Definitions of Common Mortgage Terminology
Abstract of title
A summary of recorded transactions concerning a particular property.
A 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.
Adjustable-Rate Mortgage (ARM)
A mortgage loan in which the interest rate is adjusted periodically on the basis of changes in a specified index. May result in variable monthly payments.
The process of reducing principal and interest by specified intervals over a set term.
Annual Percentage Rate (APR)
The actual cost to the borrower of a mortgage, including interest, mortgage insurance, and loan origination fees (points) calculated over the life of the loan.
Report indicating the fair market value, based on an appraiser's analysis of the property.
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
A local tax levied against properties that have benefited from civil improvements such as road or sidewalk construction, a sewer or street lights.
Anything of monetary value that a person owns. Assets include real property, personal property and enforceable claims against others (including bank accounts, stocks, mutual funds and so on).
Non amortized or partially amortized short-term loans that become due at a predetermined date. At that time the full outstanding balance must be repaid.
Proclamation by a court of an individual's (or organization's) state of insolvency, or inability, to pay debts. The petition may be brought by an individual or his creditors, with a goal of orderly and equitable settlement of obligations.
An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage.
The refinancing of an existing mortgage, in which the borrower receives cash in excess of what is used to pay off the existing mortgage, closing costs, points and other fees associated with the transaction.
Cashier's Check (or bank check)
A check whose payment is guaranteed because it was paid for in advance and is drawn on the bank's account instead of the customer's.
Certificate of Eligibility
Document issued by the Veterans' Administration to qualified veterans that entitles them to VA guaranteed loans. This certificate can be obtained through local VA office by submitting form DD-214 (Separation Papers) and VA form 1880 (request for Certificate of Eligibility).
Certificate of Title
A 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.
Certificate of veteran status
A document issued to veterans or reservists who have served 90 days of continuous active duty (including training time) which enables them to obtain lower down payments on certain FHA-insured loans. Obtainable through local VA office by submitting form DD-214 (Separation Paper) with form 26-8261A (request for Certificate of Veteran Status).
A check drawn on the issuer's account for funds that have been segregated by the bank, guaranteeing payment.
The meeting between the buyer, seller, lender and closing agents where the property and funds legally change hands.
These are 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 of the country and the lenders used.
The total of all liens on the property divided by the appraised value expressed as a percentage.
Conventional Mortgage Loan
Conventional loans cover a vast array of loan programs. They can have either fixed or variable rates or payments. These loans are not government insured or guaranteed.
A report detailing the credit history of a prospective borrower, used when determining creditworthiness.
The total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) divided by the gross monthly income, expressed as a percentage.
The written document conveying real property.
Department of Veterans Affairs (VA)
An independent agency of the federal government, which guarantees long-term, low or no down payment mortgages to eligible veterans.
Cash paid up front to the seller.
Earnest Money Deposit
Cash paid up front to the seller to show the potential buyer has a definite interest in the property.
Effective Gross Income
Total income received before taxes are deducted.
Equal Credit Opportunity Act
A Federal law that prohibits discrimination in a credit transaction on the basis of sex, marital status, race, color, religion, national origin, age, receipt of public assistance benefits and/or the borrower’s good faith exercise of the rights under the Consumer Credit Protection Act.
The value of the property over and above the financial obligations against it.
Money collected in advance by the lender and deposited to an account on a regular basis, generally for the payment of real estate taxes and insurance.
The annual examination of escrow accounts to establish whether the current monthly escrow payment is sufficient to pay insurance and taxes annually.
Fair Housing Act (FHA)
Prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents of legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability).
A loan insured by the FHA open to all qualified home purchasers.
The nation’s largest, privately-owned company that strives to make mortgage money available for people in low, moderate, and middle income families through financial products and services.
Fee Simple Estate
The owner is entitle to unrestricted powers to dispose of the property, and under which the property can be left by will or inherited.
The cost of credit, which is either collected at or before the loan closing.
Fixed-rate Mortgage (FRM)
A mortgage in which the interest rate, principal, and interest payment don't change throughout the term of the loan.
Hazard coverage that is required in designated areas for loss due to flooding.
The process reserved by a lender to terminate the borrower's interest in a property due to a default of the loan, often ending in the lender selling the property and using the proceeds to satisfy the mortgage.
Issues varying security products that help to make mortgages available to families, including low-income and minority families, by reducing the costs of housing finance, expanding housing opportunities, initiating community development lending projects, and promoting consumer education to improve financial literacy.
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.
Good Faith Estimate
An estimate of settlement costs that the applicant may incur at loan closing.
Gross Monthly Income
The borrower’s total earnings per month before expenses are deducted.
Insurance coverage that compensates for damage to a property from fire, wind, or other hazards.
Home Equity Line of Credit
A mortgage loan, generally in a subordinate position, which allows the borrower to draw funds in different increments from the loan as needed.
Home Mortgage Disclosure Act (HMDA)
Under this act, covered lenders must collect information on all applications for home purchase, home improvement and refinancing of these loans. HMDA covers all residential loans, including multi-family dwellings.
Housing Expense Ratio
The percentage of gross monthly income that goes toward paying housing expenses.
Housing and Urban Development (HUD)
U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.
A charge paid for borrowing money, calculated as a percentage of the amount borrowed.
The periodic charge, expressed as a percentage, for use of credit.
Interest Only Loan
A mortgage that requires only accrued interest be paid for a specified term of the loan.
The ownership of property by two or more persons with the survivor taking the share of the deceased.
A mortgage larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Real estate ownership through which the property owner doesn’t actually hold the property title, but has us of it through a recorded long-term lease.
A claim by one person on the property of another for payment of a debt.
The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).
A document required by lenders prior to loan approval containing detailed information about the borrower and property.
The relationship, expressed in a percentage, between the amount of the mortgage and the appraised value/purchase price of the property.
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.
The highest price that a buyer would pay for a property and the lowest price a seller would accept.
Security instrument in which real property is pledged by the borrower to the lender to secure the repayment of a loan.
The borrower in a mortgage loan transaction.
An increase in principal balance that occurs when monthly payments are not large enough to pay all interest due on a loan, usually caused when payment caps prevent sufficient payment increases. Unpaid deferred interest is added to the loan balance, causing the borrower to owe more than the loan's original amount.
Legal document stating the terms of a debt and a promise to repay it.
Compensation paid to a lender to process a loan. Sometimes expressed in the form of a points, in which case 1 point is equal to 1%.
Per diem interest
Interest calculated per day. Depending on the day of the month on which closing takes place, you'll have to pay interest from the date of closing to the end of the month.
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
A fee that is sometimes charged to a borrower for paying off a debt early.
An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
Protects lenders against borrower defaults. Generally required on mortgages where the loan to value is greater than 80%.
A government tax based on the market value of a property.
A contract signed by buyer and seller stating the terms and conditions of a home sale.
Quit Claim Deed
A release intended to pass title, interest or claim that the grantor may have in a property, but does not contain any warranty that such title is valid, nor does it contain any warrants or covenants for title.
Paying off one loan with the proceeds from a new loan using the same property as security.
Money paid to an agent for entering the sale of a property into the public records.
The cancellation of a transaction, stipulated by state and federal law that allows refinancing borrowers to cancel the loan. The general rescission period is three days from the closing date.
Land and everything that is permanently affixed to it.
Real Estate Settlement Procedures Act (RESPA)
RESPA requires lenders and brokers to provide borrowers with information on settlement costs and mortgage servicing transfers at the time of application.
A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
The payment of a debt that satisfies an obligation.
The purchase of residential mortgages by investors that originated in the primary market.
Servicing Disclosures Statement
This statement provides information regarding the lender’s ability and intention to service the loan. It also discloses the percentage of loans that are sold.
Settlement (or Closing)
A meeting between the buyer, seller and lender (or their agents) where property and funds legally change hands.
Single Family Residence
A home intended to be occupied by one family.
Interest computed solely on the principal balance.
A lien taking a minimum of a second position to another lien already existing on the property.
A measurement of land, prepared by a licensed surveyor, showing a property's boundaries, elevations, improvements and relationship to surrounding tracts.
The number of years until a loan is due to be paid in full.
The document that shows evidence of ownership in a property.
A written report, completed prior to a sale or mortgage, showing all current liens against a property in which a title policy is issued.
Insures a home buyer against errors in the title that were not discovered in the title search.
Tax paid when a title passes from one owner to another.
An account maintained by a broker or escrow company to handle all money collected for clients.
A federal law requiring disclosure of the Annual Percentage Rate to home buyers within a short period of applying for a loan. Its purpose is to help borrowers understand the actual cost of borrowing money, which allows them to compare costs among lenders.
The process of verifying data and evaluating a loan application. The underwriter gives the final loan approval.
An interest rate that changes periodically in relation to an index.
A loan guaranteed by the Department of Veterans Affairs restricted to qualified individuals of military service.
Verification of Employment (VOE)
A document signed by the borrower's employer that verifies the borrower's position and salary.
Voluntary relinquishment or surrender of some right or privilege.
A final inspection of a home to check for problems that may need to be corrected before closing.
The grantor can fully warrant good clear title to the property, free from any encumbrances that are not listed on the deed.