Mortgage Glossary
 
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A
Adjustable Rate Mortgage (ARM)
The interest rate on an ARM is not fixed for the life of the loan. These mortgages adjust periodically based on an index that changes with market conditions. The rate of interest is the sum of the index plus a margin. Most ARMs have periodic interest rate and payment caps, as well as a life cap.
 
Agent
Person authorized to act on behalf of another in dealings with third parties.
 
Amortization
The gradual reduction in the principal of a mortgage through scheduled installment payments.
 
Amortization Schedule
A schedule that shows the portions of each payment that are applied to interest and to principal. It also shows the loan balance remaining after each payment.
 
Annual Percentage Rate (APR)
A rate that reflects the actual annual cost of a loan and includes the loan interest rate, private mortgage insurance, points and fees.
 
Application
A form, commonly referred to as a 1003 form, used to apply for a mortgage and to provide information about a prospective mortgagor and the proposed loan.
 
Appraisal
A professional assessment of a property's market value.
 
Appreciation
Increase in market value of a property.
 
Assessed Value
The value placed on a property by local officials for taxation purposes (may or may not equal appraised value).
 
Asset
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including, for example, bank accounts, stocks, mutual funds).
 
Assumable Mortgage
A mortgage with a specific provision, which allows the buyer to accept responsibility for repayment from the seller of a property.
 
Assumption
New owner takes over the responsibility for repaying an existing mortgage. Both FHA and VA loans are fully assumable. Some adjustable rate mortgages may be partially assumable, but the new owners may be required to re-qualify for the loan.
 
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Balance Sheet
A report of the financial position of a business at a specific point in time, showing its assets, liabilities, and owner's equity.
 
Balloon Mortgage
A mortgage allowing for lower monthly payments, which are insufficient to fully amortize the face amount of the note prior to maturity. This means that a principal sum known as a "Balloon" is due at maturity.
 
Balloon Payments
The final payment of a mortgage, which is larger than the regular payment and usually extinguishes the debt.
 
Bankruptcy
A court action to restructure debt.
 
Basis Point
One one-hundredth of one percent. Used primarily to describe changes in yield or price of mortgages.
 
Binder
A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate. Or an agreement confirming temporary coverage pending issuance of a formal policy, when used in reference to insurance.
 
Biweekly Mortgage
A mortgage in which payments are made every two weeks instead of monthly, thus making the equivalent of 13 monthly payments a year (there are 26 two week periods) instead of 12. Allows for more rapid repayment of mortgage and decreases the amount of interest paid over the life of the loan.
 
Broker
A person who represents another, for a fee, in real estate transactions. Mortgage brokers help consumers locate suitable real estate loans and are paid a fee for their services.

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Cap
Dictates how much the interest rate or monthly payments for an ARM loan may increase.
 
Capital Gain
Taxable profit on the sale of an appreciated asset.
 
Cash Reserve
A requirement of some lenders that the buyer have enough cash left after closing to make the first two mortgage payments.
 
Cash-out Refinance
Using a new mortgage to cash out an existing mortgage with the objective of converting (all or part of) the difference in value between the original property value and the reappraised property value to cash.
 
Certificate of Eligibility
A certificate obtained by a veteran from a Veteran's Administration office, which states that the veteran is eligible for a V.A. insured loan.
 
Certificate of Title
A written document by a title attorney or company stating that the title to a parcel of real property is legally vested in the present owner.
 
Clear Title
A title to a property that is free of liens and legal questions concerning ownership.
 
Closing
Conclusion of a real estate sale, where the title of the property is transferred to the new owners and funds are transferred to the appropriate parties including but not limited to: seller, previous lender, real estate broker/agents.
 
Closing Costs
Expenses incurred by the buyer/borrower and the seller in a real estate or mortgage transaction. These may include, but are not limited to: points, taxes, settlement fees, vendor fees, such as appraisal, title and escrow, and various kinds of applicable insurance including flood or hazard insurance.
 
Closing Statement
A statement showing the various closing costs and recording which party paid these costs. Also called a settlement statement or HUD-1.
 
Co-Signer
A person who signs and assumes joint liability with another person for the repayment of a debt.
 
COFI (Cost of Funds Index)
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.
 
Collateral
Property pledged as security for a debt, for example, mortgaged real estate.
 
Combined Loan-to-Value (CLTV)
The ratio of the all the mortgage loan amounts on a property (usually a first and second) to the property's appraised value (or the selling price whichever is less).
 
Commitment Letter
A lender's formal notice to a borrower that a loan has been approved; states the terms and conditions of the loan.
 
Common Areas
Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium association (or a cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress.
 
Comparables
Properties used as comparisons to determine the value of a specified property.
 
Condo Fee (or homeowners association dues)
The monthly maintenance fee condominium unit (or planned unit development) owners must pay to cover common area expenses.
 
Condominium
A form of property ownership in which the owner holds the title to an individual dwelling, plus interest in common areas of a multi-unit project.
 
Condominium Conversion
Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership.
 
Conforming Loan
The current conforming loan limit is $417,000 and below.
 
Construction Loan
Short term financing of real estate construction. Generally followed by the long term financing called a "take out" loan, issued upon completion of improvements.
 
Contingency
Condition which must be satisfied before the buyer can consummate the purchase of a property. Contingencies are generally outlined in the purchase contract between the buyer and seller.
 
Contract
An agreement between two or more parties, which structures an obligation to do or not to do a particular thing.
 
Conventional Mortgage
Any mortgage that is not insured or guaranteed by the federal government.
 
Convertible ARM
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
 
Cooperative
A form of common property ownership in which the residents of an apartment building do not own their own units, but rather own shares in the corporation that owns the property.
 
Covenant
A clause in a mortgage that obligates or restricts that borrower and which, if violated, can result in foreclosure.
 
Credit History
A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
 
Credit Report
A report of an individual's credit history prepared by a credit bureau and used by a lender to determine a loan applicant's credit worthiness.
 
Credit Reporting Agency
An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository as well as from other sources.
 
Credit Repository
An organization that gathers, records, updates, and stores financial and public record information about the payment records of individuals who are being considered for credit.
 
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Debt-to-Income Ratio
Monthly debt and housing payments divided by verifiable gross monthly income.
 
Deed
The legal document conveying title to a property.
 
Deed of Trust
The document used in some states instead of a mortgage; title is conveyed to a trustee instead of the borrower.
 
Default
To fail to make mortgage payments on a timely basis or to comply with other mortgage conditions.
 
Delinquency
Failure to make a loan payment on time; the loan is not yet in default.
 
Deposit
Cash the buyer pays to the seller when both sign a formal sales contract.
 
Depreciation
A decline in property value; opposite of appreciation.
 
Discount
Sometimes referred to as "points", this fee results in a lower interest rate for the borrower by allowing him to pay more money to reduce his interest rate (or pay less for a higher rate). This higher cost allows the lender to sell this loan with a lower interest rate on the secondary market without taking a loss.
 
Down Payment
The part of the purchase price of a home, which the buyer pays in cash up front; not included in the loan.
 
Due-on-sale Provision
A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
 
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Earnest Money
Deposit given to the seller by the buyer when submitting an offer to show serious intent about buying a property.
 
Easement
A right created by grant, reservation, agreement, prescription, or necessary implication, which one has in the land of another.
 
Effective Age
An appraiser's estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.
 
Encumbrance
Unauthorized intrusion of a building or improvement onto another's land. A claim, line charge, attached to and binding real property.
 
Equal Credit Opportunity Act (ECOA)
A federal law prohibiting lenders from denying loans on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
 
Equity
The difference between the market value of a property and the owner's outstanding mortgage balance; measures the degree of ownership.
 
Escrow
The holding of documents and money (such as a deposit) by a neutral third party prior to closing. Also an account held by the lender into which a homeowner pays money for taxes and insurance.
 
Escrow Account
The account in which a mortgage servicer holds the borrower's escrow payments prior to paying property expenses.
 
Escrow Analysis
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.
 
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
 
Escrow Payment
That portion of a mortgagor's monthly payment held in trust by the lender to pay for taxes mortgage insurance, hazard insurance, lease payments, and other items as they become due, also known as "impounds" in some states.
 
Estate
The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.
 
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Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.
 
Fair Market Value
The highest price that a buyer, willing but not compelled to buy would pay, and the lowest a seller, willing but not compelled to sell, would accept.
 
Fannie Mae (FNMA)
An acronym for the Federal National Mortgage Association. Fannie Mae purchases mortgage loans originated by local lenders and sets guidelines that lenders must follow to qualify prospective borrowers.
 
Fannie Mae's Community Home Buyer's Program
An alternative financing option that allows moderate-income household to qualify for loans. It allows for higher housing-to-income and debt-to-income ratios, as well as non- traditional credit histories and waiver of cash reserve requirements at closing.
 
FHA Loan
A mortgage that is insured by the Federal Housing Administration (FHA). Down payment may be as little as 3 percent, but the purchase price is limited. There is a maximum mortgage amount set by the Department of Housing and Urban Development that will vary from county to county. In Minnesota, the mortgage limit varies from $200,160 to $276,683, and in Wisconsin it varies from $200,160 to $275,200. Loan limits are higher for 2-4 family homes in both states.
 
Finance Charge
The cost of credit expressed in dollars. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan.
 
Fixed Rate Mortgage (FRM)
A mortgage in which the interest rate does not change during the entire life of the loan.
 
Flood Insurance
Insurance that will be required if a property is in a federally designated flood hazard area.
 
Foreclosure
The legal process by which a mortgaged property may be sold when a mortgage is in default.
 
Freddie Mac (FHLMC)
An acronym for the Federal Home Loan Mortgage Corporation. Freddie Mac purchases mortgage loans originated by local lenders and sets guidelines that lenders must follow to quality prospective borrowers.
 
Fully Indexed Interest Rate
The index plus the margin for an adjustable rate mortgage.
 
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Gift
Money given to borrowers to assist in the purchase of a home, usually from a relative, that does not require repayment.
 
Good Faith Estimate
A written estimate of closing costs provided by the lender within three days after someone applies for a loan.
 
Government National Mortgage Association (GNMA)
A government owned agency that acts as a secondary market conduit for FHA and VA loans. GNMA guarantees the timely principal and interest payments to investors.
 
Grace Period
Period of time (usually 15 days) after a mortgage payment is due in which the lender will not charge a late penalty or report the payment as late.
 
Graduated Payment Mortgage (GPM)
A mortgage that starts with lower monthly payments that increase at a predetermined rate over time.
 
Gross Income
Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable.
 
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Hazard Insurance
Insurance to protect the homeowner and lender against physical damage to property from fire, wind, vandalism and other hazards.
 
Home Equity Line of Credit
An open-end loan, usually recorded as a second mortgage, that permits borrowers to obtain cash advances based on an approved line of credit.
 
Home Equity Loan
A loan based on the borrower's equity in his or her home.
 
Homeowner's Insurance
An insurance policy that combines hazard insurance and liability coverage.
 
Homeowner's Insurance Declaration
Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.
 
Housing Ratio
The ratio of the monthly housing payment in total (PITI - Principal, Interest, Taxes, and Insurance) divided by the gross monthly income. This ratio is sometimes referred to as the top ratio or front-end ratio.
 
HUD
Initials of the U.S. Department of Housing and Urban Development.
 
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Income Property
Real estate developed or improved to produce income.
 
Index
A published rate or benchmark measure of current interest rate levels used to calculate periodic changes in rates charged on adjustable rate mortgages.
 
Installment
The periodic payment that a borrower agrees to pay a mortgage lender.
 
Interest
The cost for borrowing money.
 
Interest Rate Cap
A provision of an ARM that limits how much the interest rate can increase per adjustment period.
 
Investment Property
A property that is not occupied by the owner and who, in most cases, receives income off the property.
 
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Jumbo Mortgage
Loans with balances higher than the Fannie Mae and Freddie Mac set limits, presently at $417,000 for a single family home.
 
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Lender
Person or entity that invests in or originates mortgage loans, such as a mortgage banker, credit union, commercial bank, or savings and loan.
 
Lien
A legal claim against a property that must be paid when a property is sold.
 
Lifetime Cap
A provision of an ARM limiting the total increase in the interest rate over the life of the loan.
 
Loan Servicing
Loan servicing is the function of collecting loan payments, managing the property tax and insurance escrows, foreclosing on defaulted loans, and remitting payments to the investor/beneficiary.
 
Loan-to-Value (LTV)
The ratio of the mortgage loan amount to the property's appraised value (or the selling price whichever is less).
 
Lock-in Rate
The interest rate the lender guarantees to the borrower provided the mortgage is closed within a certain time period.
 
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Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
 
Market Value (Fair Market)
The most likely price a given property will bring if widely exposed on the market, assuming fully informed buyer and seller.
 
Maturity
The date on which an agreement expires; termination of a promissory note.
 
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
 
Mortgage Insurance (MI)
Insurance similar to FHA or VA insurance, insuring part of the first mortgage or deed of trust, and enabling a lender to make a conventional loan of a higher percentage of the property value. This type of insurance protects the upper portion of a mortgage loan thereby reducing the lender's risk to principal loss in the event of a borrower's default. The coverage allows lenders to make higher loan-to-value ratios.
 
Mortgage Note
A legal document obligating a borrower to repay a loan at a stated interest rate during specified time period; this is secured by a mortgage.
 
Multi-Family
A building with more than four residential rental units.
 
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Negative Amortization
Payment terms under which the borrower's monthly payments are insufficient to cover interest due, thus increasing the loan balance.
 
Net Income
The amount remaining after total operating expenses (excluding interest payments) are deducted from effective gross income.
 
Non-Conforming Loan
Also known as jumbo loans. Loans that are above the loan limits set by Fannie Mae and Freddie Mac.
 
Non-Owner Occupant
A borrower that will not occupy the property and in most cases receives income off the property.

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Offer to Purchase
A formal document in which a buyer proposes to purchase a property for a specified amount and under certain conditions. Acceptance by the seller creates a contract binding on both parties, subject to any contingencies.
 
Origination Fee
A fee paid to a lender for processing a loan application. This is shown as a percentage of the mortgage amount, or points and is due at closing.
 
Owner Financing
A purchase where the seller provides all or part of the financing for the buyer.
 
Owner Occupant
The residence that the owner physically occupies and uses as his or her home.
 
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Payment Adjustment Period
The length of time, on an Adjustable Rate Mortgage (ARM) before the member's rate/payment will be reviewed and adjusted according to the market. For example: the first adjustment period for a 5/1 ARM is after five years. All subsequent adjustments are made every year thereafter.
 
Payment Cap
A provision of some ARMs limiting how much the borrower's payments may increase, regardless of how much the interest rate increases, and may result in negative amortization.
 
Payment Shock
A scenario in which monthly mortgage payments on an adjustable rate mortgage (ARM) rise so high that the borrower may not be able to afford the payments. Consumer protection guidelines regarding extremely low initial "teaser" rates, lifetime ceilings, and annual caps are designed to prevent payment shock.
 
Payoff
The unpaid principal balance, accrued interest, outstanding late charges, legal fees, and all other amounts necessary to pay off the lender in full.
 
Perc Test
A test to determine of a property is suitable for a septic tank.
 
Periodic Rate Cap
A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease over a specific period.
 
PITI
Stands for principal, interest, taxes and insurance - the components of a monthly mortgage payment.
 
Planned Unit Developments (PUD)
A housing development, where there is a homeowner's association and common areas owned by the homeowners.
 
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $100,000, one point means you pay $1000 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield of the mortgage and to cover loan closing costs. These points are usually collected at closing and may be paid by the borrower or the home seller, or may be split between them
 
Pre-Qualification
The process of determining how large a loan a prospective home buyer can qualify for; this procedure is done before actually applying for the loan.
 
Prepaids
Those expenses of owning property, which are paid in advance of their due date and usually prorated upon sale, such as taxes, insurance, rent, etc.
 
Prepayment Penalty
Charge levied by the lender for paying off a mortgage loan before its maturity date.
 
Private Mortgage Insurance (PMI)
Insurance provided by a non-government insurer to protect a lender against loss if a borrower defaults. Usually required if the down payment is less than 20 percent of the purchase price.
 
Purchase Agreement
A written agreement between a buyer and seller of real property, setting forth the price and terms of sale.
 
Purchase and Sale Agreement
A legal document requiring the buyer to buy and the seller to sell, under specified terms and conditions
 
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Rate Cap
A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.
 
Rate Lock
A written agreement in which the lender guarantees the borrower a specified interest rate, provided the loan closes within a set period of time.
 
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate; works on behalf of the seller, unless designated as a buyer's broker.
 
Refinancing
The process of obtaining a new mortgage, usually at a lower rate, to repay and replace an existing mortgage.
 
Right of First Refusal
An owner's promise to let someone make the first offer on a property, or to match the amount offered by another party.
 
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Sales Contract
A written agreement between buyer and seller stating terms and conditions of a sale or exchange of property.
 
Second Mortgage
An additional mortgage behind the first mortgage on a property. The rights of the second mortgage holder are subordinate to the rights of the first mortgage holder.
 
Secondary Mortgage Market
The buying and selling of first mortgages of trust deeds by banks, insurance companies, government agencies, and other lenders.
 
Seller Carry Back
An agreement in which the seller takes back a note for part of the purchase price secured by a junior mortgage, wrap-around mortgage, or contract for deed.
 
Servicing (or Loan Servicing)
A mortgage banking function which includes the receipt of payments, customer service, escrow administration, investor accounting, collections, and foreclosures.
 
Survey
Map made by a licensed surveyor who measures that land and charts its boundaries, improvements and relationship to the property surrounding it.
 
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Tenants-in-common
An undivided interest in property taken by two or more persons. The interest need not be equal. Upon death of one or more persons, there is no right of survivorship.
 
Term
The length of time you are given to repay a loan.
 
Termite Certificate
A document certifying a property has no termites; may be required by a lender.
 
Three/Two (3/2) Option
An alternative Fannie Mae financing plan that enables households with earnings at a certain percentage of the median income in their area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative, or a 2 percent grant or unsecured loan from a nonprofit organization or government program.
 
Title
A legal document establishing the right of ownership.
 
Title Insurance
Insurance to protect the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over property ownership.
 
Title Search
A detailed examination of the title records to ensure that the seller of a property is the legal owner and that there are no liens or other claims outstanding.
 
Total Debt Ratio
Monthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.
 
Transfer Tax
State or local tax payable when title passes from one owner to another.
 
Truth-in-Lending Act (TIL)
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.
 
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Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's ability and willingness to repay the debt, and the value of the property.
 
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