Glossary Of Terms

We have put together this handy list of terms often used in the mortgage and loan business for you to refer to.

Accrued Interest

Interest earned but not yet paid.

Adjustable Rate Mortgage Loans (ARM)

Loans with interest rates that are adjusted periodically based on changes in a pre-selected index. As a result, the interest rate on your loan and the monthly payment will rise and fall with increases and decreases in overall interest rates. These mortgage loans must specify how their interest rate changes, usually in terms of a relation to a national index such as (but not always) Treasury bill rates. If interest rates rise, your monthly payments will rise. An interest rate cap limits the amount by which the interest rate can change; look for this feature when you consider an ARM loan.
Adjustment Interval On an ARM loan, the time between changes in the interest rate or monthly payment.

Agreement of Sale

Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Alternative Documentation

A method of documenting a loan file that relies on information the borrower is likely to be able to provide instead of waiting on verification sent to third parties for confirmation of statements made in the application.

Amortization

Repayment of a loan with periodic payments of both principal and interest calculated to payoff the loan at the end of a fixed period of time.

Annual Percentage Rate (APR)

The cost of a mortgage expressed as a yearly rate. The annual percentage rate is often not the same as the interest rate. It is a percentage that results from an equation considering the amount financed, the finance charges, and the term of the loan.

Application

An initial statement of personal and financial information required to apply for a loan.

Application Fee

Fee charged by a lender to cover the initial costs of processing a loan application. The fee may include the cost of obtaining a property appraisal, a credit report, and a lock-in fee or other closing costs incurred during the process or the fee may be in addition to these charges.

Appraisal

A written estimate of a property’s current market value completed by an impartial party with knowledge of real estate markets.

Appraisal Fee

A fee charged by a licensed, certified appraiser to render an opinion of market value as of a specific date.

APR

See Annual Percentage Rate.

ARM

See Adjustable Rate Mortgage Loans.

Assignment

The transfer of ownership, rights, or interests in property by one person, the assignor, to another, the assignee.

Assumption

A method of selling real estate where the buyer of the property agrees to become responsible for the repayment of an existing loan on the property.

Balloon Mortgage
Balloon mortgage loans are short-term fixed-rate loans with fixed monthly payments for a set number of years followed by one large final balloon payment (“the balloon”) for all of the remainder of the principal. Typically, the balloon payment may be due at the end of 5, 7, or 10 years. Borrowers with balloon loans may have the right to refinance the loan when the balloon payment is due, but the right to refinance is not guaranteed.

Bankruptcy
A proceeding in a federal court to relieve certain debts of a person or a business unable to pay its debts.

Bearer
The legal owner of a piece of property.

Borrower (Mortgagor)
An individual who applies for and receives funds in the form of a loan and is obligated to repay the loan in full under the terms of the loan.

Broker
An individual who brings buyers and sellers together and assists in negotiating contracts for a client.

Call Option
A provision of a note which allows the lender to require repayment of the loan in full before the end of the loan term. The option may be exercised due to breach of the terms of the loan or at the discretion of the lender.

Caps (interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change in an adjustment interval and/or over the life of the loan. For example, if your per-period cap is 1% and your current rate is 7%, then your newly adjusted rate must fall between 6% and 8% regardless of actual changes in the index.

Caps (payment)
Consumer safeguards which limit the amount monthly payments on an adjustable-rate mortgage may change. Since they do not limit the amount of interest the lender is earning, these consumer safeguards may cause negative amortization.

Cash Out
Any cash received when you get a new loan that is larger than the remaining balance of your current mortgage, based upon the equity you have already built up in the house.

Cashier’s Check
property may be sold to pay off a mortgage loan that is in default.

Freddie Mac
A common nickname for the Federal Home Loan Mortgage Corporation.

Good Faith Estimate
Written estimate of the settlement costs the borrower will likely have to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), the lender is required to provide this disclosure to the borrower within three days of receiving a loan application.

Grace Period
Period of time during which a loan payment may be made after its due date without incurring a late penalty. The grace period is specified as part of the terms of the loan in the Note.

Gross Income
Total income before taxes or expenses are deducted.

Hazard Insurance
Protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.

Housing and Urban Development
See HUD.

HUD
Housing and Urban Development. A U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.
HUD-1 Uniform Settlement Statement A standard form which itemizes the closing costs associated with purchasing a home or refinancing a loan.

Index
A published rate used by lenders that serves as the basis for determining interest rate changes on ARM loans.

Initial Rate
The rate charged during the first interval of an ARM loan.

Interest
Charge paid for borrowing money, calculated as a percentage of the remaining balance of the amount borrowed.

Interest Rate
The annual rate of interest on the loan, expressed as a percentage of 100.

Interest Rate Cap
Consumer safeguards which limit the amount the interest rate on an ARM loan can change in an adjustment interval and/or over the life of the loan. For example, if your per-period cap is 1% and your current rate is 7%, then your newly adjusted rate must fall between 6% and 8% regardless of actual changes in the index.

Joint Liability
Liability shared among two or more people, each of whom is liable for the full debt.

Joint Tenancy
A form of ownership of property giving each person equal interest in the property, including rights of survivorship.

Jumbo Loan
A mortgage larger than the $240,000 limit set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Junior Mortgage
A mortgage subordinate to the claim of a prior lien or mortgage. In the case of a foreclosure, a senior mortgage or lien will be paid first.

Late Charge
Penalty paid by a borrower when a payment is made after the due date.

Lender
The bank, mortgage company, or mortgage broker offering the loan.
LIBOR (London Interbank Offered Rate) The interest rate charged among banks in the foreign market for short-term loans to one another. A common index for ARM loans.

Lien
A legal claim by one person on the property of another for security for payment of a debt.

Loan Application
An initial statement of personal and financial information required to apply for a loan.

Loan Application Fee
Fee charged by a lender to cover the initial costs of processing a loan application. The fee may include the cost of obtaining a property appraisal, a credit report, and a lock-in fee or other closing costs incurred during the process or the fee may be in addition to these charges.

Loan Origination Fee
Fee charged by a lender to cover administrative costs of processing a loan.

Loan-to-Value Ratio (LTV)
The percentage of the loan amount to the appraised value (or the sales price, whichever is less) of the property.

Lock or Lock-In
A lender’s guarantee of an interest rate for a set period of time. The time period is usually that between loan application approval and loan closing. The lock-in protects you against rate increases during that time.

Margin
A specified percentage that is added to your chosen financial index to determine your new interest rate at the time of adjustment for ARM loans.

Mortgage
A legal document by which real property is pledged as security for the repayment of a loan.

Mortgage Banker
An individual or company that originates and/or services mortgage loans.

Mortgage Broker
An individual or company that arranges financing for borrowers.

Mortgage Insurance
Insurance to protect the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20% of the home’s purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)

Mortgage Loan
A loan for which real estate serves as collateral to provide for repayment in case of default.

Mortgage Note
Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage or deed of trust or other security instrument.

Mortgagee
The lender in a mortgage loan transaction.

Mortgagor
The borrower in a mortgage loan transaction.

Negative Amortization
A loan payment schedule in which the outstanding principal balance of a loan goes up rather than down because the payments do not cover the full amount of interest due. The monthly shortfall in payment is added to the unpaid principal balance of the loan.

Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage by another borrower without the prior approval of the lender.

Note
Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage or deed of trust or other security instrument.

Notice of Default
Written notice to a borrower that a default has occurred and that legal action may be taken. Origination Fee
Fee charged by a lender to cover administrative costs of processing a loan.

Payment Cap
Consumer safeguards which limit the amount monthly payments on an adjustable-rate mortgage may change. Since they do not limit the amount of interest the lender is earning, they may cause negative amortization.

Per Diem Interest
Interest calculated per day. (Depending on the day of the month on which closing takes place, you will have to pay interest from the date of closing to the end of the month. Your first mortgage payment will probably be due the first day of the following month.)

PITI
Abbreviation for Principal, Interest, Taxes and Insurance, the components of a monthly mortgage payment.

Points
Points are an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. Points and interest rates are inherently connected: in general, the more points you pay, the lower the interest rate you get. However, the more points you pay, the more cash you need up front since points are paid in cash at closing.

Prepaid Expenses
Taxes, insurance and assessments paid in advance of their due dates. These expenses are included at closing.

Prepaid Interest
Interest that is paid in advance of when it is due. Typically charged to a borrower at closing to cover interest on the
loan between the closing date and the first payment date.

Prepayment
Full or partial repayment of the principal before the contractual due date.

Prepayment Penalty
Fee charged by a lender for a loan paid off in advance of the contractual due date.

Pre-qualification
The process of determining how much money a prospective home buyer will be eligible to borrow prior to application for a loan. Information submitted during pre-qualification is subject to verification at application.

Principal
The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)
Insurance to protect the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20% of the home’s purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)

Purchase Agreement
Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Real Estate Settlement Procedures Act (RESPA)
A federal law that requires lenders to provide mortgage loan borrowers with information of known or estimated settlement costs.

Real Property
Land and any improvements permanently affixed to it, such as buildings.

Reconveyance
The transfer of property back to the owner when a mortgage loan is fully repaid.

Recording
The act of entering documents concerning title to a property into the public records.

Recording Fee
Money paid to an agent for entering the sale of a property into the public records.

Refinancing
The process of paying off one loan with the proceeds from a new loan secured by the same property.

RESPA
See Real Estate Settlement Procedures Act.

Right to Rescission
Under the provisions of the Truth-in-Lending Act, the borrower’s right, on certain kinds of loans, to cancel the loan within three days of signing a mortgage.

Sales Agreement
Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Second Mortgage
An additional mortgage placed on a property that has rights that are subordinate to the first mortgage.

Settlement (or Closing)
The settlement or closing is the conclusion of your real estate transaction. It includes the delivery of your security instrument, signing of your legal documents and the disbursement of the funds necessary to the sale of your home or loan transaction (refinance).

Settlement Costs
Also known as closing costs, these costs are for services that must be performed before your loan can be initiated. Examples include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney’s fees, taxes, and surveying fees.

Survey
A measurement of land, prepared by a licensed surveyor, showing a property’s boundaries, elevations, improvements, and relationship to surrounding tracts.

Sweat Equity
Value added to a property in the form of labor or services of the owner rather than cash.

Tax Lien
Claim against a property for unpaid taxes.

Tax Sale
Public sale of property by a government authority as a result of non-payment of taxes.

Term
The period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due.

Title
Document which gives evidence of ownership of a property. Also indicates the rights of ownership and possession of the property.

Title Company
A company that insures title to property.

Title Insurance
Insurance which protects the lender (lender’s policy) or the buyer (owner’s policy) against loss due to disputes over ownership of a property.

Title Search
Examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens or other claims against the property.

Transfer Tax
Tax paid when title passes from one owner to another.

Truth-in-Lending Act
Federal law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after application. Also requires the right to rescission period.

Underwriting
In mortgage lending, the process of determining the risks involved in a particular loan and establishing suitable terms and conditions for the loan.

VA Loans
Fixed-rate loans guaranteed by the U.S. Department of Veterans Affairs. They are designed to make housing affordable for eligible U.S. veterans. VA loans are available to veterans, reservists, active-duty personnel, and surviving spouses of veterans with 100% entitlement. Eligible veterans may be able to purchase a home with no down payment, no cash reserve, no application fee, and lower closing costs than other financing options. The maximum VA loan amount is currently $203,000.

Variable Rate Mortgage
See Adjustable Rate Mortgage.

Variable Rate
Interest rate that changes periodically in relation to an index.

Verification of Deposit (VOD)
Document signed by the borrower’s bank or other financial institution verifying the borrower’s account balance and history.

Verification of Employment (VOE)
Document signed by the borrower’s employer verifying the borrower’s position and salary.

Waiver
Voluntary relinquishment or surrender of some right or privilege.

Walk-through
A final inspection of a home to check for problems that may need to be corrected before closing. Zoning Ordinances (or

Zoning Regulations)
Local law establishing building codes and usage regulations for properties in a specified area.