From A to Z, here are some common mortgage terms to know.
Mortgage terms can be confusing. We hope these definitions will help.
Abstract of Title
A written history of ownership to a specific area of land. An abstract of title covers the period from the original source of title to the present time and summarizes all subsequent documents that have been recorded against that area.
An agreement or list that is added to a contract, agreement, or other document such as a letter of intent.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically according to a pre-selected index.
Adjusted Gross Income
A person's total income, as reported on his or her IRS 1040 tax return form, after allowable contributions, deductions and expenses (alimony).
The period that elapses between the adjustment dates for an adjustable rate mortgage (ARM).
Periodic payments made under a divorce decree or a written separation agreement toward the support of a former spouse.
A national association of title insurance companies, abstractors, and attorneys specializing in real property law. The association speaks for the title insurance and abstracting industry and establishes standard procedures and title policy forms.
Payment of a debt in regular, periodic installments of principal and interest as opposed to interest only payments.
A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.An agreement or list that is added to a contract, agreement, or other document such as a letter of intent. A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.
A term used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of your mortgage loan as a yearly rate. It will be higher than the interest rate stated on the note because it includes, in addition to the interest rate, loan discount points, fees and mortgage insurance.
A prospective borrower who has completed an application. An application is series of steps, usually including the completion of documents, a lender requires of those seeking a loan.
A printed form used by a mortgage lender to record necessary information concerning a prospective mortgage.
A sum of money paid towards estimated initial mortgage processing expenses such as appraisal and credit report.
A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained.
An opinion of value reached by an appraiser based upon knowledge, experience, and a study of pertinent data.
A person qualified by education, training and experience to estimate the value of real and personal property.
An increase in the value of property due to either a positive improvement of the area or the elimination of negative factors. Commonly, and incorrectly, used to describe an increase in value through inflation.
Legal slang meaning that there existed no special relationship between the parties involved in any matter which would taint the result.
The value that a taxing authority places on real or personal property for the purpose of taxation.
A charge against a property for purpose of taxation. This may take the form of a levy for a special purpose or a tax in which the property owner pays a share of the cost of community improvements according to the valuation of his or her property.
A mortgage that can be taken over (assumed) by the buyer when a home is sold.
A mortgage that has level monthly payments that will fully amortize it over a stated term, but which provides for a lump-sum payment to be due at the end of an earlier specified term.
A proceeding in a federal court in which a debtor, who owes more than his or her assets, can discharge personal liability for his or her debts. This affects the borrower's personal liability for a mortgage debt but not the lien of the mortgage.
A mortgage with payments due every two weeks, totaling 26 payments a year.
A person (also known as mortgagor) who receives funds in the form of a loan with an obligation to repay principal with interest.
A loan spanning the gap between the termination of one loan (generally short-term) and the start of another (generally permanent long-term) loan. Also referred to as gap financing.
A form of second deed of trust or mortgage that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold.
Money advanced by an individual (builder, seller, etc.) to reduce the monthly payments for a home mortgage either during the entire term or for an initial period of years.
Currency, checks and other negotiable instruments acceptable for direct deposit by a bank.
When the principal amount of a new mortgage involved in refinancing is greater than the principal amount outstanding of the existing mortgage being refinanced, and all or a portion of the equity is converted to cash.
A requirement by some lenders that buyers have sufficient cash remaining after closing to make the first mortgage payment.
Cash to Close
Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction.
The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.
Money paid by the borrower in connection with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey, and pre-paid items such as tax and insurance escrow payments
A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.
Additional borrower(s) whose income contributes to qualifying for a loan and whose name(s) appears on documents with equal legal obligations.
A second borrower who signs a mortgage loan with a mortgagor. The co-mortgagor's income, assets and debts are combined with the mortgagor's for underwriting and ratio analysis purposes. The co-mortgagor's name must appear on the FHA Certificate of Commitment and the mortgage or deed of trust. For full guarantee under the VA's program, the co-mortgagor must be either a spouse or another eligible veteran.
Property pledged as security for a debt, such as the real estate pledged as security for a mortgage.
The servicing procedure followed to bring a delinquent mortgage current and to file the required notices to bring foreclosure when necessary.
A binding pledge made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the compliance of the borrower to stated conditions.
Any fee paid by a potential borrower to a lender for the lender's promise to lend money at a specified rate and within a given time period.
A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.
Properties used for comparative purposes in the appraisal process that have been recently sold and have characteristics similar to property being appraised, thereby indicating the approximate fair market value of the subject property.
Positive characteristics of a borrower's credit, employment or savings history which may be used to offset high debt-to-income ratios in the underwriting process.
A discount or other inducement given by a landlord or seller to a prospective tenant or buyer to induce them to sign a lease or purchase property.
Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally purchase first mortgages up to loan amounts mandated by Congressional directive.
A condition that must be met before a contract is legally binding.
A mortgage not obtained under a government insured program (such as FHA or VA).
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
A report detailing an individual's credit history.
The legal document conveying title to a real property.
Deed of Trust
An instrument used in many states in place of a mortgage. It is essentially an agreement between a lender and a borrower to give the property a neutral third party who will serve as a trustee. The trustee holds the property until the borrower pays off the debt.
The failure to perform an obligation as agreed in a contract.
A loan payment that is overdue but within the period allowed before actual default is declared.
A Planned Unit Development (PUD) in which the common property has less than a 2% influence upon the value of the premises. The 2% rule of thumb is calculated by dividing the dollar amount of amenities by the total number of units.
Department of Housing and Urban Development (HUD)
A governmental entity responsible for the implementation and administration of housing and urban development programs. HUD was established by the Housing and Urban Development Act of 1965 to supersede the Housing and Home Finance Agency.
Department of Veterans Affairs (VA)
A cabinet-level agency of the federal government. The Servicemen's Readjustment Act of 1944 authorized the agency to administer a variety of benefit programs designed to facilitate the adjustment of returning veterans to civilian life. Among the benefit programs is the VA Home Loan Guaranty program, which encourages mortgage lenders to offer long-term, no down payment financing to eligible veterans by partially guaranteeing the lender against loss upon foreclosure.
A sum of money given to bind a sale of real estate. Also known as earnest money.
A loss of value in real property brought about by age, physical deterioration, functional or economic obsolescence.
Information relevant to specific transactions that is required by law.
A point paid to the lender to permanently buy down or lower an interest rate. It is usually a percentage of the loan amount.
Money paid to make up the difference between the purchase price and the mortgage amount.
A portion of the down payment delivered with a purchase offer by the purchaser of real estate. Delivered to the seller, or an escrow agency, by the purchaser with the purchase offer as evidence of good faith. Also known as a deposit.
A right of way giving persons other than the property owner access to or over a property.
An improvement that illegally violates another's property or right to use that property.
Equal Credit Opportunity Act (ECOA)
A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.
The ownership interest; i.e. portion of a property's value over and above the liens against it.
A loan based on the borrower's equity in his or her home.
An item of value, money or documents, deposited with a third party, to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate. In some parts of the country, escrows of taxes and insurance premiums are called impounds or reserves.
That portion of a mortgagor's monthly payments held by a lender or servicer to pay taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also called impounds or reserves in some states.
This law requires consumer reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information.
Federal Home Loan Mortgage Corporation - FHLMC (FREDDIE MAC)
A quasi-governmental agency that purchases conventional mortgages in the secondary mortgage market from insured depository institutions and HUD-approved mortgage bankers. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal, and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages. Popularly know as Freddie Mac.
Federal National Mortgage Association - FNMA (FANNIE MAE)
A taxpaying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.
The greatest possible interest a person can have in real estate, including the right to dispose of the property or pass it on to one's heirs.
A real estate loan that has priority over any subsequently recorded mortgages.
Fixed-rate Mortgage (FRM)
A mortgage in which the interest rate and payments remain the same for the life of the loan.
A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower's debt.
A written explanation signed by the individual giving the gift stating, "This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time."
Created in 1968 by an amendment to Title III of the National Housing Act (12 USC 1716 et seq.), this federal government corporation is a constituent part of the Department of Housing and Urban Development. Among other governmental functions, it guarantees securities backed by mortgages that are insured or guaranteed by other government agencies. Also called Government National Mortgage Association (GNME).
Good Faith Estimate (GFE)
A document which tells borrowers the approximate costs they will pay at or before settlement, based on common practice in the locality. Under requirements of the Real Estate Settlement Procedures Act (RESPA), the mortgage banker or mortgage broker, if any, must deliver or mail the GFE to the applicant.
Gross Monthly Income
Total monthly income earned before tax and other deductions
A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards (i.e. fire).
Home Equity Line of Credit
A form of revolving credit in which your home serves as collateral.
An insurance policy that combines liability coverage and hazard insurance.
A multiple peril insurance policy available to owners of private dwellings which covers the dwelling and its contents, as well as personal liability.
Homeowners' Association Dues
The fees imposed by a condominium or homeowners' association for maintenance of common areas.
Housing Expense Ratio
The relationship of a borrower's monthly payment obligation on housing PITI(principal, interest, taxes, insurance) and other applicable housing expenses, divided by gross monthly income, expressed as a percentage. Also called the top ratio.
Unverified credit report which may contain unchecked, duplicated, or overlapping data. It is often used for a quick look at a prospective borrower's credit history.
A qualifying ratio used in underwriting a residential mortgage loan which computes the percentage of monthly income required.
A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the COFI(Cost of Funds Index). Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. On ARMs, a predetermined margin is added to the index to compute the interest rate adjustment.
The periodic payment that a borrower agrees to pay a mortgage lender.
A loan insured by HUD-FHA or a private mortgage insurance company.
Consideration in the form of money paid for the use of money. Also a right, share or title in property.
The percentage of an amount of money which is paid for its use for a specified time.
Interest Rate Cap
A provision of an ARM limiting how much interest rates may increase per adjustment period. See also Lifetime cap.
Real estate owned with the intent of supplementing income and not intended for owner occupancy.
An undivided interest in property, taken by two or more joint tenants. Upon the death of a joint tenant, the interest passes to the surviving joint tenants, rather than to the heirs of the deceased.
Final determination by a court of the rights and claims of the parties to an action.
The penalty a borrower must pay when a payment is made after the due date.
Lender Paid Mortgage Insurance (LPMI)
Insurance in which the cost of the mortgage insurance is included in the interest rate. Although the interest rate is slightly higher with LPMI, this option usually results in a lower monthly payment and a larger tax deduction*. *Consult your tax advisor
A legal claim or attachment against property as security for payment of an obligation.
A provision of an ARM that limits the total increase in interest rates over the life of the loan.
The ability to readily convert assets or investments to cash.
The ratio between the amount of a given mortgage loan and the lower of sales price or appraised value.
A specified number of days before loan closing during which the range of rates available to a borrower is protected from financial market fluctuations in interest rates. Locking does not guarantee what specific rate will apply at closing, as that depends on specific transaction characteristics and the borrower's credit profile.
The rate at which banks in the foreign market lend dollars to one another. LIBOR varies by deposit maturity. A common interest rate index; one of the most valid barometers of the international cost of money.
Loss Payable Clause
An insurance policy provision for payment of a claim to someone other than the insured, who holds an insurable interest in the insured property.
Factory-built or prefabricated housing, including mobile homes.
The set percentage the lender adds to the index rate to determine the interest rate of an ARM.
The most probable price which a ready, willing and able buyer would pay and a willing seller will accept, both being fully informed under no pressure to act. The market value may be different from the price a property can actually be sold for at a given time (market price).
The termination or due date, on which final payment on a loan must be paid in full.
A factory-assembled residence consisting of one or more modules, in which a chassis and wheels are an integral part of the structure, and can be readied for occupancy without removing the chassis and/or wheels.
A factory-assembled residence built in units or sections, transported to a permanent site and erected on a foundation. Excludes mobile homes.
Usually, the amount of PITI (principal, interest, taxes, and insurance) paid each month on a mortgage loan.
The conveyance of an interest in real property given as security for the payment of a loan.
An agreement between lender and borrower detailing the terms of a mortgage loan such as interest rate, loan type, term and amount.
See private mortgage insurance.
Mortgage Insurance Premium (MIP)
The consideration paid by a mortgagor (borrower) for mortgage insurance -either to the FHA or to a private mortgage insurer.
A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.
The lender on a mortgage transaction.
The borrower in a mortgage transaction who pledges property as security for a debt.
A loan payment schedule in which the outstanding principal balance goes up, rather than down, because the payments do not cover the full amount of interest due. The unpaid interest is added to the principal.
Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines.
A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt, and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee is named as the payee.
The use of a property as a full-time residence, either by the title holder (owner-occupancy) or by another party through a formal agreement (rental).
Securing a completed mortgage application from a commercial or residential borrower.
The amount charged for services performed by the company handling the initial application and processing of the loan.
The unpaid principal balance and escrow amounts to be used for payment in full of the mortgage or for closing sale of the property.
One percent of the loan or a measure of the interest rate.
PITI (Principal, Interest, Taxes, and Insurance)
The most common components of a monthly mortgage payment.
Planned Unit Development (PUD)
A comprehensive development plan for a large land area. A PUD usually includes residences, roads, schools, recreational facilities, commercial, office and industrial areas. Also, a subdivision having lots of areas owned in common and reserved for the use of some or all of the owners of the separately owned lots. See also DeMinimus PUD.
Plans and Specifications
Architectural and engineering drawings and specifications for construction of a building or project. They include a description of materials to be used and the manner in which they are to be applied.
A one-time charge by the lender to increase the yield of the loan; a point is 1% of the amount of the mortgage.
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Preliminary Title Report
The results of a title search by a title company prior to issuing a title binder or commitment to insure clear title.
Closing costs related to the mortgage loan which are collected at loan closing - including per diem pre-paid interest and initial deposits of monthly escrows of taxes and insurance.
A fee charged to a borrower who pays off a loan before it is due.
The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.
A residence which the borrower intends to occupy as the principal residence.
The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.
The remaining balance due on a debt, exclusive of accrued interest.
Private Mortgage Insurance
Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.
The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.
An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.
Guidelines applied by lenders to determine how large a loan to grant a home buyer.
A deed relinquishing all interest, title, or claim an owner has in a property. A quitclaim deed implies no warranty.
Real estate or real property owned by an individual or business.
Real Estate Settlement Procedures Act (RESPA)
A federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances.
Land and that which is affixed to it.
The repayment of a debt from the proceeds of a new loan using the same property as security.
The recordable instrument issued by the lender verifying full payment of a mortgage debt.
Second Home (Vacation Home, Weekend Home)
A residence other than the borrower's primary residence which the borrower intends to occupy for a portion of each year. Must be suitable for year-round occupancy.
A mortgage that has rights that are subordinate to the rights of the first mortgage holder.
In lending, the collateral given, deposited, or pledged to secure the payment of a debt.
Mortgage or deed of trust evidencing the pledge of real estate as collateral for the loan.
Payment by the seller or any other interested party of some or all of the purchaser's usual closing costs. Investors and insurers sometimes limit the amount of seller contribution and require lenders to adjust the property's value if contributions exceed limitations. Undisclosed seller contributions (such as decorating allowances, appliances, or payment of moving expenses) are made to borrowers outside of closing and are also subject to investor and insurer restrictions.
Money paid by borrowers and sellers to effect the closing of a mortgage loan, including payments for title insurance, survey, attorney fees, and such prepaid items as taxes and insurance escrow.
Services provided by the lender at the closing of a loan.
The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.
The value of land without improvements, as if vacant.
Improved or unimproved land divided into a number of parcels for sale, lease, financing, or development.
To make subject or junior to. For example, a loan on vacant land is made subject to a subsequent construction loan.
The measurement and description of land by a registered surveyor.
A claim against property for unpaid taxes.
The use of real estate under any kind of right of title.
The time limit within which a loan must be repaid.
The legal evidence of ownership rights to real property.
Title (Insurance) Company
A company that confirms the legal owner of a property, as well as insures a home owner and lender against a loss that could result from a title dispute.
An insurance policy that protects a lender and/or homebuyer (only if homebuyer purchases a separate policy, called owner's coverage) against any loss resulting from a title error or dispute.
Title Insurance Policy
A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee, or otherwise.
An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.
The instrument given by a borrower (trustor) to a trustee vesting title to a property in the trustee to ensure the borrower's fulfillment of an obligation. A mortgage.
A Federal law requiring full disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms and financial institutions.
Analysis of risk and setting of an appropriate rate and terms for a mortgage on a given property for given borrowers.
Uniform residential loan application.
An option which allows the borrower to opt to pay a slightly higher loan interest rate in lieu of paying the loan origination points generally charged for the particular loan product.