Glossary of Mortgage Terminology

Helping you understand the loan process is important to us.  An informed decision is always the best decision, and it ensures that you get the financing that best meets your needs.

Please feel free to utilize this glossary as a resource to familiarize yourself with a few terms that are widely used in the industry.  If you ever have any questions about financing a home, please give us a call.

 

Acquisition Costs:  Costs of acquiring property other than purchase price, for example, attorney fees, title insurance, lender's fees.

Addendum:  Something added. A list or other material added to a document, contractual agreement, appraisal, etc.

Adjustable Rate Mortgage (ARM):  A mortgage in which the interest rate is adjusted periodically according to a pre-selected index.

Amortization:  Payment of a debt in regular, periodic installments of principal and interest as opposed to interest only payments

Annual Percentage Rate (APR):  A term used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan.  The APR reflects the cost of your mortgage loan as a yearly rate.  It will be higher than the interest rate stated on the note because it includes, in addition to the interest rate, loan discount points and fees, and mortgage insurance.

Application:  A printed form used by a mortgage lender to record necessary information concerning a prospective mortgage.

Application Fee:  A sum of money paid toward the estimated initial mortgage processing expenses such as appraisal and credit report.

Appraisal:  A report made by a qualified person setting forth an opinion or estimate of property value.  The term also refers to the process by which this estimate is obtained.

Appreciation:  An increase in the value of property due to either a positive improvement of the area or the elimination of negative factors.  Commonly, and incorrectly, used to describe an increase in value through inflation.

Assessed Valuation:  The value that a taxing authority places on real or personal property for the purpose of taxation.

Assessment:  A charge against a property for purposes of taxation.  This may take the form of a levy for a special purpose or a tax in which the property owner pays a share of the cost of community improvements according to the valuation of his or her property.

Assumption:  Agreement by a buyer to assume the liability under an existing note secured by a mortgage or deed of trust.  The lender usually must approve the new debtor in order to release the existing debtor (usually the seller) from liability.


Balloon Loan:  A loan which calls for periodic payments which are insufficient to fully amortize the face amount of the note prior to maturity, so that a principal sum known as a "balloon" is due at maturity.

Buydown or Optional Discount Points:  A payment to the lender from the seller, buyer, or third party, in order to reduce the interest rate.


Cap:  The maximum increase of an Adjustable Rate Mortgage.  Example:  The original loan is made at 10% with a 5% cap.  The interest rate on the loan may not exceed 15% regardless of index changes.

Cash-out Refinance (also Equity-out):  A refinancing of the original mortgage loan that also includes a portion of the borrower's equity taken out in cash.

Cash to Close:  Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction.

CC&Rs (Covenants, Conditions and Restrictions):  A term used in some areas to describe the restrictive limitations which may be placed on a property.  In other areas, simply called restrictions.

Certificate of Occupancy:  A certificate issued by a local building department to a builder or renovator, stating that the building is in proper condition to be occupied.

Closing:  The consummation of a real estate transaction.  The closing includes the delivery of a deed, financial adjustments, the signing of a note and the disbursement of funds necessary to complete the sale and loan transaction.

Closing Costs:  Money paid by the borrower in connection with the closing of a mortgage loan.  This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey and prepaid items such as taxes and insurance escrow payments.

Closing Statement: A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance and mortgage insurance.

Co-Borrower:  Additional borrower(s) whose income contributes to qualifying for a loan and whose name(s) appears on all documents with equal legal obligations.

Collateral:  Property pledged as security for a debt, such as the real estate pledged as security for a mortgage.

Commitment (Loan):  A binding pledge made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the compliance of the borrower to stated conditions.

Commitment Fee (Loan):  Any fee paid by a potential borrower to a lender for the lender's promise to lend money at a specified rate and within a given time.

Comparables:  Properties used as comparisons to determine the value of a specific property.

Condominium:  A structure of two or more units, the interior space of which is individually owned; the balance of the property (both land and building) is owned in common by the owners of the individual units.

Conforming Loan:  Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).  These agencies generally purchase traditional fixed-rate level payment first mortgages up to loan amounts mandated by Congressional directive.

Conventional Mortgage:  A mortgage not obtained under a government insured program (such as FHA or VA).

Credit Report:  A report detailing an individual's credit history.


Deed of Trust:  An instrument used in many states in place of a mortgage.  Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

Default : The failure to perform an obligation as agreed in a contract.

Delinquency:  A loan payment that is overdue but within the period allowed before actual default is declared.

Deposit:  A sum of money given to bind a sale of real estate.  Also known as earnest money.

Depreciation:  A loss of value in real property brought about by age, physical deterioration, functional or economic obsolescence.


Earnest Money:  A portion of the down payment delivered with a purchase offer by the purchaser of real estate to the seller or an escrow agent as evidence of good faith.  Also known as a deposit.

Equal Credit Opportunity Act(ECOA):  A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.

Equity:  The ownership interest -- that portion of a property's value over and above the liens against it.

Escrow:  In general, a procedure whereby a disinterested third party handles legal documents and/or funds on behalf of a seller or buyer.  An escrow account can be created by an attorney to handle the buyer's deposit on the property, by the lender to cover repairs that will not be completed before the closing or by the lender to pay the property taxes and insurance premiums.


Fair Credit Reporting Act (FCRA):  A Federal law which requires a lender who is rejecting a loan request because of adverse credit information to inform the borrower of the source of such information.

Federal Home Loan Mortgage Corporation --FHLMC (FREDDIE MAC):  A corporation authorized by Congress.  It purchases residential mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration as well as conventional home mortgages.  It sells participation certificates whose principal and interest are guaranteed by FHLMC.

First Mortgage:  A real estate loan that has priority over any subsequently recorded mortgages.

Fixed Interest Rate:  An interest rate which does not change during the loan term.

Foreclosure:  A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower's debt.


Gift Letter:  A written explanation signed by the individual giving the gift stating, "This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time."


Hazard Insurance:  A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards (i.e., fire).

Homeowners Association Dues:  The fees imposed by a condominium or homeowners association for maintenance of common areas.


Interest:  Consideration in the form of money paid for the use of money -- also a right, share or title in property.

Interest Rate:  The percentage of an amount of money which is paid for borrowing it for a specified time.

Investment Property:  Real estate owned with the intent of supplementing income and not intended for owner occupancy.


Joint Tenancy:  An undivided interest in property, taken by two or more joint tenants.  Upon the death of a joint tenant, the interest passes to the surviving joint tenant(s), rather than to the heirs of the deceased.


Lease:  An agreement by which an owner of real property (lessor) gives the right of possession to another (lessee), for a specified period of time (term) and for specific consideration (rent).

Lien:  A legal claim or attachment against property as security for payment of an obligation

Loan-to-Value Ratio:  The ratio of the loan amount divided into the sales price or appraised value, whichever is less.


Market Value:  The most probable price which a ready, willing and able buyer would pay and a willing seller will accept, both being fully informed under no pressure to act.  The market value may be different from the price a property can actually be sold for at a given time (market price).

Maturity:  The termination or due date on which final payment on a loan must be paid in full.

Monthly Payment:  Usually, the amount of PITI (principal, interest, taxes and insurance) paid each month on a mortgage loan.

Mortgage:  The conveyance of an interest in real property given as security for the payment of a loan.

Mortgagee:  The lender in a mortgage transaction.

Mortgage Insurance Premium (MIP):  The consideration paid by a mortgagor (borrower) for mortgage insurance -- either to the FHA or to a private mortgage insurer.

Mortgage Note:  A written promise to pay a sum of money at a stated interest rate during a specified term.  The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.

Mortgagor:  The borrower in a mortgage transaction who pledges property as security for a debt.


Negative Amortization:  A condition created when the loan payment is less than the interest due on the loan.  Even though payments are made on time, the amount owing on the loan increases because the payment made is not sufficient to cover the entire amount of interest due.

Non-conforming Loan:  Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines.


Occupancy:  The use of a property as a full time residence, either by the title holder (owner-occupancy) or by another party through a formal agreement (rental).

Over Improvement:  An improvement, excessive in cost or size in relation to land value or the value of surrounding improvements.


Percentage Point or Point:  One percent of the loan amount or a measure of the interest rate.

Personal Property:  Any property which is not designated by law as real property.  Examples of personal property which cannot be included in the mortgage are furniture, boat docks, barbecues and lawn furniture.

PITI (Principal, Interest, Taxes and Insurance):  The most common components of a monthly mortgage payment.

Preliminary Title Report:  The results of a title search by a title company prior to issuing a title binder or commitment to ensure clear title.

Primary Residence:  A residence which the borrower intends to occupy as the principal residence.

Private Mortgage Insurance:  Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.

Processing:  The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

PUD (Planned Unit Development):  A planned combination of diverse land uses, such as housing, recreation and shopping in one contained development or subdivision.  A major feature of a PUD includes areas of common land for use by the housing unit owners; the association of unit owners generally owns, pays fees and maintains the common areas.

Purchase Contract (Agreement/Offer):  An agreement between a buyer and seller of real property, setting forth the price and terms of the sale.  Also known as a sales contract.


Real Estate Settlement Procedures Act (RESPA): A Federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs.  It also establishes guidelines for escrow account balances and the disclosure of settlement costs.

Real Property:  Land and that which is affixed to it.

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

Rescission:  Annulling a contract and placing the parties to it in a position as if there had not been a contract.


Satisfaction of Mortgage:  The recordable instrument issued by the lender verifying full payment of a mortgage debt.

Second Home (Vacation Home, Weekend Home):  A residence other than the borrower's primary residence which the borrower intends to occupy for a portion of each year.  Must be suitable for year-round occupancy.

Secondary Mortgage Market:  A market where existing mortgages are bought and sold.  It contrasts with the primary mortgage market where mortgages are originated.

Security:  In lending, the collateral given, deposited, or pledged to secure the payment of a debt.

Settlement Services:  Services provided by the lender at the closing of a loan.

Subordinate:  To make subject or junior to.  For example:  A loan on vacant land is made subject to a subsequent construction loan.

Survey:  The measurement and description of land by a registered surveyor.


Title:  The legal evidence of ownership rights to real property.

Title Insurance Policy:  A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee or otherwise.

Title Search:  An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.

Truth-in-Lending Act:  A federal law requiring a disclosure of credit terms using a standard format.  This is intended to facilitate comparisons between the lending terms of financial institutions.