Glossary of Terms

Adjustable Rate Mortgage – a mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.

Amortization – repayment of a mortgage debt in periodic payments over the length of the loan term. Payments usually include principal and interest.

Amortization Schedule – a table showing the amounts of principal and interest due at regular intervals and the unpaid mortgage balance after each payment is made.

Application – a series of steps, usually including the completion of documents that a lender requires of those seeking a loan.

Appraisal – an opinion or estimate of value. The process by which this estimate is obtained includes comparing a property to similar properties in the same market that have recently been sold.

Appreciation – an increase in value for any reason, except inflation.

Asset – a property or right owned, tangible or intangible, that has monetary value and is capable of providing future benefits to its owner.

Breach – A violation of any legal obligation.

Buydown Mortgage – a temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower’s monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage.

Cash Out Refinancing – when the principal amount of a new mortgage involved in refinance is greater than the principal amount outstanding of the existing mortgage being refinanced, and all or a portion of the equity is being converted to cash.

Caps (Interest) -consumer safeguards on an adjustable-rate mortgage which limit the amount monthly payments may change.

Caps (Payment) – consumer safeguards on an adjustable-rate mortgage which limit the amount monthly payments may change.

Closing – repayment of a mortgage debt in periodic payments over the length of the loan term. Payments usually include principal and interest.

Closing Costs – fees paid to affect the closing of a mortgage, such as an origination fee, discount points, title insurance fees, survey fees and attorney’s fees.

Collateral – property pledged as security for a debt, for example, real estate pledged as security for a mortgage.

Commitment – an agreement, often in writing, between a lender and borrower to loan money at a future date subject to compliance with stated conditions.

Condominium – a form of property ownership whereby the purchaser receives title to the unit and a proportionate interest in common areas.

Conventional Financing – in real estate, mortgage financing which is not insured or guaranteed by a government agency such as HUD/FHA or VA.

Credit Report – a report to a prospective lender on the credit withstanding of a prospective borrower, used to aid in the determination of creditworthiness

Covenant –a legally enforceable promise or restriction in a mortgage. For example, the borrower may covenant to keep the property in good repair and adequately insured against fire and other casualties. A breach of covenant in a mortgage usually creates a default as defined y the mortgage, and can be the basis for foreclosure.

Deed – a written document sign, delivered and usually recorded, which conveys title to property from one owner to another.

Default – a breach or nonperformance of the terms of a note or the covenants of a mortgage.

Delinquency – failure of a borrower to make timely payments under a loan agreement.

Depreciation –a decline in value of a building or other real estate improvement, resulting from age, physical wear, and economic or functional obsolescence. This figure is deducted annually from net income.

Downpayment – a portion of the sales price paid a seller by a buyer to close a sales transaction, with the understanding that the balance will be paid later. Also, the difference between the sale price and the mortgage amount.

ECOA – (Equal Credit Opportunity Act) A federal law that 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 form public assistance programs. Also called “Regulation B”.

Equity – a homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage. For example, if the fair market value of your home is $125,000 and your mortgage balance is $119,000, then your equity equals $6,000.

Escrow – 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.

Escrow Payment – the portion of a mortgagor’s monthly payment held by a lender to pay taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due.

Fannie Mae – another name for the Federal National Mortgage Association (FNMA), the nation’s largest mortgage investor. A quasi-governmental secondary market organization that offers various mortgage purchase and securitization programs.

Fair Market Value – The price at which a property will sell from a willing buyer to a willing seller, each of whom has a reasonable knowledge of all the pertinent facts and neither being under and obligation to buy or sell.

Federal Home Loan Mortgage Corporation (FHLMC) – see Freddie Mac

Federal Housing Authority (FAH) – an agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage and loans made by private lenders. The FHA set standards for construction and underwriting but does not lend money or plan or construct housing.

Federal National Mortgage Association (FNMA) – see Fannie Mae

FHA Insurance – the undertaking by FHA to insure the lender against loss arising from a default by the borrower.

FICO score – A numerical score based on a system developed by Fair, Isaac and Company that uses the borrower’s credit history and other factors to predict the creditworthiness of borrowers.

Fixed – Rate Mortgage -a mortgage in which the interest rate and payments remain the same for the life of the loan.

Foreclosure – a legal procedure in which mortgage property is sold to pay the outstanding debt in case of default.

Freddie Mac – another name for the Federal Home Loan Mortgage Corporation (FHLMC), a quasi-governmental secondary market organization that offers various mortgage purchase and securitization programs.

Gift – A monetary gift with no expectation of repayment. It can be used to pay closing costs or make, or supplement your down payment. There are acceptable and unacceptable donors.

Gift Letter – a letter certifying to the underwriter that the funds in an applicant’s account are truly a gift and need not be repaid.

Good Faith Estimate (GFE) – a written estimate provided by a mortgage lender of the closing cost a borrower can expect to pay at or before settlement. This estimate must be mailed or delivered to all loan applicants within three business days after a loan application is received.

HUD – the Department of Housing and Urban Development. A governmental entity responsible for the implementation and administration of housing and urban development.

HUD-1 Income – 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 with a standard 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. The bank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the “closing statement” or “settlement sheet.”

Interest – consideration in the form of money paid for the use of money, usually expressed as an annual percentage.

Jumbo Loan – a mortgage loan that exceeds the legislated purchase limits of Fanie Mae and Freddie Mac. Also called a non-conforming loan.

Lien – A legal hold or claim of a creditor on the property of another as security for a debt. Liens are always against property, usually real property.

Loan Origination – the process by which a mortgage banker or direct lender brings into being a mortgage secured by real property.

Loan-to-Value Ratio – the ratio of mortgage amount to appraised value or sales price of real property. Used by lenders to determine maximum loan amounts as set by law.

Lock-in – also called a rate-lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan appli-cation is processed.

Mortgage Clause – a clause that may be attached to an insurance policy stipulating that the lender will receive a portion of insurance proceeds sufficient to satisfy the unpaid amount of a loan in the event of a loss.

Mortgage Insurance Premium (MIP) – the amount paid by a mortgagor for mortgage insurance either to FHA or a private mortgage insurance company.

Mortgage Broker – A firm or individual who, for a commission, matches borrowers and lenders. A mortgage broker does not retain servicing, does not use its own firms and is not a principle.

Mortgagor – One who borrows money, giving as a security a mortgage or deed of trust on real property.

Origination – the process of creating residential mortgage loans.

Origination Fee – the lender’s fee charged a borrower to prepare documents, make credit checks, inspect and sometimes appraise a property. Usually states as a percentage of the face value of the loan.

PITI – acronym for the items included in a monthly payment: principal, interest, taxes and insurance.

Pre-Approval – an evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender would be willing to lend. The pre-approval process involves a thorough look into the income and expenses of the borrower, including a look at the borrower’s credit report and score.

The pre-approval process involves a confirmation of income and a credit check on the borrower. As long as no major income or credit changes occur between the time of pre-approval and the actual purchase of a home, the dollar amount of pre-approval can be expected to remain the same. The process may take anywhere from a few minutes (for an online lending application) to a couple of weeks. A nonrefundable fee may be charged for the process.

A pre-approved mortgage is still subject to review once a specific property has been chosen, so the dollar amount is not guaranteed. A pre-approval may be lowered or even revoked if the property in question may be difficult to resell in the real estate market due to preconditions, location and other factors.

Pre-Qualification –similar to pre-approval, pre-qualification is a more informal evaluation of a buyer’s credit worthiness and gives her a rough estimate of how much she can afford to borrow. The main difference between pre-qualification and pre-approval is that the lender doesn’t verify any information the borrower provides for a pre-qualification. Lenders will verify credit, income, employment and other assets when buyers get pre-approved.

Private Mortgage Insurance (PMI) – insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage.

Point – an amount equal to one percent of the principal amount of a mortgage.

Principal – the original balance of money lent, excluding interest. Also the remaining balance of a loan, excluding interest.

Refinancing – the repayment of a debt from the proceeds of a new loan using the same property as security.

Term – the period of time between the commencement date and termination date of a note, mortgage, legal document or other contract.

Underwriting – in mortgage banking, the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report and of the borrower’s ability and willingness to repay the loan.

Unsecured Loan – Money you may receive with the expectation of repayment. It is not an acceptable source of funds for the down payment, closing costs or financial reserves. An example is a signature loan, or a line of credit against your credit card.

VA Mortgage – a mortgage loan that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

Variable Rate Mortgage – A mortgage agreement that allows for a adjustment of the interest rate in keeping with a fluctuating market and terms agreed upon in the note. (Also called an Adjustable Rate Mortgage)

Wholesaler – A lender who purchases mortgage that a mortgage broker or correspondent completely or partially originated, versus working directly with consumers.

Please contact a Mortgage Expert for further explanation.