Glossary

ACCELERATION CLAUSE

Allows the lender to speed up the rate at which your loan comes due or to demand immediate payment of the entire outstanding loan balance should you default on your loan.

ADJUSTABLE-RATE MORTGAGE (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. It is also sometimes referred to as the renegotiable-rate mortgage or variable-rate mortgage.

AMORTIZATION

Loan payment of equal periodic payments calculated to pay off the debt, as well as the accrued interest on the outstanding balance, at the end of a fixed period.

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.

APPRAISAL

An estimate of the value of property made by a licensed professional called an appraiser.

ASSUMPTION

Agreement between buyer and seller, where the buyer takes over (assumes) the payments on an existing mortgage from the seller. Assuming a loan usually saves the buyer money because an existing mortgage debt does not require closing costs or new, potentially higher, market-rate interest charges.

BROKER

An individual licensed to assist in arranging funding or negotiating contracts for a client who does not personally loan the money. Brokers usually charge a fee or receive a commission for their services.

BUY-DOWN

Occurs when the lender, the homebuilder, or both subsidize your mortgage thereby lowering the interest rate during the first few years of the loan. While the payments are initially low, they increase when the subsidy expires.

CASH OUT

In a cash out, you receive the difference between the loan amount and the closing costs plus purchase or refinance costs.

CLOSING

The meeting between you, the seller, and the lender (or their agents) during which the property and funds legally change hands. It is often referred to as the settlement.

CLOSING COSTS

Costs associated with the loan, which are assessed at settlement. When closing costs are included in the loan, they are added to the loan balance instead of being paid by homebuyer in one lump sum at the close of escrow. When not included, the homebuyer pays the costs assessed at settlement in one lump.

CLOSING COSTS EXPENSES

Over and above the price of the property, incurred by buyers and sellers in transferring ownership of a property. Usually they include an origination fee, attorney/title fees, appraisal and credit report fees, taxes, deed recording fee, and charges for obtaining title insurance and a survey. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing Disclosure (CD)

Provides important details about a mortgage loan including final closing costs.

COMMITMENT AGREEMENT

Often in writing, an agreement between a lender and borrower to loan money at a future date, subject to the completion of paperwork or compliance with stated conditions.

CONFORMING LOANS

A loan that is less than the limit that has been set by the Federal Housing Finance Agency (FHFA).

CONSTRUCTION LOAN

A short term, interim loan used to finance home construction. The lender advances funds to the builder at periodic intervals as the work progresses.

CONVENTIONAL LOAN

A loan used for financing the cost of purchasing or refinancing a home that is not insured by the FHA or guaranteed by the VA or USDA (US Department of Agriculture).

CREDIT REPORT

A report of an individual’s credit history, obtained from a reputable credit bureau that summarizes their liabilities and verifies any liens or late payments. The report is used by a lender in determining a loan applicant’s creditworthiness.

DEED OF TRUST

In many states, this document is used in place of a mortgage to secure the payment of a note.

DEFAULT

Failure to meet legal obligations in a contract. Specifically, failure to make the monthly payments on a mortgage.

DELINQUENCY

Failure to make payments on time. This can lead to foreclosure.

DEPARTMENT OF VETERANS AFFAIRS (VA)

Independent agency of the federal government that guarantees long-term, low- or no-down payment mortgages to eligible veterans. See VA Loans.

DEPT-TO-INCOME RATIO

The ratio, expressed as a percentage, when your housing expenses and debts are divided by your gross monthly income (conventional, FHA and USDA loans) or net effective income (VA loans).

DISCOUNT POINTS

One-time charge imposed by the lender or broker to lower the rate at which the lender or broker would otherwise offer the loan. It is sometimes referred to as a “loan discount.”

DOWN PAYMENTS

Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 5 to 20 percent of the sales price on conventional loans. They can be less on FHA and VA loans.

DUE-ON-SALE CLAUSE

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.

EARNEST MONEY

Money given by a buyer to a seller, through a title company, as part of the purchase price to bind a transaction or assure payment.

EQUAL CREDIT OPPORTUNITY ACT (ECOA)

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

Difference between the fair market value of the home and current indebtedness, also referred to as the owner’s interest.

ESCROW

Neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or closing. Escrow may also refer to an account held by the lender into which you pay money for tax or insurance payments. 

FANNIE MAE (FNMA)

A government sponsored enterprise to expand equitable access to affordable housing.   

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)

See Freddie Mac.

FEDERAL HOUSING ADMINISTRATION (FHA)

Division of the Department of Housing and Urban Development. Its main activity is insuring residential mortgage loans made by private lenders.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)

See Fannie Mae.

FHA LOAN

A loan insured by the Federal Housing Administration open to all qualified home purchasers.

FHA MORTGAGE INSURANCE (MIP)

FHA mortgage insurance premiums (MIP) protect lenders in case of a default by the borrower of the FHA loan. The FHA mortgage insurance cost is borne by the homebuyer and is required on all FHA loans.

FIRST MORTGAGE

Mortgage that is the primary lien against a property.

FIXED-RATE MORTGAGE

Mortgage on which the interest rate does not change for the term of the loan.

FORECLOSURE

Legal procedure in which property securing debt is sold by the lender to pay the defaulting borrower’s debt.

FREDDIE MAC

Also known as Federal Home Loan Mortgage Corporation or FHLMC. A government sponsored enterprise to expand equitable access to affordable housing.   

GINNIE MAE

Also known as Government National Mortgage Association. It ensures liqulity for housing programs that serve first time homebuyers, low-to-moderate homebuyers, and qualified Veterans.

GOOD FAITH ESTIMATE (GFE)

Estimate of charges likely incurred in connection with a settlement of a Reverse Mortgage.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)

See Ginnie Mae.

GROSS MONTHLY INCOME

Total amount the borrower earns per month, before any expenses, taxes, and so on are deducted.

HAZARD INSURANCE

Form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm, and so on.

HOUSING EXPENSE-TO-INCOME RATIO

Expressed as a percentage, which results when housing expenses are divided by your gross monthly income (conventional, FHA and USDA loans) or net effective income (VA loans).

IMPOUND

Portion of your monthly payments held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

INDEX

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, which is then used to adjust the interest rate up or down on an adjustable mortgage. (Investments could include one or more of the following: one, three, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, the monthly average costs-of-funds incurred by savings and loans.)

INTEREST CAP

A consumer safeguard for adjustable-rate mortgages that limits the amount interest rates may change per year, for the life of the loan, or both.

INVESTOR

Money source for a lender.

JUMBO LOAN

Loan that is larger than the conventional conforming limit set by the FHFA. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

LIEN

Claim made on a property in order to satisfy the debt or obligation.

LOAN Estimate (LE)

Provides important details about a mortgage loan including estimated costs.

LOAN-TO-VALUE RATIO (LTV)

The relationship between the amount of the mortgage loan and the appraised value of the property or sales prices, whichever is less, and expressed as a percentage.

MARGIN

The amount a lender adds to the index on an adjustable-rate mortgage to establish the adjusted interest rate.

MARKET VALUE

Highest price that the buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for.

MONTHLY HOUSING EXPENSE

Principal, interest, taxes, and insurance. Also called PITI.

MORTGAGE

A legal document that pledges a property to the lender as security for payment of a debt, or the deed by which such a transaction is affected.

MORTGAGE INSURANCE (MI)

Also known as PMI or Private Mortgage Insurance and is underwritten by an independent mortgage insurance company. PMI is designed to protect the mortgage lender against loss incurred by a mortgage default and is generally required for loans with a loan-to-value ratio of 80.01% or higher and when the down payment is less than 20 percent. See private mortgage insurance.

MORTGAGEE

The mortgage lender.

MORTGAGOR

The borrower or homeowner.

NEGATIVE AMORTIZATION

Occurs when 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 homebuyer ends up owing more than the original amount of the loan.

NET EFFECTIVE INCOME

The borrower’s gross income less federal income tax.

NMLS

Nationwide Multistage Licensing System and Registration. This is the system of record for non-depository mortgage lenders and financial services licensing. This system is also available for consumers to check the licensing status of a lender or a licensed mortgage loan originator.

NO COST LOAN

A loan that has no points or closing costs. The interest rate will be higher than the interest rate on loans that assess points and closing costs.

NO POINTS LOAN

A loan that does not charge any points but does assess closing costs. Often referred to as a zero-point loan.

NON-ASSUMPTION CLAUSE

A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

NON-OWNER OCCUPIED

A property this not occupied by the homeowner.

ORIGINATION FEE

The fee that may be charged by a lender to originate a loan is generally shown as a percentage of the loan amount.

PAYMENT CAP

A consumer safeguard for adjustable-rate mortgages that limits the amount monthly payments may change.

PITI

Principal, Interest, Taxes, and Insurance. Also called monthly housing expense.

POINTS (LOAN DISCOUNT POINTS)

Prepaid interest assessed at closing by the lender. It is the percentage of the loan amount that is credited to the borrower. Each point is equal to 1 percent of the loan amount. For example, two points on a $100,000 mortgage is $2,000.

POWER OF ATTORNEY

A legal document authorizing one person to act on behalf of another.

PRE-APPROVAL

A general analysis of borrowers’ financial position, without a specific property identified, based on non-verified information. 

PRE-QUALIFICATION

A general analysis of borrowers’ financial position, without a specific property identified, based on verified information.

PREPAIDS

Expenses necessary to create an escrow account or to adjust the seller’s existing escrow account. Prepaids can include taxes, hazard insurance, private mortgage insurance, mortgage insurance, guarantee fees, and special assessments.

PREPAYMENT

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

PREPAYMENT PENALTY

Money charged for an early repayment of debt. Prepayment penalties are legal in most states and the District of Columbia.

PRINCIPAL

The amount of debt, excluding the interest, left on a loan.

PRIVATE MORTGAGE INSURANCE (PMI)

See Mortgage Insurance.

QUALIFYING RATIO

The ratio of your fixed monthly expenses to your gross monthly income. It is used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.

RATE LOCK

A written agreement that guarantees the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

REALTOR

A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

RECORDING FEES

Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

RESCISSION

The cancellation of a contract. With respect to mortgage refinancing, the law gives homeowners three days to cancel a contract, once it is signed, if the transaction uses equity in the home as security. 

RESPA

Acronym for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs one time after application and one time prior to or at settlement. The law requires lenders to furnish information after application only in the form of a Loan Estimate, and for Reverse Mortgages, a Good Faith Estimate.

SECOND MORTGAGE

A lien on the property in second position, utilizing the available equity, purchased to avoid paying private mortgage insurance. Often used for home improvements, debt consolidation, and so on.

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.

SETTLEMENT

The meeting between the buyer, the seller, and the lender (or their agents), where the property and funds legally change hands. It is often referred to as the closing.

SETTLEMENT 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 settlement costs are usually about 3 to 6 percent of the mortgage amount.

SURVEY

Measurement of land, prepared by a registers land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

TITLE

Document that gives evidence of an individual’s ownership of property.

TITLE INSURANCE

A policy, usually issued by a title insurance company, which insures you against errors in the title search. The cost of the policy is usually a function of the value of the property, and can be paid by the purchaser, the seller, or both.

TITLE SEARCH

Examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

TRUTH-IN-LENDING ACT

Federal law requires disclosure of loan cost information so borrowers can comparison shot for certain types of loans.

UNDERWRITING DECISION

Decision, made by an underwriter, whether to grant a loan to a potential homebuyer based on credit, employment, assets, and other factors. This decision also includes the matching of the risk to an appropriate rate and term or loan amount.

VA LOAN

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.

VA FUNDING FEE

A fee charged to Veterans wanting to obtain a VA loan.  This fee is charged so the Department of Veteran Affairs and will vary in amount depending on the type of VA loan being borrowed and any previous use of entitlement.

VERIFICATION OF DEPOSIT (VOD)

Document signed by the financial institution verifying the status and balance of the borrower’s financial accounts.

VERIFICATION OF EMPLOYMENT (VOE)

Document signed by borrower’s employer verifying position, date of hire, and salary.