mortgage (RAM)
A type of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loam is paid in full. Also called a "Release of Mortgage". Top
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one. Top
Secondary Mortgage Market
The place where primary mortgage lenders sell mortgages to obtain more funds to originate more new loans. It provides liquidity for the lenders' security. Top
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like. Top
Settlement/Settlement Costs
See Closing/Closing Costs. Top
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation. Top
Simple Interest
Interest which is computed only on the principle balance. Top
Survey
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings. Top
Sweat Equity
Equity created by a purchaser performing work on a property being purchased. Top
Title
A document that gives evidence of an individual's ownership of property. Top
Title Insurance
A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests. Top
Title Search
An examination of municipal records to determine the legal ownership of property. This usually is performed by a title company. Top
Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as "Regulation Z". Top
Two-Step Mortgage
A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called "SuperSeven" or "Premier mortgage". Top
Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors. The matching of this risk to an appropriate interest rate, term and loan amount. Top
Usery
Interest charged in excess of the legal rate established by law. Top
VA Loan
A long-term, low, or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements. Top
VA Mortgage Funding Fee
A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed. Top
Variable Rate Mortgage (VRM)
See adjustable rate mortgage. Top
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts. Top
Verification of Employment (VOE)
A document signed by the borrower's employer verifying his/her position and salary. Top
Warehouse Fee
Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehousefee. Top
Wraparound Mortgage
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 previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top. Top