Mortgage Terms

Common Mortgage Terms

Following are mortgage terms commonly used during mortgage approval and mortgage interest rates confirmation process. 

Accrued Interest

Interest that is earned but not paid, ultimately adding to the amount owed.

Additional Principal Payment

A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

Adjustable-Rate Mortgage (ARM)

An Adjustable Rate Mortgage, or ARM, is a mortgage where the mortgage interest rate is adjusted periodically based on an index.

Affordability

A consumer’s capacity to afford a house usually expressed in terms of the maximum price the consumer could pay for a house and be approved for the mortgage required to pay that amount.

Amortization

The gradual repayment of a mortgage loan, both principal and interest, through installments expressed in terms of the number of months required to repay the mortgage loan in full (also known as the amortization term).

Appraisal

A written report prepared by a qualified appraiser estimating the fair market value of a property based on the appraiser’s knowledge, experience, and analysis of the property (also known as appraised value).

Appraiser

A professional with knowledge of real estate markets skilled in the practice of determining a property’s fair market value.

Annual Percentage Rate (APR)

The cost of credit expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans. However, APR should not be confused with the actual note rate.

Asset

Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Buydown

When the seller, builder, or buyer pays an amount of money upfront to the lender to reduce monthly payments during the first few years of a mortgage.

Cash-Out Refinancing

Refinancing for an amount over the balance on the old loan plus settlement costs. The borrower takes the “cash-out” of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.

Certificate of Eligibility

A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)

A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

Closing

A meeting held to finalize the sale of a property. At this time, the buyer signs the mortgage documents and pays closing costs.

Closing Costs

Closing costs also referred to as a “settlement”, include a loan origination fee, points, an appraisal fee, title search and insurance fees, survey, taxes, a deed recording fee, credit report charge and other costs assessed at settlement. The closing costs usually equal about 2% to 6% of the mortgage amount.

Co-Borrowers

One or more persons who have signed the note and are equally responsible for repaying the loan.

Conforming Loan

A conforming loan is any loan that meets the criteria and limits set forth by the two largest buyers of loans, Fannie Mae and Freddie Mac.

Conventional Mortgage

Any mortgage which is not insured or guaranteed by a government agency such as HUD/FHA, VA, or the Farmers Home Administration called Conventional Mortgage.

Consumer Reporting Agency

An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and other sources.

Credit Report

A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit Score

A credit score is a number generated by a statistical system used to rate the credit of an applicant according to various characteristics relating to creditworthiness.

Delinquency

Failure to make mortgage payments for 90 days.

Default

Failure to make mortgage payments on time beyond 90 days of the due date or the inability to comply with other requirements of a mortgage.

Discount Point(s)

Additional points you can pay a lender to lower the mortgage interest rate on your loan at closing. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).

Down Payment

Part of the purchase price of a property that is paid in cash by the buyer and not financed with a mortgage.

Down Payment Assistance

A program that provides financial assistance for a down payment and closing costs for qualified borrowers.

Debt-to-Income Ratio (DTI)

Debt-to-income ratio (also referred to as DTI, back-end ratio or bottom-end ratio) is the total of all monthly debt payments calculated by taking the proposed housing expense (not including living expenses such as food and utilities) divided by monthly gross (before tax) income.

Earnest Money Deposit

This is a sum of money given to bind the sale of real estate, to ensure payment, or to advance funds in the processing of a loan.

Equity

The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow

Refers to a neutral third party who carries out the instructions for both the buyer and seller to handle all the paperwork of settlement or “closing.” Escrow may also refer to an account held by the lender into which the home buyer pays money for tax or insurance payments.

Fannie Mae

A congressionally chartered shareholder-owned company that is the nation’s largest supplier of home mortgage funds formally known as the Federal National Mortgage Association (FNMA).

Fees

The sum of all upfront cash payments required by the lender as part of the charge for the loan.

FHA Loan

A mortgage that is insured by the Federal Housing Administration (FHA), also known as a government mortgage.

First Mortgage

The primary lien against a property.

Fixed-Rate Mortgage

A mortgage loan in which the mortgage interest rate charged remains constant throughout the life of the loan.

Floating Rate

A mortgage interest rate that is allowed to move up or down with the rest of the market or along with an index. The prime lending rate is used as a basis for the floating rate, with the agreement stating that the mortgage interest rate charged to the borrower is the prime mortgage interest rate plus a certain spread. A borrower may elect to lock the rate and points at any time but must do so a few days before closing.

Foreclosure

The legal process by which a lender acquires possession of the property securing a mortgage loan as a result of a default by the borrower.

Freddie Mac

This is a government-owned corporation that buys mortgages and packages them into mortgage-backed securities, formally known as the Federal Home Loan Mortgage Corp. (FHLMC)

Fully Amortizing Payment

The monthly mortgage payment, which if maintained unchanged through the remaining life of the loan at the then-existing mortgage interest rate will pay off the loan over the remaining life. On FRMs, the payment is always fully amortizing provided the borrower has made no prepayments. (If the borrower makes prepayments, the monthly payment is more than fully amortizing). On GPMs, the payment in the early years is always less than fully amortizing. On ARMs, the payment may or may not be fully amortizing, depending on the type of ARM.

Gift of Equity

A sale price below market value where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as a down payment.

Ginnie Mae

A government-owned corporation that assumed responsibility for the special assistance loan program, formerly administered by Fannie Mae and referred to as the Government National Mortgage Association (GNMA).

Government-Sponsored Enterprise (GSE)

Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. The three most commonly known GSEs are Fannie Mae, Freddie Mac, and Ginnie Mae.

Gross Income

A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Hazard Insurance

The insurance purchased by the borrower and required by the lender to protect the property against loss from fire and other hazards. This is also known as “homeowner insurance” and is represented by the second “I” in PITI.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a type of secondary financing that consists of a revolving line of credit secured by a lien junior to a mortgage.

Housing Expense

The sum of the mortgage payment, hazard insurance, property taxes, and homeowner association fees. This is also the same as PITI and “monthly housing expenses.”

Housing Expense Ratio

The percentage of gross monthly income budgeted to pay housing expenses.

Index

A measure of mortgage interest rate to decide the amount a mortgage interest rate on an ARM that will change over time. The index is generally a published number or percentage, such as the average mortgage interest rate or yield on Treasury bills. Some index rates tend to be higher than others, whereas some tend to be more volatile.

Interest

The fee charged for borrowing money.

Interest-Only Mortgage

A mortgage where a period of the monthly mortgage payments is directed toward paying off interest only. During that period, the loan balance remains unchanged.

Investment Property

A real estate property purchased to earn a return on the investment (purchase), either through rent (income), the future resale of the property, or both. An investment property is possible for a long-term endeavor, such as an apartment building, or an intended short-term investment in the case of flipping (where a property is bought, remodeled or renovated, and sold for profit).

Jumbo Loan

A loan with a loan amount larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Currently, the limit is set at $453,100 for most areas. However, special areas, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, have higher limits. Because jumbo loans are difficult to fund by these two agencies, they usually carry a higher mortgage interest rate.

 

Late Charge

The penalty a borrower pay when a payment is late until a given number of days (usually 15) after the due date.

Late Fees

The amount the borrower promises to repay, as outlined in the mortgage contract. It differs from the amount of cash disbursed by the lender by the number of points and other upfront costs included in the loan.

Liabilities

A person’s financial obligations. Liabilities include long-term and short-term debt.

LIBOR

Abbreviation of the London Interbank Offered Rate.

Lien

The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.

Liquid Asset

An easy to convert the asset into cash. 

Loan Amount

The amount the borrower promises to repay, as outlined in the mortgage contract. It differs from the amount of cash disbursed by the lender by the number of points and other upfront costs included in the loan.

Loan-to-Value Ratio (LTV)

The loan-to-value (LTV) ratio is the relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Lock-In

You can lock in specific rates and points to protect you against the mortgage interest rate changing during the time between applying for a loan and closing on it.

Lock-In Period

A lock period is a period before closing when you can hold a specific mortgage interest rate for your loan.

Margin

Margin is the amount a lender adds to the index on an Adjustable Rate Mortgage (ARM) as profit to establish the adjusted mortgage interest rate.

Maturity

The date on which the principal balance of a loan becomes due and payable.

Maximum Loan Amount

The maximum loan amount is the most a borrower is qualified to borrow.

Minimum Down Payment

The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house.

Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Insurance(MI)

The money paid to insure the mortgage when the down payment is typically less than 20 percent is Mortgage insurance.

Mortgage Insurance Premium (MIP)

The amount paid by a borrower (or mortgagor) for mortgage insurance.

Mortgage Interest Rate

The mortgage interest rate is the percentage of the loan to pay annually as the interest accrues.

Mortgagor

The borrower in a mortgage agreement.

Multi-Family Home

A building or structure designed to house several different families in separate housing units.

Net Worth

The value of all of a person’s assets, including cash.

Non-Conforming Mortgage

A non-conforming loan is a home mortgage that does not meet the criteria of Fannie Mae or Freddie Mac for various reasons including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a higher rate and/or points.

Non-Liquid Asset

A difficult to convert the asset into cash. 

Non-Permanent Resident Alien

A non-citizen employee without a green card in the US. As distinct from a permanent resident alien, who has a green card and who lenders do not distinguish from US citizens. Non-permanent resident aliens are subject to somewhat more restrictive qualification requirements than US citizens.

Note

A legal document that obligates a borrower to repay a mortgage loan at a stated mortgage interest rate during a specified period.

Origination Fee

An origination fee is a charge for processing a loan application.

Payment Change Date

The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap

A limit on the amount that payments can increase or decrease during any one adjustment period.

Periodic Rate Cap

A limit on the amount that the mortgage interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

Primary Residence

The primary location that a person inhabits. It does not matter whether it is a house, apartment, trailer, or boat, as long as it is where you live most of the time.

Principal

A principal is an amount of debt (excluding interest) remaining on a loan.

Principal, Interest, Taxes, and Insurance (PITI)

The four components of a monthly mortgage payment.

Processing

Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on.

Pre-qualification

The process of determining how much money you will be eligible to borrow before you apply for a loan.

Qualification

Qualification is the process to determine whether you have enough cash and income to meet the requirements for a loan.

Qualifying Ratios

Qualification ratios are limits set by lenders to state the maximum housing expense to income ratio, and total debt to income ratio in order a borrower can have to qualify for a loan.

Rate Lock

A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified mortgage interest rate and lender costs for a specified period.

Real Estate Settlement Procedures Act (RESPA)

A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Recording

The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Refinance

Refinancing is the process of the same buyer paying off one loan with the proceeds from another loan.

Required Funds for Closing

The total cash required for you to close a loan is required cash.

Reserve Requirements

A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home.

Scheduled Mortgage Payment

Under the terms of the mortgage contract, the amount the borrower is obliged to pay for each period, includes interest, principal and mortgage insurance.

Second Home

A second home is a one-unit property owned by a person, occupied for a portion of the year by the borrower. It is not subject to any timesharing ownership arrangement. 

Second Mortgage

A loan with a second-priority claim against a property if the borrower defaults.

Security

The property pledged as collateral for a loan. 

Self-Employed Borrower

A borrower must document income using tax returns rather than the information provided by an employer.

Seller Contribution

A contribution to a borrower’s down payment or settlement costs made by a home seller as an alternative to a price reduction.

Servicer

An organization that collects principle and interest payments from borrowers and manages borrowers’ escrow accounts.

Short Sale

An agreement between a mortgage borrower in distress and the lender allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure or a deed in place of foreclosure.

Standard Payment Calculation

The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current mortgage interest rate.

Third-Party Origination

When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Title Insurance

Title insurance is a policy, usually issued by a Title Insurance company. It guarantees that an owner has title to a property and insures against errors in the title search.

Total Expense Ratio

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Treasury Index

An index used to determine mortgage interest rate changes for certain adjustable-rate mortgage (ARM) plans.

Underwriting

The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.

VA Mortgage

the Department of Veterans Affairs guarantees this loan for Veterans which a lender approves.

Waive Escrow

Authorization by the lender for the borrower to pay taxes and insurance directly.