Our Mortgage Glossary provides definitions for some of the most common terms that you’ll hear in the mortgage industry.
ADJUSTABLE RATE MORTGAGE (ARM): A mortgage loan that allows the lender to periodically adjust the interest rate in accordance with a specified index as agreed to at the inception of the loan.
AMORTIZATION: The process by which the loan principal decreases over the life of a loan. As each mortgage payment is made, part of the payment is applied as interest on the loan, and the remainder of the payment is applied towards reducing the principal.
AMORTIZATION SCHEDULE: A timetable showing how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.
ANNUAL PERCENTAGE RATE (APR): The percentage relationship of the total finance charge to the amount of the loan. This is not the interest rate, rather, it is a bottom-line number that borrowers can use to easily compare rates charged by different lenders.
APPRAISAL: A report that sets forth an opinion or estimate of value, primarily based on an analysis of comparable sales of similar homes nearby.
APPRAISED VALUE: An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
APPRAISER: An individual who, by education, training, and experience, estimates the value of real property and records the findings on industry accepted appraisal forms.
BORROWER: The person to whom credit is extended. On a mortgage loan, the person who has an ownership interest in the security property, signs the security instrument, and signs the mortgage/deed of trust note (if his or her credit is used for qualifying purposes).
CERTIFICATE OF TITLE: A document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be free and clear of all liens or other claims.
CHAIN OF TITLE: An analysis of the transfers of title to a piece of property over the years.
CLEAR TITLE: A title that is free of liens or legal questions as to ownership of the property.
CLOSING: This has different meanings in different states. In some states, a real estate transaction is not considered “closed” until the documents have been recorded at the local recorder’s office. In others, the “closing” is a meeting where all of the documents are signed and money changes hands.
CLOSING COSTS: Closing costs are separated into what are called “non-recurring closing costs” and “pre-paid items.” Non-recurring closing cost are any items which are paid just once as a result of buying the property or obtaining a loan. “Prepaids” are items which recur over time, such as property taxes and homeowners insurance.
CLOSING DISCLOSURE (CD): A document that is designed to provide disclosures that will be helpful to consumers in understanding all the costs of the transaction. The CD must be provided to consumers at least three business days before consummation of the loan.
CO-BORROWER: An additional individual who is both obligated on the loan and is on title to the property.
CONVENTIONAL MORTGAGE: A mortgage that is not insured or guaranteed by a federal government agency—the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), or Rural Development (RD).
CREDIT REPORT: A report to a lender on the credit standing of a prospective borrower used to aid in determination of the borrower’s credit worthiness.
CREDIT SCORE: A numerical value that ranks an individual according to his or her credit risk at a given point in time, as derived from a statistical evaluation of information in the individual’s credit file that has been proven to be predictive of loan performance. In mortgage lending, Credit Score typically refers to the classic FICO score developed by Fair Isaac Corporation. Other credit scoring models, such as Vantage, CE Score, Credit Karma, etc., are not typically used in mortgage lending.
DEBT: Borrowed money, the repayment of which may be either secured or unsecured, with various possible repayment schedules.
DEBT-TO-INCOME RATIO: A ratio derived by dividing the borrower’s total monthly obligations (including housing expense) by his or her stable monthly income. This calculation is used to determine the mortgage amount for which a borrower qualifies. This is the same as “total debt-to- income ratio.”
DOWN PAYMENT: The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
EARNEST MONEY: Money put down by a potential buyer to show their seriousness 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 declines to continue the process after the agreed upon time period as defined in the purchase agreement contract.
EQUITY: A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
ESCROW: An item of value, money or document deposited with a third party to be delivered upon the fulfillment of a condition.
ESCROW ACCOUNT: A trust account that is established to hold funds allocated for the payment of a borrower’s property taxes and assessments by special assessment districts, ground rents, insurance premiums, condo or homeowners’ association or planned unit development association dues and similar expenses as they are received each month in accordance with the borrower’s mortgage documents and until such time as they are disbursed to pay the related bills.
FEDERAL HOUSING ADMINISTRATION (FHA): FHA, also a part of HUD, provides mortgage insurance on loans made by FHA-approved lenders.
FHA-INSURED MORTGAGE: A mortgage by the Federal Housing Administration; may be referred to as a “government” mortgage.
FICO: Credit score; the classic FICO credit score developed by Fair Isaac Corporation.
FINANCED MORTGAGE INSURANCE PREMIUM: A mortgage insurance premium for which the borrower is not required to make an advance payment from his or her own funds. Rather, the amount required to pay for a lump-sum premium is financed by including it as part of the original mortgage amount.
FIRST-TIME HOME BUYER: An individual is to be considered a first-time home buyer who (1) is purchasing the security property; (2) will reside in the security property; and (3) had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the security property. In addition, an individual who is a displaced homemaker or single parent also will be considered a first-time home buyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period.
FIXED RATE MORTGAGE: A mortgage on which the interest rate is set for the term of the loan.
FLOOD INSURANCE: Insurance that compensates for physical property damage resulting from flooding. It is required for properties in federally designated Special Flood Hazard Areas.
FORECLOSURE: The legal process by which a borrower who defaults on a mortgage is deprived of their interest in the mortgaged property. This usually involves a forced sale of the property as a public auction with the proceeds of the sale being applied to the mortgage debt.
HOMEOWNER’S INSURANCE: Insurance coverage available for owner-occupied properties to protect against personal liability and physical property damages for a dwelling and its contents.
HOUSING RATIO: The proportion of a house payment to total monthly income.
INTEREST: The charge for the privilege of borrowing money. Mortgage interest is the percentage charged on a mortgage that must be paid in addition to the principal. Available interest rates fluctuate based on market conditions.
INVESTMENT PROPERTY: An investment property is not occupied by the owner and is usually rented to produce an income. It is important to note that it is still considered investment property even though there may not be a positive cash flow of rental income. An investment property can be any type of dwelling, single or multi-family, condominium or cooperative unit.
LENDER: A term which can refer to the institution making the loan or to the individual representing the firm. For example, loan officers are often referred to as “lenders”.
LIABILITIES: A person’s financial obligations. Liabilities include long-term and short term debt, as well as any other amounts that are owed to others.
LINE OF CREDIT: An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower.
LOAN ESTIMATE (LE): A disclosure that will be helpful to consumers in understanding the key features, costs and risks of the mortgage loan for which they are applying.
LOAN SERVICING: After a loan is obtained, the company the borrower makes the payments to “services” that loan. The company processes payments, sends statements, manages the escrow/impound account, provides collection efforts on delinquent loans, ensures that insurance and property taxes are made on the property, handles pay-offs and assumptions, and provides a variety of other services.
LOAN TO VALUE RATIO (LTV): The ratio, expressed as a percentage, of the appraised value or purchase price of the mortgage property, whichever is lower, to the original outstanding principal balance of the mortgage loan. Most loan programs with an LTV over 80% will require private mortgage insurance (PMI).
MORTGAGE: A security instrument or legal document that borrowers sign pledging real property as a security for repayment of a debt. Instead of mortgages, some states use First Trust Deeds.
MORTGAGE BROKER: A mortgage company that originates loans then places those loans with a variety of other lending institutions.
MORTGAGE LOAN: The lending of money by a mortgagee, the institution granting the loan, to mortgagor, the person receiving the money, for the purpose of purchasing or refinancing real estate.
MORTGAGE INSURANCE PREMIUM (MPI): The amount paid for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.
NOTE: A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
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 fee(s) charged by a lender to prepare loan documents, make credit checks, inspect, and sometimes appraise a property. The fee(s) are usually computed as a percentage of the face value of the mortgage.
PRIVATE MORTGAGE INSURANCE (PMI): Protects lenders against loss if a borrower defaults on their loan. Most lenders require PMI for loans with loan-to-value (LTV) percentages over 80%. Whereas home loans historically required 20% down payments, PMI allows borrowers to purchase a home for as little at 3% down. PMI only applies to conventional loans. Other loan programs offer similar programs to PMI.
PRINCIPAL: Most commonly refers to the amount borrowed or the amount still owed on a loan, separate from interest. Mortgage principal refers to the outstanding balance on your mortgage. It is the amount borrowed from the lender, minus the amounts repaid to the lender. As monthly payments are made, the mortgage principal is reduced.
PURCHASE: The first and typically the most common reason for a mortgage lender to loan money to individuals is for the purchase of a home. Most people cannot afford to pay cash for a home and need to take out a loan using the home as collateral.
QUALIFYING RATIOS: Calculations that are used in determining whether a borrower can qualify for a mortgage. Ratio requirements vary among loan programs and lenders. There are two ratios. The “top” or “front” ratio is a calculation of the borrowers monthly housing costs (principal, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “back” or “bottom” ratio includes housing cost as well as all other monthly debt as a percentage of monthly income.
REHABILITATION MORTGAGE: A mortgage created to cover the costs of repairing, improving, and sometimes acquiring an existing property.
RURAL DEVELOPMENT (RD): A government agency within the U.S. Department of Agriculture (USDA) that makes direct loans and guarantees mortgages secured by residential properties located in rural areas, concentrating on borrowers who meet income eligibility requirements. Formerly the Rural Housing Service (RHS).
SALES CONTRACT: A contract for the purchase/sale, exchange, or other conveyance of real estate between parties. Sales contracts are in writing and contain the full names of the buyer(s) and seller(s), the property address or legal description, the sales price, and include signatures by the parties. Sales contracts are also known as agreements of sale, purchase agreements, or contracts for sale.
TITLE: A document that gives evidence of an individual’s ownership of property.
TITLE INSURANCE: Insurance against loss resulting from defects in the title. There are two types of title insurance. Owner’s Title Insurance, or an Owner’s Policy, protects the buyer from defects in the title. Lender’s Title Insurance, or a Loan Policy, protects the lender from defects in the title. Lender’s Title Insurance is required in a mortgage transaction, whereas Owner’s Title Insurance is optional.
VA-GUARANTEED MORTGAGE: A mortgage that is guaranteed by the U.S. Department of Veterans Affairs; may be referred to as a “government” mortgage.