Mortgage Definitions

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Explore the Glossary

Your A-Z in Mortgage Definitions

Financial services, as an industry, relies on many concepts, terms, and ratios that may be new or perhaps a little confusing. Mortgages as a subset can be particularly daunting. Strong Home Mortgage created this glossary of more than 275 mortgage definitions to help you navigate purchase, refinance, and home equity loans. To suggest any mortgage definitions we may have missed, please email marketing@stronghome.com.

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1003, or Uniform Residential Loan Application (URLA)
Standard mortgage loan application form developed by FNMA (Fannie Mae).

1098
Tax form that reports the interest amount and points paid over the previous year.

A
Abstract, or Chain of Title
Complete track record of all title history for a property. History should include all documents from the original source of the title (e.g., a land grant from the US government) through to the present.

Acceptance
When a contract is executed, the buyer agrees to be bound by its terms.

Acre
Land measurement used in US property negotiations. One acre equals 43,560 square feet.

Additional Principal Payment
Payment that exceeds scheduled principal amount due. Reduces outstanding balance on your loan and saves on interest over the loan’s lifetime. Basic means to pay off a mortgage early.

Adjustable-Rate Mortgage (ARM), or Variable Rate Mortgage
Mortgage type that features an interest rate and/or monthly payment that may fluctuate periodically over the loan’s lifetime. Initially, your lender may charge a lower interest rate that is fixed for a period of time. Most ARMs have a cap that limits rate movement during an adjustment period and for the duration of the loan.

Adjustment Cap (plus Adjustment Date and Period)
The adjustment cap is a limitation on how much the variable interest rate in an Adjustable-Rate Mortgage (ARM) can increase per adjustment period. There is an initial adjustment cap which limits how much the interest rate can increase the first time it adjusts after the fixed-rate perMore than iod expires. Then there is a subsequent adjustment cap which limits how much the interest rate can increase in the adjustment periods that follow. Finally, the lifetime adjustment cap limits how much the interest rate can increase in total, over the life of the loan.

Adjustment date is the moment when the interest rate changes on an Adjustable-Rate Mortgage (ARM). Adjustment period is the time between adjustment dates on an Adjustable-Rate Mortgage (ARM).

Affordability Analysis
Initial examination of your ability to afford a home purchase. Factors considered include home loan type, income, liabilities, available funds, plus estimated taxes, insurance, and closing costs. See also Pre-Qualification.

Amortization (plus Amortization Schedule and Term)
Ongoing reduction of a debt paid in equal installments. Early on, most of your loan payment applies to interest. Later, payments apply almost entirely to principal. Amortization schedule is a table that details all monthly payments to both principal and interest. Use this to learn the amount of principal you’ll repay during your loan’s lifetime. Amortization term is the time needed in months to pay off the loan (e.g. on a 30-year mortgage, term is 360 months).

Annual Percentage Rate (APR)
Yearly cost of a loan, shown as a percentage. Because The Federal Truth in Lending Act requires lenders to disclose APR, it’s a good basis for cost comparison between like credit transactions. APR includes charges and fees like mortgage insurance, closing costs, loan origination fees, and discount points.

Appraisal (plus Appraisal Contingency)
A valuation of a property made by an authorized appraiser in support of a home loan application. Key factors include recent sales of like properties (in the specific neighborhood, if available) and current market trends. Also weighs the property’s amenities, number of bedrooms and bathrooms, floor plan, and square footage. Appraisal contingency is the stipulation in a purchase contract that a property must appraise equal to or higher than your offer price.

Appreciation
Growth in property value over time. Key factors include location, condition, and selling price of comparable homes. Appreciation positively impacts equity and your ability to take on a home equity line of credit (HELOC).

Assessed Value
Worth of a property, as deemed by a public tax assessor. Used to set property taxes.

Assignment
Method of transfer between parties, with a right or contract. Your lender may transfer your mortgage to another party.

Assumable (as in Assumable Mortgage)
Transferrable to another party while keeping the same terms. When you sell a home, the new owner may be able to assume the loan with no change in interest rate and/or repayment schedule. There can be a transfer fee associated with assuming.

Attorney Fees
Costs potentially due at closing for legal expenses.

B

Balance Sheet
Financial statement (in dated table form) that demonstrates assets, liabilities, and net worth.

Balloon Loan
Mortgage type with lower initial monthly payments and a large single, final payment to repay the remaining balance of the loan. With lower monthly payments, you could make higher interest payments over the loan’s lifetime.

Base Rate
Interest rate used as an index for pricing a variable-rate loan, like an Adjustable-Rate Mortgage (ARM).

Basis Point (BPS)
Amount equal to 0.01%, or 0.0001. Convert basis points to a percentage by multiplying x 100.

Bond
Interest-bearing certificate of debt with a maturity date. In real estate, a bond is a written obligation generally secured by a mortgage or deed.

Borrower
Person(s) being extended a loan for a home purchase or refinance. Responsible for making all payments and covering all fees assessed over the loan’s lifetime.

Break Even
Point where two factors offset, with the net result be level or even. An example is when income equals expenses. In purchasing discount points on a mortgage, breaking even on $4,800 to reduce your interest rate and monthly mortgage payment by $200 would take 24 months.

Bridge Loan
Mortgage type to cover the time between terminating one loan and starting another. A bridge loan might be secured by your current property so that closing on the new home occurs before the present one is sold.

Broker (plus Broker Fees)
Third party who doesn’t lend money but arranges funding or negotiates a contract between parties. Broker fees are charged by a professional who assists with a real estate transaction.

Buydown
Lump-sum prepayment of mortgage interest to lower your monthly mortgage payment. Made by a lender or builder, often for a period of one to three years. See also Term.

Buyer’s Agent
Real estate professional who works on behalf of the homebuyer.

C

Call Option
Loan provision that allows a lender to accelerate debt. Full payment would be required immediately, with reason(s) and timeframe specified.

Cap (as in Interest Rate Cap)
Limit on the amount a variable interest rate can increase. Adjustable-rate mortgages often have periodic (annual or semiannual) rate caps and lifetime caps. A periodic rate cap might be +2-5% per adjustment period, while a lender’s lifetime interest rate cap is often +6%.

Capital Gain (also Capital Gain Tax)
Profit earned on an asset (e.g., a home). Capital Gain Tax is levied against profit earned on asset sales.

Cash to close (plus Cash Available for Closing)
Amount required in cash from borrowers at closing. Cash available for closing is what you have available to cover down payment and closing costs. Lending guidelines may require cash reserves, or that the down payment only come from specific sources.

Cash-Out Refinance
Refinancing transaction that produces an excess, often given as cash and used for debt consolidation or home improvement. Your new loan amount, closing costs, and any points purchased exceed the principal balance of your existing first mortgage and any secondary mortgages or liens.

Ceiling Rate
Maximum interest rate that can accrue on an Adjustable-Rate Mortgage (ARM).

Certificate of Eligibility
Document issued by the federal government to verify that a veteran, active-duty servicemember, reservist, or surviving spouse can pursue a Department of Veterans Affairs (VA) loan.

Certificate of Reasonable Value (CRV)
Document issued by the Department of Veterans Affairs (VA) and based on an approved appraisal that establishes the maximum loan amount and value for a VA loan.

Certificate of Title (plus Clear Title)
Statement based on public record and furnished by an abstract company, title company, or attorney that states who holds the titled to specified real estate. Clear titles are deemed marketable because they’re free of liens or legal disputes concerning ownership.

Closed
Item status indicating no further action is required.

Closing, or Settlement
Occasion when you sign, date, and notarize your new loan documents. Depending on property location or transaction type, a right of rescission period may apply. Where applicable, The Truth in Lending Act allows three business days to rescind or cancel a transaction. Funds are prohibited from being disbursed until the fourth business day.

Closing Costs, or Settlement Costs (plus Closing Disclosure and Statement)
Closing costs are fees paid at final settlement to obtain your new loan. Costs include ownership transfer of any collateral property from seller to you, attorney’s fees, preparation and title search fees, discount points, appraisal cost, title insurance, and credit report charges. Closing costs generally equal 3% of your loan amount. Funds needed to close a loan that aren’t listed as part of closing costs include homeowner’s insurance, property taxes, and escrow impound account funds. Closing disclosure (CD) is a document that outlines important information needed to close a loan, including interest rate, closing costs, and monthly payments. Lenders are required to provide this to you no later than three business days before closing. Closing statement is an accounting of all costs and fees for both parties, buyer and seller, at closing.

Co-Borrower
Fully obligated, additional party who shares equal responsibility for repayment and equal rights to proceeds from a loan.

Collateral
Asset used to secure loan repayment (e.g. a vehicle). Borrower risks losing asset if loan isn’t repaid.

Collection
Efforts used to bring a delinquent loan current. If necessary, includes filing legal papers and notices for foreclosure procedure.

Combination Loan
Mortgage type that combines a conforming first mortgage with a second mortgage under the same lender for up to 80% of property’s value, with one down payment. May help you avoid higher rates with a Jumbo first mortgage.

Combined Liens
Outstanding balance of all mortgages on a property. Used to determine the total available equity when weighing the appraised value of property minus total combined or outstanding liens.

Combined Loan-to-Value (CLTV) Ratio
Ratio between unpaid principal of your first mortgage plus your credit limit, given a home equity line of credit (HELOC), the unpaid principal of all closed-end subordinate financing, and the appraised value of your home. Communicated as a percentage.

Commitment Letter
Document from lender to buyer outlining agreed-upon mortgage terms. Signifies financing is officially approved for a real estate transaction.

Comparables, or Comps
Recently-sold properties similar to the one under current consideration. Should be same size, location, and amenities. Comparable data assists an appraiser with determining a property’s fair market value.

Compound Interest
Interest paid on principal, as well as the accrued and unpaid interest.

Conforming Loan
Mortgage loan that meets the dollar limits set by the Federal Housing Agency (FHFA) and standard features as defined by Fannie Mae and Freddie Mac.

Construction Loan
Short-term loan for financing your home’s construction cost. Lender makes periodic payments to the builder as work progresses.

Contingency
Interim condition in a sales contract that must be satisfied before a home sale completes. In homebuying, the most common contingencies are home inspection (pass/fail) and loan approval.

Contractual Payment (First Mortgage vs. HELOC)
For a first mortgage, your contractual payment is required monthly as detailed in your loan contract. Payment may include principal and interest due plus a portion of funds due to homeowner’s insurance, mortgage insurance (if applicable to your mortgage type), and property taxes. Contractual payment = principal + interest + mortgage insurance (if applicable) + homeowner’s insurance and tax (if applicable). For a HELOC, contractual payment is the amount owed each month, which may fluctuate based on terms and usage of your loan agreement. Contractual Payment = interest-only or interest + principal.

Conventional Loan
Mortgage type that isn’t insured or guaranteed by the federal government. Can be for conforming or non-conforming loan amounts.

Convertibility Clause
Provision in some Adjustable-Rate Mortgages (ARMs) that allows you to change an ARM to a fixed-rate loan, at specified times and for the loan’s lifetime.

Convertible ARM
Adjustable-Rate Mortgage (ARM) that can be changed to a fixed-rate loan, given specific conditions.

Convey
To transfer or deliver title to property from one party to another by deed or contract. Conveyed items are part of the transfer of title with the property.

Co-Signer
Secondary party who also signs your loan and assumes equal responsibility for loan repayment if the primary borrower can no longer make payments but receives no benefit from loan proceeds.

Cost of Funds Index (COFI)
Index used to determine interest rate changes for certain Adjustable-Rate Mortgages (ARMs). Represents weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco. See also Adjustable-Rate Mortgage (ARM).

Covenant
Promise in a mortgage or deed that requires or prevents specific property uses that, if violated, would result in loss or foreclosure of property.

Credit
Money extended to you by your lender; to incur debt and defer its payment.

Credit Bureau (plus Credit Monitoring Service)
Organization who gathers, records, updates, and houses financial and public records of individuals who have been granted credit. Provides information to lenders and other authorized users for a fee. The three major credit bureaus are Equifax, Experian, and TransUnion. You’re legally entitled to receive one free report annually from each. A credit monitoring service offers early detection of unauthorized activity in order to limit the financial damage suffered at the hands of an identity thief.

Credit Limit (plus Credit Risk)
Maximum you can borrow per credit line. Credit risk is the likelihood a borrower may fail to repay a loan per contractual obligations.

Credit Report (plus Credit Score)
Track record of a party’s debts and payment patterns. Contains personal information, credit account history, credit inquiries, and public records that help determine credit risk. You’re legally entitled to receive a free credit report annually from either Equifax, Experian, or Transunion. Credit scoreis a number that represents a party’s credit quality. Helps to predict the relative likelihood a party will repay credit obligation(s). In general, the higher your credit score, the more likely you’ll be approved for a loan and receive a lower interest rate.

Creditor
Party or business from whom you borrow and therefore owe money.

Creditworthiness
Likelihood you or any other borrower will repay debt. Creditors weigh this during the credit approval process.

Cumulative interest
Total interest accrued on your loan.

Curtailment
Payment that decreases loan principal.

D

Debt
Money you owe to creditors. Also, a metric used to determine creditworthiness.

Debt Consolidation
Taking out one loan to pay off multiple debts. Ideal if interest rate is lower than the lines it replaces. Popular use: a home equity line of credit (HELOC).

Debt-to-Income (DTI) Ratio
Your total monthly debt payments divided by your gross monthly income before taxes and shown as a percentage. Debt payment examples include credit cards and loans.

Deed
Legal document at closing that transfers ownership of real estate from seller to buyer. Lenders generally require a title search and report to ensure a borrower legally owns real estate used to secure the loan. See also Warranty Deed or Quit-Claim Deed.

Deed of Trust
Legal document which represents an agreement between the buyer and a lender to have property held in trust by a neutral and independent third party until the loan is paid off. Used in place of a mortgage in some US states. Title is vested in a trustee to secure loan repayment.

Default
Failure to comply with the terms of the loan set forth on the promissory Note and Mortgage or Deed of Trust. For example, not making scheduled payments over a period of time. Default may expose borrowers to legal claims such as foreclosure.

Delinquency
Failure to make payments in a timely fashion. Delinquency over a certain period of time may lead to default.

Depreciation
Measure of decline in property value over time. Depreciation could be driven by factors such as economic circumstances, general wear and tear, or property damage.

Discount Points, or simply Points
Amount paid to your lender at closing in exchange for a lower interest rate. One discount point is 1% of loan amount. One point on a $200,000 mortgage costs $2,000.

Down Payment
Sum of money paid toward the purchase price of a property prior to the closing of a mortgage loan. Down payments generally range between 3% and 20% of the home sale price. The amount of the down payment will vary depending on the loan you choose and the lender’s requirements.

Draw
Receiving an advance against your available credit line.

Draw Period
Timeframe during which you can obtain advances from a credit line. At the end of this period, borrowers may be able to renew the credit line or be required to pay the outstanding balance in full or in monthly installments.

Due-on-Sale Provision
Stipulation that allows lender to demand repayment in full if you sell the property serving as security for a mortgage.

E

Earnest Money
Deposit made to the seller as a sign of good faith toward a down payment. Generally made as the purchase agreement is executed.

Encumbrance
Any property lien that can impact transferability of the property. Examples include unpaid taxes, mortgages, and leases.

Equal Credit Opportunity Act (ECOA)
Federal law that prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, age, sex, familial status, marital status, the good faith exercise of any rights under the federal Consumer Credit Protection Act, state property laws allowing or recognizing Registered Domestic Partnerships, Civil Unions or other such similar unions, or receipt of income from public assistance programs.

Equity
Difference between a property’s fair market value (what’s been appraised) and outstanding mortgage balances and liens.

Escrow (plus Escrow Account, or Impound Account)
Funds deposited with a third party and held until a future date or condition is met. An escrow account is created to hold money at no cost to you. Used to cover property taxes and homeowner’s insurance payments. When a property tax or insurance bill is received, escrow funds are used.

Escrow Analysis (plus Escrow Overage and Shortage)
Periodic review, often annual and due to a specific event, when amounts collected and paid into the escrow account are compared with actual charges paid out of the escrow account for tax and insurance bills. Also, projects what’s needed to fund escrow for the forthcoming year. Overage occurs when your escrow balance exceeds its required minimum. Funds may apply towards your future escrow balance, or you may receive a refund check. Shortage occurs when your escrow balance drops below its required minimum. You may need to cover the shortage by upping your contractual payment. You could also choose to make a separate, one-time payment into escrow. Examples of overages and shortages are when there’s a decrease or increase in your property taxes or insurance premiums, respectively.

Extra Payment, or Payment Overage
Additional amount beyond your contractual payment that can go towards next month’s due. It can also reduce unpaid principal balance on your mortgage or future interest assessed.

F

Fair Credit Reporting Act (FCRA)
Federal law that regulates consumer credit reporting as well as reporting under several related industries to ensure that consumer information is reported in an accurate, timely, and complete manner; to give the consumer information regarding how and from what source consumer information is being used in credit, employment, or other evaluations; to provide the consumer means to mitigate the use of their personal information; and to protect the confidentiality of consumer information.
Fair Market Value
The probable value of a property based on the conditions of the current market.

Fannie Mae, or FNMA (Federal National Mortgage Association)
Public-traded, government-sponsored enterprise (GSE) created by Congress in 1938 as part of the New Deal. Established to stimulate the housing market by acting as a source of financing through the purchasing mortgage loans from lenders to facilitate the flow of capital; thereby making mortgages more accessible to moderate and low-income borrowers.

Federal Housing Administration (FHA)
Agency under the Department of Housing and Urban Development. Guarantees certain mortgage loans by providing mortgage insurance  which protect FHA-approved lenders from losses. As a result, FHA loans allow for lower down payment minimums and lower credit score requirements.

Fee Simple
Clear and absolute property ownership. A fee simple property owner can use the property as desired, subject only to encumbrances like liens, or local guidelines, such as zoning and taxation. Examples include building on it, selling, or leasing.

FHA Loan, or Government Loan
Mortgage type insured by the Federal Housing Administration (FHA). Protects lender if you default on a FHA loan. Insurance enables lender to provide options and benefits not easily available through conventional loan financing.

FICO®
Acronym for Fair Isaac Corporation. Develops mathematical formulas for credit scores by assessing credit risk. FICO scores fall between 300 and 850. The higher the FICO, the lower the credit risk.

Finance Charge
A finance charge is the total amount of interest and loan charges you would pay over the entire life of the mortgage loan. The finance charge can be found on page 5 of the Closing Disclosure in the “Loan Calculations” section and may include charges such as: origination charges, discount points, mortgage insurance and other applicable lender charges.

First Mortgage
Primary lien on a property that has priority over all claims on the property in the event of a defualt.

First-Time Homebuyer
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 as a principal residence; 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. First-Time Homebuyers may qualify for benefits such as discounts and other perks depending on the loan program and state.

Fixed-Rate Mortgage (plus Fixed-Rate Loan Option)
A fixed-rate mortgage is a type of home loan for which the interest rate is set when you take out the loan and it will not change during the term of the loan.  A fixed-rate loan option is available on certain home equity credit lines and comes in when all or part of the money borrowed under a home equity line of credit is converted to a fixed interest rate.

Floating Rate
A lender’s non-guaranteed interest rate which may periodically fluctuate in response to changing market conditions. Your actual interest rate and discount points will be based on the market price available in the moment your interest rate is locked.

Flood Certification (plus Flood Insurance)
Document that reflects the tetermination that your property is or isn’t located within a high-rish flood zone. Flood insurance is required by law when a property is deemed to be within a flood zone and protects you against losses due to a flood.

Forbearance
Period during which your lender or servicer allows a temporary pause or reduction in monthly loan payments. If you’re willing but unable to make loan payments due financial hardship, then you may qualify for forbearance. Forbearance does not erase the amount owed on the mortgage. Repayment of any missed or reduced payments will be required. Foreclosure
Legal procedure in which a property securing a defaulted mortgage is repossessed by the lender and sold to repay the mortgage loan.  Liability after foreclosure differs by state and could result in a deficiency judgment if the sale proceeds are insufficient to repay the loan in full.

Freddie Mac, or FHLMC (Federal Home Loan Mortgage Corporation)
Publicly-traded, government-sponsored enterprise created by Congress in 1970 Rather than lending directly to borrowers, Freddie Mac operates in the U.S. secondary mortgage market, buying loans from approved. Those lenders who are then, in turn, able to provide more loans to qualified borrowers and keep capital flowing into the housing market.

Funding Date
The date in which loan proceeds become available or are disbursed in accordance to the terms of the loan agreement.

G

Good Faith Estimate (GFE)
Itemized list of estimated costs associated with a home loan. Lender is required to provide this within three business days from when the loan application is received.

Ginnie Mae, or GNMA (Government National Mortgage Association)
Government-owned corporation created by Congress in 1968 under the U.S. Department of Housing and Urban Development (HUD). GNMA assumes responsibility for special assistance loan programs formerly administered by Fannie Mae (FNMA).

Government Loan
See FHA Loan.

H

High-Risk Loan
Mortgage extended to a borrower with poor credit history (e.g., a sub-prime loan). For candidates who fall outside conventional or conforming loan limits set by Fannie Mae and Freddie Mac.

Home Equity
The difference between the appraised value of your home and the amount you owe on your mortgage.

Home Equity Line of Credit (HELOC)
Lender agreement secured through homeownership, leveraging the equity you have in the property. Loan is a line of credit, with term generally set at 30 years. Withdraw money up to the credit limit for the first 10 years (the draw period). The next 20 years is your repayment period. Uses for HELOCs include debt consolidation or payoff, home improvements, investing, emergency funds, health bills, college tuition, and more. See also Home Equity Loan (HELOAN).

Home Equity Loan (HELOAN)
Lender agreement secured through homeownership, leveraging the equity you have in the property. Loan is a lump sim payment, with term generally set at 30 years. Unlike a HELOC, your rate and monthly payments are fixed for the loan’s life. Uses for HELOANs include debt consolidation or payoff, home improvements, investing, emergency funds, health bills, college tuition, and more. See also Home Equity Line of Credit (HELOC).

Home Inspection
Comprehensive home examination and report by a licensed inspector. Often required for a mortgage.

Home Loan
The lender finances the purchase of a residential property.

Home Price Index
Financial and market analysis tool that provides historical data on residential home prices.

Homeowner’s Association (HOA)
Group formed within a neighborhood, apartment, or other complex who establishes rules of ownership and seeks to positively impact property valuation. Collects dues for landscape maintenance or membership in facilities.

Homeowner’s Insurance, or Hazard Insurance
Protection for your home against losses and damage. Required by lenders, the premiums are included in mortgage payments and closing costs.

House Flipping
Home purchase for the purpose of a quick sale (a “flip”) and profit. Generally bought for a reduced price. House flippers must first renovate the home before listing and earning fair market value.

HUD (US Department of Housing and Urban Development)
Government agency whose mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD administers the Federal Housing Administration (FHA) and enforces the Fair Housing Act.

HUD Loan
Loan available to HUD homebuyers for fixing up homes and absorbed into the mortgage. Often confused with an FHA loan.

I

Income
Regular earnings, commissions, rental payments, investments, and other sources generating money for you. The calculation of revenue minus expenses is also income.

Income Property
Real estate developed or improved to produce income.

Index
A benchmark interest rate that reflects general market conditions and it changes based on the market. Changes in the index, along with your loan’s margin, determine the changes to the interest rate for an adjustable-rate mortgage loan.

Inflation
Rate at which the value of currency falls, expressed as a percentage over a specified length of time.

Initial Draw Amount
Proceeds taken from a construction loan or home equity line of credit (HELOC) at closing, up to your qualified limit.

Initial Rate, or Teaser Rate
Starting rate with low interest and low monthly payments at the beginning but increasing with the next adjustment period. The increase is because it’s lower than index plus margin for the initial period.

Inquiry
Request for your credit report as a lender considers for a loan. Inquiries are hard or soft depending on whether or not they impact your credit score.

Installment Loan
Credit repaid in equal payments.

Insurance (also Insurance Binder)
Contract type that compensates losses in exchange for periodic payment. Each contract is a policy, and each periodic payment is a premium. An insurance binder documents that insurance is temporarily in effect. Because coverage expires, a permanent policy must be obtained.

Insured Mortgage
Loan that’s protected by an insurer in case of default. Insurance protects the lender (not you) in case of a default.

Interest Accrual Rate
Percentage at which interest accrues on your mortgage. Generally, also the rate used to calculate your monthly payments.

Interest-Only Loan
A loan that stipulates you pay only the interest due for a period of the loan term. Lowers your monthly payment but does not decrease your loan’s principal balance. Making interest-only payments results in larger payments coming due at the end of the interest-only payment period.

Interest Rate (also Interest Rate Cap)
Annual cost of a loan to you, expressed as a percentage. Doesn’t include fees or other charges. See also Annual Percentage Rate (APR). Interest Rate Cap is a limit on how much variable interest rate can increase. Home loans generally have annual/semiannual caps plus lifetime caps. Many caps allow 2-5% interest rate increases per adjustment period. Lifetime cap is generally 6% over a loan’s lifetime.

Investment Property
Property bought to generate rental income for an investor, or to be sold as it appreciates in value.

J-K

Joint Ownership, or Joint Tenancy
When two or more people share ownership rights in a home (e.g., spouses).

Judgment
Court decree that one person is indebted to another for a specified amount of money. Depending on jurisdiction, the court may place a lien against the debtor’s real property as collateral for payment of the judgment to the creditor.

Jumbo Loan
Mortgage whose loan amount exceeds Fannie Mae and Freddie Mac standards for eligibility. Depending on geographic location, temporary conforming loan limits can be higher. Lenders may charge additional fees and place certain restrictions due to larger loan amounts.

L

Lender
Bank or finance company who extends a home loan or mortgage money to you.

Lender Fees
Fees designed to cover costs incurred during the loan process (e.g. processing).

Liabilities
Financial obligations, from potential losses from legal claims to long- and short-term debt.

Lien (and Lienholder)
Legal claim on your real property by a creditor. Used to secure debt. The lienholder is the Individual or entity placing a lien.

Lifetime Adjustment Cap
Limit on how much variable interest rate can increase over loan term.

Line of Credit (LOC)
Lender agreement to extend credit up to a maximum amount for a specified time. Your home is what secures a home equity line of credit (HELOC).

Loan (also Loan Term or simply Term)
Money lent from a financial institution to creditworthy borrower(s), over a specified time period, at a particular interest rate. Loan term is the number of years or months it takes to pay off your loan. The approved term is used to determine payment amount, repayment schedule, and interest paid over the loan’s lifetime.

Loan Commitment (also Loan Estimate and Loan Modifications)
Formal lender notification stating your loan has been approved. Specifies terms under which the lender agrees to fund the loan.

Loan Estimate
is a disclosure to help you understand key loan terms and estimated costs about a mortgage loan you have requested. Submit select information: name, income, social security number, property address, estimated property value, desired loan amount, the lender. All lenders are required to use the same standard loan estimate form. That way, it’s easier for you to shop for a mortgage.

Loan Modifications
are revisions to one or more loan terms.

Loan Origination
Process by which a lender executes a home loan, extends credit, and records a mortgage against your real property to secure repayment.

Loan-to-Value Ratio (LTV)
Ratio between unpaid loan principal (or your credit limit) and the appraised value of your collateral, expressed as a percentage. If you have a $50,000 first mortgage with an appraised home value of $75,000, then LTV is 67% ($50,000 / $75,000 = 67%).

Lock Period
Amount of time you can secure an interest rate for your loan as long as you close within that time frame and there are no changes to your loan application. Usually ranges from 30-90+ days. Generally, the longer the lock period, the more you pay in fees or interest.

M

Manufactured Housing
Any structure partially or entirely constructed at another location, then relocated to your property and placed on a permanent foundation.

Margin
Number of percentage points added or subtracted from the index to determine interest rate adjustments on an adjustable-rate mortgage (ARM). Specified in the promissory note and consistent for the loan’s lifetime.

Maturity Date
Date the outstanding loan principal, interest, and fees must be repaid in full.

Mobile Home
Home type built on a wheeled chassis for regular or infrequent transport.

Modular Home
Factory-built, component-based home erected on your property.

Mortgage, or Deed of Trust, or Security Deed
Legal document that provides your lender with a lien on real estate to secure loan repayment. The commitment or term is generally 10 to 30 years, after which the loan must be paid in full.

Mortgage-Backed Security
Fixed-income security that derives cashflow from payments on a pool of underlying residential or commercial mortgages.

Mortgage Broker
Entity who liaises between you and your mortgage lender to locate the best deal in exchange for a fee. Handles paperwork but does not extend direct loans.

Mortgage Calculators
Online financial tools that allow you to enter various personal financial figures to determine affordability. Explore a few simple mortgage calculators.

Mortgage Insurance, or Private Mortgage Insurance (PMI)
Protection for your lender should you default on a loan. Required when your down payment is less than 20% of loan value on a conventional loan.

Mortgage Points, or Discount Point, or simply Points
Amount paid to your lender to lower your interest rate, generally handled at closing. One mortgage point equals 1% of the loan amount. For example, one point on a $100,000 mortgage costs $1,000. Negative points are credits to reduce closing costs.

Mortgage Type
Loan products offered by Lenders such as Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, or conventional mortgage loans. VA loans are for qualifying veterans, active-duty servicemembers, reservists, and surviving spouses. FHA loans are available to all qualified borrowers. FHA and VA loans are guaranteed and insured by the federal government, which protects your lender from loss should you default. Conventional loans are available to all qualifying borrowers but aren’t guaranteed or insured federally.

Multifamily Residence (2 to 4 units)
Residential property with two to four individual housing units (a duplex, triplex, or quadplex).

N

Negative Amortization
When monthly payments don’t cover loan interest due. The unpaid interest is added to the unpaid balance, which means the homebuyer will owe increasingly more than the original amount of the loan.

New Line Amount
Sum of existing credit line plus additional credit requests.

No Closing Cost Loan
Loan with zero cash owed at closing. Lenders generally include closing costs in the loan principal balance or charge a higher interest rate to cover any closing cost advances.

Non-Conforming loan
is a mortgage that does not meet the guidelines of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac (and therefore can’t be sold to them). GSE guidelines consist of a maximum loan amount, suitable properties, down payment requirements, credit requirements, and other factors.

Non-Owner Occupied
Properties with occupants other than the owner(s).

Note
Written agreement in which a signer promises to pay a specific amount of money to another party.

Note Rate
Interest rate detailed with a mortgage.

Notice of Default
Written notice that a default has occurred, plus any legal action ahead.

Notice of Incomplete Application (NOIA)
Written notice that your loan application is missing information. Provide all required information or your lender can’t continue forward with the loan process.

O

Offer
Monetary promise, verbal and/or written, by a buyer, in an attempt to purchase a home from a seller.

Option ARM
Adjustable-rate mortgage (ARM) type that offers several monthly payment options for financial flexibility. Manage payments in rising rate markets, or take advantage of falling interest rates.

Origination Fee
A fee imposed by your lender to cover specified processing expenses with your mortgage. Generally expressed as a percentage of the amount loaned (often 1% or one point).

Owner Financing
Purchase transaction in which the property seller provides all or part of financing.

Owner-Occupied
Property where the owner uses the home as their principal residence.

P
Payment Cap
Limit on monthly payment increases but not interest. May cause negative amortization. Featured with some adjustable-rate mortgages, along with annual, semi-annual, or lifetime interest rate caps. See also Interest Rate.

Payment Change Date
When a new monthly payment takes effect on an adjustable-rate mortgage (ARM). Generally occurs in the month immediately after interest rate adjustment.

Payoff
Payment in full of your outstanding loan balance.

Per Diem interest
D
aily accrual of loan interest. Calculated by multiplying outstanding loan balance by annual interest rate then dividing by 365 for days in a year.

Piggyback Loan
Second mortgage added (“piggybacked”) to a first mortgage and generally used in lieu of mortgage insurance.

PITI (Principal, Interest, Taxes, Insurance)
Acronym also referred to as your monthly mortgage payment.

Points
Amount paid to your lender at closing in exchange for a lower interest rate. One discount point is 1% of loan amount. One point on a $200,000 mortgage costs $2,000. Credits at closing are reflected as negative points.

Portable Mortgage
Mortgage you can carry from one home purchase to the next if permitted within the terms and conditions of the mortgage contract.

Power of Attorney
Legal document and standing which grants someone the right to act on behalf of another. Generally used in times of incapacity or death.

Pre-Approval
Lender’s conditional agreement to loan a specific amount of money under set terms. Often presented in letter form. Generally includes an initial review by an underwriter.

Preferred Lender
Lender closely affiliated with and recommended by a brokerage or a builder based on reputation and other factors.

Pre-Foreclosure
When you fail to make mortgage payments and the lender issues a notice of default.

Prepaid Costs
Expenses paid at closing in advance of actual due date (e.g., escrows for taxes and insurance).

Prepaid Interest
Interest collected at closing for daily interest accrued between the closing date and your first monthly mortgage payment.

Prepayment
Amount paid to reduce principal loan balance before it’s due.

Prepayment Penalty
A fee charged by some lenders if you pay off all or part of your mortgage early. It is a clause included in the mortgage contract.

Pre-Qualification
Preliminary estimation of how large a loan you may qualify for. Not a commitment to lend. You provide financial and other information (e.g., employment history, collateral). Your lender offers an initial determination you can use as your house hunting budget.

Primary Mortgage Market
Where you can obtain a mortgage loan directly. Banks, mortgage brokers, mortgage bankers, and credit unions are all primary lenders in the primary mortgage market.

Prime Loan
Low risk loan that is generally offered to borrowers in good credit standing.

Prime Rate
I
nterest rate that banks charge their most qualified customers when lending money. Published daily by The Wall Street Journal. Based on a survey of prime rates used by the 10 largest US banks. Changes in prime rate influence other rates, including mortgage interest rates.

Principal and Interest
Principal is money borrowed. Interest is the cost for borrowing money. They represent most of your mortgage payment.

Principal Balance
The amount owed on the original financed loan amount. Doesn’t include interest or other charges.

Principal Payment
Portion of your monthly mortgage payment that lowers your loan principal balance.

Private Label Mortgage Outsourcing
When a private bank or other financial lender outsources mortgage products to other lenders.

Private Mortgage Insurance (PMI)
Protection for your lender should you default on a conventional loan. Required when your down payment is less than 20% of loan value.

Processing Fee
See Lender Fees

Promissory Note
Written promise of repayment to another party, with a specified amount and terms of the loan.

Property Tax
Taxes levied against the value of your property.

Purchase Agreement
Written contract between buyer and seller that states the terms and conditions under which a property will be sold.

Q

Qualifying Ratios
Math used to determine whether you qualify for a mortgage. The calculations are twofold: housing expense and total debt obligations, both as a percentage of your income.

Quit Claim Deed
Legal document that shifts responsibility in a home title to another. For example, when a property is conveyed through a will, as a gift, or as part of a divorce settlement. Used for spouses or in family situations in which more than one individual has an interest.

R

Rate
Amount of loan interest, expressed as a percentage.

Rate Cap
See also Interest Rate Cap

Rate Lock (also Rate Lock Expiration)
Commitment from a lender to guarantee your interest rate for a specified time period. Often used to secure a favorable interest. Upon rate lock expiration, your rate is again subject to market fluctuations and must be locked anew before your loan’s closing date.

Rate Reduction Option
Provision in a fixed-rate mortgage that allows you to reduce your interest rate in the future without needing to refinance. Generally doesn’t require re-qualifying.

Real Estate Investment Trust (REIT)
Securities or mutual funds that invest directly in real estate.

Real Estate Settlement Procedures Act (RESPA)
Consumer protection law that requires advance disclosure of settlement costs to homebuyers and sellers. Prohibits referral and other fees and sets rules for escrow accounts. Requires you to be notified as home loan servicing is transferred.

Re-Amortize
Take your remaining mortgage balance, then establish a new period of amortization after which the principal loan balance will be zero. Typically used after term end with an interest-only loan.

Recorder (also Recording and Recording Fee)
Public official (often a registrar of deeds or county clerk). Recording is public notation of terms affecting title to real property into official county records (e.g. with a deed, security instrument, satisfaction of mortgage, or extension of mortgage). Recording fee is the associated charge.

Reduced Documentation
Method used to determine income as you attempt to qualify for a loan with less documentation than a traditional loan. You detail income, but no verification documentation is required.

Refinance
When you replace the terms of an existing loan and pay off your current loan with the proceeds from a new loan. Used to lower monthly payments, interest rates, and/or financing costs.

Rehabilitation Loan
A mortgage that allows you to purchase or refinance renovations and updates to a home. Qualify based on the as-completed value of the subject property, up to a maximum loan limit.

Remaining Balance
What’s currently owed on a home loan.

Repayment Period
Time allowed to fully repay your outstanding balance.

Rescission
Form of contract cancellation permitted on specific transactions under the Truth in Lending Act, completed within three business days of closing.

Reserves
Easily accessible assets, separate from your down payment, set aside for unforeseen events or emergencies. During loan approval, lenders often require reserves (generally equal to two monthly mortgage payments) to be verified.

Reverse Mortgage
Mortgage designed for homeowners aged 62 years and older which provides access to home equity in cash payments. Frees money to use for other important costs or home repairs. Since reverse mortgages are generally structured as loans, payments aren’t considered income.

Right of First Refusal
Provision in an agreement that requires the property owner to give another party the first opportunity to purchase or lease before listing for public consideration.

Rural Housing Service (RHS) (also Rural Housing Loans)
Agency of the Department of Agriculture, offers rural housing loans to low-to moderate-income rural residents and other qualified borrowers to purchase property in rural areas.

S
Sales Contract
Real estate agreement between homebuyer and seller. Includes property address, condition, purchase price, inspections, closing date, possession date, and more.

Second Home
Property occupied for part of the year, in addition to a primary residence.

Second Mortgage
Mortgage made in addition to your primary mortgage that can provide access to and flexibility with cash equity in your home. Helpful with affording substantial expenses (e.g. a college loan).

Secondary Mortgage Market
Segment of mortgage and real estate securities market that deals in mortgage investment and not direct mortgage lenders.

Secured Loans
Loans for which a lien on property exists. Collateral options include an automobile, boat, real estate, other personal property).

Security
Physical or liquid assets pledged as loan collateral. If you default, then your lender can sell the collateral to satisfy debt.

Seller’s Agent
Real estate professional who works on behalf of the home seller.

Settlement
See Closing

Settlement Agent
Person or entity who transfers the property title and closes the mortgage loan (e.g., an attorney, title insurer, escrow agent).

Settlement Costs
See Closing Costs

Short Sale
When you can no longer afford your mortgage payments, and your home is worth less than you owe, this allows you to sell the home to pay off the mortgage. Your lender or servicer agrees to accept a lower amount than you owe on the mortgage, based on your financial hardship.

Single-Family Residence
A dwelling unit for the purpose of housing one family. Can be attached or detached.

Speculative Home Market
Where investors buy homes, quickly re-sell them, and hope to cash-in on improving markets. Generally considered risky.

Start Rate, or Initial Rate, or Intro Rate
Initial interest rate for an adjustable-rate mortgage (ARM). Provides lower interest and monthly payments at first. Increases at the next adjustment period.

Subordinate Financing
Any subsequent loan that is taken out after your initial first mortgage is considered to be a junior-lien or subordinate mortgage. At foreclosure, payment claims are handled after the first mortgage is paid.

Sub-Prime Loan
High-risk loan packaged with non-conforming loan limits and interest rates. Enables a homebuyer with poor credit to qualify for a mortgage.

Survey
Formal documentation of property that establishes boundary lines. Defines limits on construction and other features that could affect property valuation. It will act as a certification for the lender that the property is of proper value and could easily bear the amount, they are lending to you. Lenders generally require you to purchase this.

Swing Loan
See also Bridge Loan.

T

Term
Number of years to pay off your loan. Used to determine payment amount, repayment schedule, and total interest paid over the loan’s lifetime.

Third-Party fees
Fees charged for services rendered by parties other than you or your lender (e.g., for appraisal, credit report, title, flood certifications).

Title (also Title Company, Insurance, and Search)
Written evidence of property ownership. Title company is the agency who investigates your property’s title or deed for discrepancies or undiscovered liens. Title insurance protects interested parties (e.g. property owner) against issues that would affect legal ownership. Issued by the title company to the lender after the title is deemed clear. Title search is the examination of records to determine legal ownership of property. Includes all liens and encumbrances on it. Generally performed by a title company or attorney.

Total Expense Ratio
See Debt-to-Income (DTI) Ratio

Transaction fee
Fee charged each time you draw on your credit line.

Treasury Index
Index used to determine interest rate changes for certain adjustable-rate mortgages (ARMs). Based on auction results that the US Treasury holds for its bills and securities. Also derived from the US Treasury’s daily yield curve, based on closing market bid yields on actively-traded securities in the over-the-counter market. See also Prime Rate

Trustee
Fiduciary who holds and/or controls property for the benefit of another.

Truth in Lending Act
Federal law requiring disclosure of credit terms. Uses a standard format that intends to facilitate comparisons between lending terms of different financial institutions. (Protects you against inaccurate and unfair credit billing practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans)

U

Underwriter (also Underwriting)
Professional who approves or denies mortgages based upon your lender’s approval requirements. Underwriting is your lender’s process of deciding whether or not to loan based on credit, employment, assets, and other factors. They match risk to an appropriate rate, term, and loan amount.

Uniform Residential Loan Application
See 1003 Is a standardized loan form used in the mortgage industry. This form is called a 1003 form, it requires that borrowers fill out all necessary information before a loan can be established between a lender and the borrower.

Unsecured Lines of Credit, or Unsecured Loan
A secured line of credit is guaranteed by collateral, such as a home. An unsecured line of credit is not guaranteed by any asset; one example is a credit card. An unsecured loan is debt for which the lender does not require the borrower to provide collateral.

Upfront Costs
Upfront costs are the costs you pay out of pocket once your offer on a home has been accepted. Upfront costs include earnest money, the inspection fee, appraisal fee, application fees or even closing costs. These are expenses as you apply for a loan.

V

VA Loan
Mortgage guaranteed by the Department of Veterans Affairs (VA) for qualified veterans, active duty servicemembers, reservists, and surviving spouses of US military forces. VA loans are backed by the federal government but issued through private lenders.

Vacation Home, or Second Home
Single-family property that you occupy in addition to your primary residence. Can occasionally be rented to friends and family. Property can’t be income-producing, and rental income can’t be used as application qualification. A two to four-unit property isn’t eligible for vacation or second home status.

Valuation
See Appraisal A mortgage valuation is a specific type of assessment done by the mortgage lender to help them confirm the property’s value. It’s also used to see if the property will be a suitable security for the loan you’ve applied for. This is done through an Appraisal.

Variable Rate
Interest rate that fluctuates in relationship to an index (e.g., prime rate). Accordingly, payments may increase or decrease.

Variable-Rate Monthly Minimum Payment
Minimum amount you’d need to pay each month on a home equity line of credit (HELOC). Includes principal and interest. Varies monthly based on your outstanding loan balance and fluctuating interest rate. Intended to repay your loan balance in equal principal and interest installments over the remaining loan term, based on balance and rate information at calculation.

W

W-2
Annual wage and tax statement from your employer. Details your income and various taxes withheld. Provided to the IRS with your tax return.

Walk-Through
A final walkthrough is an opportunity for home buyers to inspect the house before the official closing. The final walkthrough allows the buyer and their real estate agent to go through the house room by room to ensure property remains in the same condition it was when the offer was written.

Warranty Deed
A deed to real property for the buyer which guarantees that the seller owns clear title and that no prior liens or disputes exist against the property. Holder has legal selling rights.

Windstorm Insurance
Coverage pays for property damage resulting from wind. Generally required in coastal areas. Like flood coverage, this covers damage to the home and personal property (in some instances). Can also cover living expenses if the home is deemed uninhabitable. Some states offer assistance programs to help you find coverage in areas where it’s scarce. Windstorm coverage is typically included in a standard homeowner’s policy.

Wire Transfer
Electronic transfer of funds that allows money to be exchanged quickly and securely without the need for cash. Includes domestic and international exchanges.

X-Y-Z

Year-End Statement
Report of how much was paid in interest and the remaining balance for a year for your current mortgage. With an impound account, the report also includes how much was paid and reserved in property tax.

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