Glossary Index

Most Frequently Asked Mortgage Questions

Our Mortgage Glossary

A

Adjustable Rate Mortgage (ARM):
a mortgage that has an initial rate adjusting periodically based on a designated financial index. A predetermined margin is added to the index to compute the interest rate.

Adjustment Interval:
on an Adjustable Rate Mortgage, the time between changes in the interest rate and/or monthly payment.

Amortization:
the gradual reduction of mortgage debt through periodic scheduled payments over a specific mortgage term.

Annual Percentage Rate (APR):
an interest rate reflecting the cost of a loan as a yearly rate. Often, this rate is higher than the stated note rate on the mortgage, as it takes into account points and other credit costs.

Appraisal:
a report that sets forth an estimate or opinion of fair market value; also refers to the process by which a value estimate is obtained.

Arms-Length Transaction:
a transaction negotiated by unrelated parties, each acting in his/her own best interest.

Assumption:
agreement between buyer and lender where the buyer assumes the payments on an existing mortgage.

B

Back-End Ratio:
total debt-to-income ratio (total monthly obligations divided by gross monthly income.

Balloon Payment Mortgage:
usually a short-term loan involving small payments for a defined period of time and one large payment for the remaining principal balance on a targeted date.

Bankruptcy:
a federal court proceeding where a debtor is relieved from the payment of his/her debts.

Broker:
an individual that assists, funds or negotiates loans for a customer without lending the money him/herself

Buy Down:
an arrangement where a party pays a lender an up-front fee or premium to lower the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

C

Caps (Interest):
consumer safeguards that limit the amount that the interest rate on an ARM loan may change per year and/or the life of the loan.

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

Cash-Out Refinance:
a transaction that provides cash to the borrower in excess of 1% of the mortgage amount or provides cash that is used to pay off consumer debt.

Cash Reserves:
the amount of liquid assets the borrower has remaining after the mortgage loan transaction is completed.

Closing:
a meeting between the buyer, seller and lender escrow officer where the property and funds legally change hands.

Closing costs:
money paid by borrowers and sellers to effect the closing of a loan that usually includes an origination fee, appraisal fee, title search and insurance, taxes, deed recording fee, credit report charge and other costs assessed at settlement.

Co-Borrower:
a person who is jointly and equally liable for repayment of the mortgage obligation.

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.

Commitment:
an agreement between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Compensating Factors:
borrower strengths that mitigate or compensate for a borrower's weakness.

Conforming Loans:
loans that do not exceed the maximum loan amount and LTV limitations established by FNMA or FHLMC.

Conventional Loan:
a loan not insured by FHA, VA or Farmers Home Administration.

Convertible ARM:
a type of ARM that includes an option for the mortgagor to change the mortgage to a fixed rate mortgage at specified intervals during a predetermined time.

Credit Bureau Repository:
an organization that compiles credit history data directly from lenders and creditors to build in-file credit reports for individuals: the main repositories are TRW, TransUnion and Equifax.

Credit Ratio:
the ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income or gross monthly income.

Credit Report:
report listing borrower's consumer credit use, including past and current debts, payment ratings and terms.

D

Debt-To-Income Ratio:
the ratio of the borrowers total monthly obligations, including housing expenses and recurring debts to monthly income. It is used to determine the borrower's capacity to repay the mortgage and all other debts.

Deed of Trust:
a legal instrument that secures a note and perfects a security interest upon real property, only applicable in some states.

Default:
failure to make the required payments on a loan. Can result in foreclosure.

Delinquency:
failure to make loan payments on time. This could lead to default or foreclosure.

Department of Veterans Affairs:
independent agency of the federal government which guarantees long-term, low or no-down payment loans to eligible veterans.

Discount Points:
payable to the lender by the borrower or seller to decrease the interest rate. One point is equal to 1% of the loan amount.

Down Payment:
money paid to make up the difference between the purchase price and loan amount. They are usually 10-20% of the sales price on conventional loans.

E

Escrow:
neutral third party that handles settlement or closing details. It also may refer to an account held by the lender into which the borrower pays for tax or insurance payments.

F

FHA Loan:
Loan insured by the Federal Housing Administration open to qualified home purchasers.

FHA Mortgage Insurance:
requires a small fee (up to 3% of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA.

Fixed Rate Mortgage:
loan in which the interest rate remains consistent throughout the term of the loan.

Foreclosure:
a legal procedure by which a borrower is in default under a mortgage or deed of trust, loses his interest in the mortgaged property. The property is often sold by the lender to pay the defaulting borrower's debt.

G

Gift Funds:
funds donated on behalf of the borrower from certain eligible sources to assist the borrower in meeting closing costs. Generally eligible sources include relatives, church, municipality or non-profit organizations.

Graduated Payment Mortgage (GPM):
a type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. A negative amortization is built into it.

Gross Monthly Income:
a borrower's total monthly earnings before any expenses are deducted.

H

Hazard Insurance:
insurance which protects the borrower and home from specified losses, such as fire, flood, other natural disasters, etc.

Home Equity Line of Credit (HELOC):
a real estate loan that allows a borrower to withdraw equity in real estate owned with specific limitations.

Homeowners Association (HOA):
a non-profit organization that manages the common areas expenses and services of a condominium or PUD project.

Housing Debt-To-Income Ratio:
the sum of all monthly housing mortgage expenses such as PITI, homeowners dues, private mortgage insurance and any special assessments as a percentage of gross qualifying income.

I

Index:
the rate against which lenders measure the difference between the current rate on adjustable rate loans and that earned by other investments, (U.S. Treasury security yields, monthly average interest rate on loans closed by savings and loans, and monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate up or down.

Installment Debt:
borrowed money repaid at regular intervals---the monthly debt service can be excluded for D/A purposes if 10 or fewer payments remain to be made.

Investment Property:
an income-generating property lived in by someone other than the owner.

J

Jumbo Loan:
a loan greater than the $359,650 limit set by FNMA and FHLMC. They usually carry a higher interest rate because they cannot be funded by these agencies.

Junior Lien:
any lien that is subordinate or subsequent to the claims of a prior lien.

L

Lien:
a claim upon a piece of property for the payment of satisfaction of a debt or obligation.

Loan-To-Value Ratio:
the comparison of the amount of a loan and the appraised value of the property.

M

Margin:
the amount that is added to the index to create the mortgage interest rate for an ARM.

Market Value:
the highest price that a buyer would pay and the lowest price a seller would accept on a property.

Mortgage:
a note or other evidence of real property being pledged as the security for a debt.

Mortgage Insurance (MI):
insurance that protects a mortgage lender against loss in the event of default by the borrower. This insurance allows lenders to make loans with lower down payments.

N

Negative Amortization:
occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the remaining balance of the loan.

Non-Conforming Loans:
loans exceeding the conforming loan limits (generally over jumbo loans' limit of $359,650).

O

Origination Fee:
a fee charged to the borrower to reduce the interest rate.

P

Points:
prepaid interest assessed at closing by the lender. Each point is equal to 1% of the loan amount.

Power of Attorney:
a legal document authorizing one person to act on behalf of another.

Prepaid Items:
expenses necessary to create an escrow account or to adjust an existing account, including taxes, hazard insurance, special assessments, PMI, etc.

Prepayment Penalty:
fee incurred when loans are repaid early (usually 6 months of interest on 80% of current balance).

Principal:
the balance remaining on a loan, not including interest.

Private Mortgage Insurance (PMI):
insurance coverage that lenders require the borrower to obtain for loans over 80% loan-to-value.

Purchase Money Mortgage:
a mortgage used to purchase real property where title is conveyed from one individual to another.

Q

Qualifying Ratios:
the percentage of payment or income and debt-to-income that is used to measure the borrower's capacity to repay the mortgage debt.

R

Rate and Term Refinance:
a refinance of any mortgage in which the new mortgage amount is limited to the unpaid principal balance of the existing first mortgage plus any closing costs.

Real Estate Settlement Procedures Act (RESPA):
federal law allowing consumers to receive and review information on known or estimated settlement costs after application and again at settlement. Requires lenders to furnish information after application only.

Realtor:
a broker or agent assisting in real estate transactions belonging to the National Association of Realtors.

Recision:
law that gives a borrower 3 days after signing to cancel a contract.

Recording fees:
fee paid to the county for recording a home sale, making it part of the public records.

Revolving Debt:
a debt without a fixed payment. Repayment is usually a percentage of the remaining balance, paid at consistent intervals.

S

Second Mortgage:
a mortgage that is in a second position behind the first mortgage. (see "Junior Liens")

Self Employed Borrower:
a borrower whose income is derived from a business source in which he/she has an ownership interest of 25% or more.

Settlement Costs:
see "closing costs."

Single Family Residence (SFR):
structure intending to house one family.

Subordinate Financing:
secondary financing secured by a lien that is junior to the first mortgage or senior claim.

Supplemental Income:
incomes require tax returns to support the qualifying income that derive from sources such as interest/dividends, capital gains, and rental properties.

T

Temporary Buydown:
a loan on which the interest rate has been "bought down" for a temporary period of time at the beginning of the loan by escrowing funds at the time of closing, which will be applied to the total monthly mortgage payment as each becomes due. (see "buy down")

Term Mortgage:
see "Balloon Payment Mortgage."

Title Insurance:
a policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search.

Title Search:
an investigation usually performed by a title insurance company that determines the legal ownership of a property.

Truth-In-Lending:
a federal law requiring disclosure of the APR to home buyers shortly after they apply for the loan.

U

Underwriter:
an analyst who reviews the supportive documentation to determine the risk associated with the loan request.

Underwriting:
the decision whether to make a loan based on employment, credit, assets and other factors.

V

Variable Rate Mortgage (VRM):
see "Adjustable Rate Mortgage."

Verification of Deposit:
form signed by the borrower's bank or lender verifying the status and balance of financial accounts.

Veterans Administration (VA):
government agency designed to encourage mortgage lenders to offer long term, low down payment financing to eligible veterans by partially guaranteeing the lender against loss from default.

Z

Zoning:
the creation of districts by local governments in which specific types of property uses are authorized.