mortgage terminology

Use this glossary of mortgage terms to better understand the overall mortgage process as well as specific mortgage terms that may be unfamiliar to you.

3/1, 5/1 , 7/1 and 10/1 ARMs

Adjustable rate mortgages, in which, rate is fixed for three year, five year, seven year and 10‐year periods, respectively, but may adjust annually after that. Also called Hybrid ARMS

Form 1003

Designed by Fannie Mae and Freddie Mac it is used by lenders to obtain financial and personal information from borrowers who apply for a mortgage loan secured by a one to four unit residential real estate mortgage loan secured by a one to four unit residential real estate.

Form 1003 is also known as the Uniform Residential Loan Application (URLA).

Freddie Mac also uses the same application form and is known as the Freddie Mac Form 65 Freddie Mac Form 65.

1031 Exchange

A tax‐deferred exchange of “like” real estate, employed to offset or avoid capital gains tax.

4506‐T

Form 4506‐T is an Internal Revenue Service (IRS) document that is used to retrieve past tax returns, W‐2, and 1099 transcripts that are on file with the IRS.

The document gives permission for a third party to retrieve the tax payer’s data.

The taxpayer must sign and date the 4506‐T.

Abstract of title

A summary of recorded transactions, concerning A summary of recorded transactions, concerning a particular property.

Acceleration Clause

Condition in a mortgage that gives the lender the right to require immediate repayment of the loan balance if regular mortgage payments are not made or for breach of other conditions of the mortgage.

Accrued Interest

Interest earned but not yet paid.

Acquisition Costs

Purchase price, plus closing costs, minus seller Purchase price, plus closing costs, minus seller credits.

Adjustable Rate Mortgage (ARM)

A mortgage, in which, the A mortgage, in which, the interest rate interest rate is adjusted periodically based on a pre‐selected index.

Also sometimes known as a renegotiable rate mortgage, variable rate mortgage or Canadian roll t over mortgage.

Adjusted Basis

The cost of a property, plus the value of any capital expenditures for improvements to the property, minus any depreciation taken.

Adjustment Date

The date that the interest rate changes on an adjustable rate mortgage (ARM) adjustable rate mortgage (ARM).

Adjustment Interval

On an adjustable rate mortgage the time between changes in the interest rate and/or monthly payment typically one three or five years depending on the index.

Adjustment Period

The period elapsing between adjustment dates for an adjustable rate mortgage (ARM).

Affiliated business arrangement (ABA)

An ABA is an arrangement to share or refer business between two different companies involved in providing services in the closing of a real estate transaction.

If there is greater than one percent (1%) ownership interest of a party in both the business referring out the service and the business receiving the referral, it must be disclosed to the borrower.

Agent

One that acts for or represents another.

Agreement of Sale

Also known as a “Sales Contract.”

A written document, in which, a purchaser agrees to buy property, under certain given conditions, and the seller agrees to sell, under certain given conditions.

Alternative Documentation

A method of documenting a loan file, which relies on information the borrower is likely to be able to provide information the borrower is likely to be able to provide, instead of waiting on verifications sent to third parties for confirmation of statements made in the application. confirmation of statements made in the application.

Amortization

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

Amortization Term

The length of time required to amortize the mortgage loan expressed as a number of months. loan expressed as a number of months.

For example 360 months is the amortization term for a 30‐year fixed rate mortgage.

Annual Percentage Rate (APR)

The measurement of the full cost of a loan, including interest and loan fees expressed as a yearly percentage rate.

Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans.

Application

Often referred to as a 1003, an initial statement of personal and financial information required to approve your loan.

Application fee

A fee charged, by a lender, to cover initial costs of processing a loan application, often including charges for property appraisal and a credit report.

Appraisal

An estimate of the value of property, made by a qualified professional called an “Appraiser”.

Based on an appraiser’s knowledge, experience, analysis of the property and comparable sales (comps) in the area.

Appraisal Fee

A fee charged, by a licensed certified appraiser, to render an opinion of market value as of a specific date.

APR (Annual Percentage rate)

The measurement of the full cost of a loan, including interest and loan fees expressed as a yearly percentage rate.

Because all lenders apply the same rules in calculating the Annual Percentage Rate, it provides consumers with a good basis for comparing the cost of different loans.

Assessment

A local tax, levied against a property, for a specific purpose, such li h as: a sewer or street lights.

Assignment

The transfer of a mortgage from one person to another.

Assumability

An assumable mortgage can be transferred from the seller to the new buyer.

Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption.

If a mortgage contains a Due on Sale Clause, it may not be assumed by a new buyer.

Assumption

The agreement between buyer and seller, where the buyer takes over the payments on an existing mortgage from the seller. 

Assuming a loan, can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and (new) probably higher market rate interest charges will apply.

Assumption Fee

The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.

Balance sheet / Personal financial statement (PFS)

A document showing the financial situation‐assets, liabilities and net worth of a person at a specific point in time.

Balloon Mortgage

A loan which is amortized for a longer period than the term of the loan.

Usually this refers to a thirty year amortization and a five or seven year term.

At the end of the term of the loan, the remaining outstanding principal on the loan is due.

This final payment is known as a balloon payment.

Balloon Payment

The final lump sum paid at the maturity date of a balloon mortgage.

Basis point

A unit of measure: 1/100th of one percent.

For example, the difference between a 9.0 percent loan and a 9 5 percent loan is 50 basis points.

Bankruptcy

Proclamation by a court of an individual’s (or organization’s) state of insolvency, or inability, to pay debts.

Petition may be brought by an individual or his creditors, with a goal of orderly and equitable settlement of obligations.

Bi‐weekly Payment Mortgage

A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule).

Th 26 (or possibly 27) bi‐weekl h y payments are each equal to one half of the monthly payment required, if the loan were a standard 30‐year fixed rate mortgage.

The result for the borrower is a substantial savings in interest.

Blanket Mortgage

A mortgage covering at least two pieces of real estate as security for the same mortgage.

Bona fide

In Good Faith.

A “Bona Fide” offer, is an offer made in good faith.

Borrower (Mortgagor)

One who applies for and receives a loan, in the form of a mortgage, with the intention of repaying the loan in full.

Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client, but who does not loan the money himself/herself.

Brokers usually charge a fee or receive a commission for their services.

Buy Down

When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan.

While the payments are initially low they will increase when the subsidy expires.

Buyer’s broker / agent

An agent, hired by a buyer, to locate a property for purchase and to represent the buyer, in negotiations, with the seller’s broker (agent), for the best possible deal for the buyer.

Buyer’s Market

Market conditions that favor buyers.

With more sellers than buyers in the market, buyers have ample choice of properties and can negotiate lower prices.

Call option

A provision in the mortgage which gives the mortgagee the right to call the mortgage due and payable at the end of a specified period, for whatever reason.

Cash Flow

The amount of cash derived over a certain period of time from an income producing property.

The cash flow should be large enough to pay the expenses of the income producing property: mortgage payment (PITI), maintenance, utilities, etc…

Caps (interest)

Consumer safeguards, which limit the amount of change to the interest rate, for an adjustable rate mortgage.

Caps (Payment)

Consumer safeguards, which limit the amount of change to the monthly payments, for an adjustable rate mortgage.

Cash‐out (Refinance)

A refinance for more than the balance of the original mortgage, with the extra money is taken out of the equity in the property.

APR (Annual Percentage rate)

The measurement of the full cost of a loan, including interest and loan fees expressed as a yearly percentage rate.

Because all lenders apply the same rules in calculating the Annual Percentage Rate, it provides consumers with a good basis for comparing the cost of different loans.

Assessment

A local tax, levied against a property, for a specific purpose, such as: a sewer or street lights.

Assignment

The transfer of a mortgage from one person to another.

Assumability

An assumable mortgage can be transferred from the seller to the new buyer.

Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption.

If a mortgage contains a Due on Sale Clause, it may not be assumed by a new buyer.

Cashier’s Check or (Bank Check)

A check, which payment is guaranteed, because it was paid for in advance and is drawn on the bank s’ account account, instead of the customer’s.

Certificate of occupancy

Document, issued by local government agency, stating that a property meets the requirements of health and building codes.

Certificate of title

Written opinion of the status of title to a property, given by an attorney or title company This certificate does not offer the protection given by title insurance.

Chain of title

The chronological order of conveyance of a property, from the original owner to the present owner.

Clear title

A marketable title, free of clouds and disputes.

Closing / settlement

The meeting (in wet funding states) between the buyer, seller and lender or their agents, where the property and funds legally change hands, also called settlement.

Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement.

The cost of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing Costs

Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property.

Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. 

Closing costs will vary according to the area, county, and the lenders used.

Closing statement

A financial disclosure statement, which lists the funds received and expected at the closing.

Cloud on title

An outstanding claim or encumbrance that, if valid, would affect or impair the owner s’ title.

COFI / cost of funds index

An index used to calculate the rate of an adjustable ‐rate mortgage. 9

The rate adjusts based on a cost ‐ of ‐funds index often the 11th District Cost of Funds. 

Index + Margin = Rate

Collateral

Assets which back a mortgage loan.

Combined loan‐to‐value (CLTV)

The ratio of the total mortgage liens against the subject property to the lesser of either the appraised value or the sales price.

Commission

Money paid to a licensed real estate agent or broker by the seller (usually 6 about percent of a home’s sale price).

Also money paid to a licensed loan officer (MLO) by the lender or broker for closing the loan.

Commitment

A formal offer by a lender to make a loan under certain terms or conditions to a borrower.

Community reinvestment act (1977)

The Community Reinvestment Act or Title VIII of the Housing and Community Development Act of 1977, is a United States Federal Law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low an d moderate ‐ income neighborhoods.

Congress passed the Act to reduce discriminatory credit practices against low ‐income neighborhoods, a practice known as redlining.

Banks must extend loans in communities, in which, they accept deposits.

Condominium

A form of property ownership, in which the homeowner holds title to an individual dwelling unit and an interest in common areas and facilities of a multi‐unit project.

Conforming loan

A mortgage loan under the maximum amount of loans that FNMA (Fannie Mae) and FHLMC (Freddie Mac) are legally allowed to buy.

Maximum loan amount varies by county.

Construction Loan

A short ‐term interim loan to pay for the construction of buildings or homes.

These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Consumer Financial Protection Bureau (CFPB)

A federal agency, which enforces laws that protect consumers of financial products and services such as mortgages, credit cards and deposit accounts.

Consumer Reporting Agency (OR Bureau)

An organization that handles the preparation of reports used by lenders to determine a potential borrowers’ credit history.

The agency gets data for these reports from a credit repository and other sources.

The Big 3: Experian, Equifax, and TransUnion

Contingency

A condition that must be satisfied, before a contract is legally binding before a sale can close.

Real estate sales contracts often have a specific date or number of days, in which, the contingencies must be removed.

Contract Sale or Deed

A contract between purchaser and a seller of real estate, to convey title after certain conditions have been met to convey title, after certain conditions have been met.

It is a form of installment sale.

Conventional Loan

A mortgage not insured by FHA or guaranteed by VA.

Conversion Clause / option

A provision in an ARM allowing the loan to be converted to a fixed‐rate at some point during the term.

Usually conversion is allowed at the end of the first adjustment period.

The conversion feature may cost extra.

Also referred to as a Convertible ARM

Conveyance

The transfer of a deed.

Or possibly a lease or mortgage.

Covenants, conditions and restrictions (CC&Rs)

A document defining the use, requirements and restrictions of a property.

Credit Report

A report documenting the credit history and current status of a borrower s’ credit standing.

Credit Risk Score

A credit risk score is a statistical summary of the information contained in a consumer’s credit report.

The most well known type of credit risk score is the Fair Isaac or FICO score.

This form of credit scoring is a mathematical summary calculation, which assigns numerical values to various pieces of information in the credit report.

The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

Deed

A legal document that transfers a property from one owner to another.

The deed contains a description of the property, and is signed, witnessed and delivered to the buyer at closing.

Deed of Trust

Agreement to pledge property as security for a loan, used in many p gg states in place of a mortgage.

In this arrangement, the borrower transfers legal title to a trustee, who holds the property in trust as security for the repayment of the debt.

The deed of trust becomes void if the debt is repaid, but if the borrower defaults on the loan, the trustee may sell the property to pay the debt.

Default

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

Deferred Interest

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance.

See negative amortization.

Delinquency

Failure to make payments on time.

This can lead to foreclosure.

Deposit / Earnest Money Deposit

Cash paid when a formal sales contract is signed.

The deposit is usually held by a third party until the sale is complete.

Depreciation

When the value of property declines.

Discount Point

Prepaid interest assessed at closing by the lender.

Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).

Dodd‐Frank Act

Passed in July 2010

Purpose:

1. To promote financial stability

2. To end “too big to fail”

3. To protect taxpayers by ending bailouts

4. To protect consumers from abusive practices

Established the Consumer Financial Protection Bureau (CFPB)


Title X (Consumer Financial Protection Act)

1. Created the CFPB

2. Assumed rule‐making and enforcement of prior regulations pertaining to the mortgage industry 


Title XIV (Mortgage Reform and Anti‐Predatory Lending Act)

1. Concerned with regulations such as RESPA, TILA, and others

2. Addresses concerns of borrowers and guidelines of mortgage industry to ensure this


Down Payment

Money paid to make up the difference between the purchase price and the mortgage loan amount.

Due‐on‐Sale‐Clause

A provision in a mortgage or deed of trust , which allows the lender to demand immediate payment of the balance of the mortgage, if the mortgage holder (mortgagor) sells the home.

Earnest Money (deposit)

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

Deposit made by a buyer, in evidence of good faith, when the purchase agreement is signed.

Effective Interest Rate

The cost of a mortgage, expressed as a yearly rate, usually higher than the interest rate on the mortgage, since this figure includes up ‐front costs.

It is used to compare the annual interest between loans with different compounding terms (daily, monthly, annually, or other). 

The effective interest rate differs in two important respects from the annual percentage rate (APR):

1. The effective interest rate generally does not incorporate one ‐time charges such as front‐end fees;

2. The effective interest rate is (generally) not defined by legal or regulatory authorities (as APR is in many jurisdictions).

Encumbrance

A legal right or interest in a property that affects title and lessens the property value and lessens the property value.

Encumbrances can take the form of claims, liens, unpaid taxes and so on.

These will usually have to be taken care of before a buyer may purchase a property.

EQUAL CREDIT OPPORTUNITY ACT(ECOA)

A federal law, which requires lenders and other creditors to make credit equally available without discrimination based on race color religion national origin age sex marital status or receipt of income from public assistance programs.

Also known as Regulation B

Equity

The difference between the fair market value and current indebtedness also referred to as the owner s’ interest.

The value an owner has in real estate over and above the obligation against the property.

Escrow

An account held by the lender into which the home buyer pays money for tax or insurance payments.

Also earnest deposits held (in Escrow) pending loan closing.

Escrow account

Account held by a lender (servicer) containing funds collected as part of mortgage payments for annual expenses such as, taxes and insurance, so that the homeowner does not have to pay a large sum when these fall 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

The part of a mortgagor’s taxes, hazard insurance, mortgage insurance and other items as they become due.

Escrow Waiver

Escrow Waiver is waiver of the requirement to fund an escrow account with lender (servicer) and instead pay insurance and taxes separately.

This waiver may require a fee (or higher interest rate) and is not available with all loan programs.

FACT Act (2003)

Fair and Accurate Credit Transactions Act

An amendment to the Fair Credit Reporting Act.

The act allows consumers to request and obtain a free credit report once every twelve months from each of the three nationwide consumer credit reporting companies.

The act also contains provisions to help reduce identity theft.

It also requires secure disposal of consumer information.

Fair Housing act (Regulation V)

Prohibits discrimination in real estate transactions because of race, color, religion, sex, handicap, familial status (families with children), or national origin.

It applies to mortgage lending as well as other aspects of real estate transactions, including sales and rentals, real estate brokerage, and appraisals.

Fannie Mae (FNMA)

The nickname commonly used for the Federal National Mortgage Association.

Federal Home Loan Mortgage Corporation (FHLMC)

Also called: Freddie Mac

A government sponsored entity that purchases conventional mortgages from insured depository institutions and HUD ‐approved mortgage bankers.

Federal Housing Administration (FHA)

A division of the Department of Housing and Urban Development.

Its main activity is the insuring of residential mortgage loans made by private lenders.

FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)

Also know as Fannie Mae

A government sponsored entity that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by the VA.

Federal reserve

The central bank of the United States and major regulatory agency for many commercial banks.

Fee simple

Absolute ownership of real property.

FHLMC

The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans.

Also known as “Freddie Mac.”

Firm Commitment

A promise from a lender to make a mortgage loan.

First Mortgage

The primary lien against a property.

Fixed Installment

The monthly payment due on a mortgage loan including payment of both principal and interest.

Fixed Rate (Mortgage)

An interest rate that is fixed for the term of the loan.

Flood insurance

A form of hazard insurance required by lenders to cover properties in flood zones.

Floor

A pre‐determined amount that establishes the minimum interest rate over the life of an adjustable rate mortgage loan.

This can be expressed as a percentage below the start rate, as a rate of interest independent of the start rate, or, quite typically, the “Floor” may be established as being equal to the Margin.

FNMA

The Federal National Mortgage Association is a secondary mortgage institution.

FNMA buys VA, FHA and conventional mortgages from primary lenders.

Also known as “Fannie Mae.”

Forbearance

Grace period given when a lender postpones foreclosure, to give the borrower time to catch up on overdue payments.

Foreclosure

A legal process, by which, the lender or the seller forces a sale of a mortgaged property, because the borrower has not met the terms of the mortgage.

Also known as a repossession of property.

Freddie Mac

The nickname most commonly used for the Federal Home Loan Mortgage Corporation

Fully Amortized ARM

An adjustable rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance at the interest accrual rate over the amortization term.

Ginnie Mae (GNMA)

The nickname most commonly used for the Government National Mortgage Association.

Grace Period

Period of time during which a loan payment may be made after its due date without incurring a late penalty.

Gramm Leach Bliley act (1999)

The Gramm‐Leach‐Bliley Act requires financial institutions which offer consumers financial products or services like loans, financial or investment advice, or insurance to explain their information‐sharing practices to their customers and to safeguard sensitive data.

Under the Safeguards Rule, financial institutions must protect the consumer information they collect.

Gross Income

Total income before taxes or expenses are deducted.

Gross Monthly Income is the total amount earned by a borrower each month.

Growing Equity Mortgage (GEM)

A fixed rate mortgage that provides scheduled payment increases over an established period of time.

The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.

Guarantee

To assume liability for another’s debts in the event of default.

Guaranty

A promise by one party, to pay a debt or perform an obligation contracted by another, if the original party fails to pay or perform according to a contract.

Hazard Insurance

A form of insurance, in which, the insurance company protects the insured (typically the homeowner) from specified losses such as fire, windstorm and the like.

Homeowners Warranty

A type of insurance, which covers repairs to specified parts of a house for a specific period of time.

Housing and Urban Development (HUD)

A U.S. government agency established to implement federal housing and community development programs.

Oversees the Federal Housing Administration (FHA).

Housing Code

Local government ordinance, which sets minimum standards of safety and sanitation for existing residential buildings.

HUD‐1 Statement

A document that provides an itemized listing of the funds that are payable at closing.

Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts.

Each item on the statement is represented by a separate number within a standardized numbering system.

The totals at the bottom of the HUD‐1 statement define the seller’s net proceeds and the buyer’s net payment at closing.

Hybrid ARM

A hybrid adjustable‐rate mortgage blends the characteristics of a fixed‐rate mortgage and a regular adjustable‐rate mortgage.

This type of mortgage will have an initial fixed interest rate period followed by an adjustable rate period.

After the fixed interest rate expires, the interest rate starts to adjust based on an index, plus a margin.

The date, at which, the mortgage changes from the fixed rate to the adjustable rate is referred to as the reset date.

Impound

The portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due.

Impound Account

1. Savings account for accumulating that portion of a borrowers monthly payments designated for future payments of taxes and insurance, which is held by the servicer.

2. (Required by certain lenders or with certain types of financing.)

Index

A published interest rate, against which, lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments, which is then used to adjust the interest rate on an adjustable mortgage up or down.

Popular indices include: LIBOR, COFI, COSI, T‐Bills, etc.