Common Mortgage Terms
Following are mortgage terms commonly used during mortgage approval and mortgage interest rates confirmation process.
Following are mortgage terms commonly used during mortgage approval and mortgage interest rates confirmation process.
Interest that is earned but not paid, ultimately adding to the amount owed.
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
An Adjustable Rate Mortgage, or ARM, is a mortgage where the mortgage interest rate is adjusted periodically based on an index.
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.
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).
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).
A professional with knowledge of real estate markets skilled in the practice of determining a property’s fair market value.
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.
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
When the seller, builder, or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage.
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes “cash-out” of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
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, 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.
One or more persons who have signed the note and are equally responsible for repaying the 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.
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.
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 from other sources.
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.
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.
Failure to make mortgage payments for 90 days.
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.
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).
Part of the purchase price of a property that is paid in cash by the buyer and not financed with a mortgage.
A program that provides financial assistance for a down payment and closing costs for qualified borrowers.
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.
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.
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.
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.
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).
The sum of all upfront cash payments required by the lender as part of the charge for the loan.
A mortgage that is insured by the Federal Housing Administration (FHA), also known as a government mortgage.
The primary lien against a property.
A mortgage loan in which the mortgage interest rate charged remains constant throughout the life of the loan.
An 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.
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.
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)
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.
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.
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).
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.
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.
The insurance purchased by the borrower and required by the lender in order 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.
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.
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.”
The percentage of gross monthly income budgeted to pay housing expenses.
A measure of mortgage interest rate to decide the amount an 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.
The fee charged for borrowing money.
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.
A real estate property purchased with the intention of earning 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).
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.
The penalty a borrower pay when a payment is late until a given number of days (usually 15) after the due date.
The amount the borrower promises to repay, as set forth 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.
A person’s financial obligations. Liabilities include long-term and short-term debt.
Abbreviation of the London Interbank Offered Rate.
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.
An easy to convert asset into cash.
The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.
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.
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.
A lock period is the time period prior to closing when you can hold a specific mortgage interest rate for your loan.
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.
The date on which the principal balance of a loan becomes due and payable.
The maximum loan amount is the most a borrower is qualified to borrow.
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.
A legal document that pledges a property to the lender as security for payment of a debt.
The money paid to ensure the mortgage when the down payment is typically less than 20 percent is Mortgage insurance.
The amount paid by a borrower (or mortgagor) for mortgage insurance.
Mortgage interest rate is the percentage of the loan to pay annually as the interest accrues.
The borrower in a mortgage agreement.
A building or structure designed to house several different families in separate housing units.
The value of all of a person’s assets, including cash.
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.
A difficult to convert asset into cash.
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.
A legal document that obligates a borrower to repay a mortgage loan at a stated mortgage interest rate during a specified period of time.
An origination fee is the charge for processing a loan application.
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.
A limit on the amount that payments can increase or decrease during any one adjustment period.
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.
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.
A principal is an amount of debt (excluding interest) remaining on a loan.
The four components of a monthly mortgage payment.
Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on.
The process of determining how much money you will be eligible to borrow before you apply for a loan.
Qualification is the process to determine whether you have enough cash and income to meet the requirements for a loan.
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 in order to qualify for a loan.
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 of time.
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
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.
Refinancing is the process of the same buyer paying off one loan with the proceeds from another loan.
The total cash required for you to close a loan is required cash.
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.
Under the terms of the mortgage contract, the amount the borrower is obliged to pay for each period, includes interest, principal and mortgage insurance.
A second home is a one unit property owned by an person, occupied for a portion of the year by the borrower. It is not subject to any timesharing ownership arrangement.
A loan with a second-priority claim against a property in the event that the borrower defaults.
The property pledged as collateral for a loan.
A borrower who must document income using tax returns rather than information provided by an employer.
A contribution to a borrower’s down payment or settlement costs made by a home seller as an alternative to a price reduction.
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts.
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure or a deed in lieu of foreclosure.
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.
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 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 obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
An index used to determine mortgage interest rate changes for certain adjustable-rate mortgage (ARM) plans.
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.
the Department of Veterans Affairs guarantee this loan for Veterans which a lender approve.
Authorization by the lender for the borrower to pay taxes and insurance directly.