Mortgage Glossary

Abstract Title: A written history of the ownership of the property.

Acceleration Clause: Allows the lender to speed up when your loan comes due or demand immediate payment of the loan balance should you default.

Adjustable Rate Mortgage (ARM): Is a mortgage in which the interest rate is subject to periodic adjustment based on a pre-selected index.

Adjustment Interval: On an adjustable rate mortgage, the time between changes in the interest rate, typically 1, 3 or 5 years.

Affidavit: A sworn statement in writing.

Amortization: Refers to the paying off the mortgage with a fixed repayment schedule in regular installments over a period of time. A fully amortized loan will be completely paid off at the end of the loan term.

Annual Percentage Rate (APR): A rate reflecting the cost of a mortgage as a yearly rate. This rate will be slightly higher than the interest on the mortgage because it considers points and other credit costs. The APR allows buyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal: An estimate of the value of real property, made by a qualified professional called an "appraiser." Appraisers are licensed by the state and provide an independent unbiased opinion on the value of the property

Assumption: Is where the buyer takes over the payments of the current mortgage. This must be approved by the lender and be allowed by the loan contract.

Balloon: Usually a short-term fixed-rate loan which involves small payments for a certain period and one large payment for the remaining balance at a specified time.

Beneficiary: The entity funding the loan. This is the entity to which the loan is owed.

Bankruptcy: A reorganization or discharge of debts.

Broker (Mortgage): An individual that acts as an intermediary between the borrower and the lender. They assist in arranging funding or negotiating contracts, but do not loan the money themselves.

Buy Down: When a lender, builder or relocation program subsidizes the loan by lowering the interest rate for the first few years. The monthly payments are initially lower, but they will increase when the subsidized period is over.

Cap: The highest rate that an adjustable rate mortgage may reach.

Cash Out: Money disbursed to the borrower.

Certificate of Occupancy: A certificate issued by city to a builder, stating that the building is ready to be occupied.

Certified Copy: A true copy, attested to be true by the officer holding the original such as the county clerk. Needs to have the stamp and signature of the official stating that it is a true copy.

Clear-to-close: Loan is ready to be closed.

Closing: The meeting, typically at the title company, where all the legal documents conveying ownership are signed as well as the mortgage documents.

Closing Costs: The expenses over and above the price of the property in a real estate transaction. Every transaction is a little different and will have different fees. There are two types of fees that will be paid at closing. There first are fees associated with your mortgage such as an origination fee, discount points, appraisal fee. The second group is associated with the transfer of the property. These will include fees like the title search and title insurance, survey, prorated property taxes, and deed recording fee.

Commitment: The agreement between the lender and buyer to provide a mortgage at a future date subject to the completion of paperwork or compliance with stated conditions.

Community Property: Property owned in common by a husband and wife, which was not acquired as separate property. In community property states such as Texas, assets may be owned in part by a spouse even if their name does not appear on the title.

Comparable (Comp): A property similar to the subject property. Real estate agents use comps to aid in setting the price and by the appraisers in determining the market value the property.

Construction Loan: Short term loan for financing the cost of construction. Typically interest only and becomes due after the construction is complete.

Consumer Credit: Credit owed by the borrower that not secured by real estate.

Conventional Loan:  A conventional mortgage refers to a loan that is not insured or guaranteed by the federal government. 

Credit Ratio: The ratio a borrower's monthly payments on long-term debts to their income.

Credit Report: History of buyer’s past credit performance.

Credit Score: The score given to an individual to determine the credit worthiness. These scores come from Experian, Equifax and Trans Union. They range from 300-850.

Debt Ratio: The customer's monthly obligations divided by their monthly gross income. See also Back End.

Deed: Legal document which conveys the title to a property.

Deed of Trust: A document used to pledge the real property to secure a debt.

Default: Failure of a party to meet their obligations in a contract. In the case of a mortgage it is typically a failure to make the payments.

Deferred Interest: When the monthly payments do not cover the interest cost, the interest that is not paid is added to the loan balance.

Delinquency: Failure to make payments on time. This can lead default.

Department of Veterans Affairs (VA): An agency of the federal government which guarantees mortgages to eligible veterans. VA loans can be up to 100% of the value of the home.

Derogatory Letter: Letter written by the borrower to the lender providing an explanation for a derogatory item in their credit report.

Discharge: After a completed bankruptcy, discharged debts are no longer owed or collectible.

Discount Points: Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount.

Dismissal: In cases where a bankruptcy case is discontinued without being completed, a Bankruptcy Dismissal document will be needed for the loan package.

Down Payment: The money contributed by the buyer to the purchase price of the property. This does not count closing cost.

Due-On-Sale Clause: This is the clause in the loan documents that requires that the loan be paid off when the property is sold. The title company typically takes care of this as part of the title process.

Earnest Money: Earnest Money is a deposit made to the seller showing the buyer’s good faith in the transaction. The title company normally holds the money, not the seller.

Easements: An interest in property, that is owned by someone else that entitles the holder to a specific limited use of the property. An example would be a utility easement that allows the electric company to run line under a designated area of the property.

Encroachment: A piece of property that intrudes on another's property. A common example is a fence that is on the wrong side of the property line.

Equal Credit Opportunity Act (ECOA): A federal law requiring lenders to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity: The difference between the value of the property and the loan balance.

Escrow: Refers to a third party who carries out the instructions of the buyer and seller in handling the paperwork for transferring the ownership.

Escrow Account: Refers to an account held by the lender into which the homeowner pays money for tax or insurance payments.

Federal Home Loan Mortgage Corporation (FHLMC) also known as Freddie Mac, is a public government-sponsored that purchases conforming conventional mortgages form qualified lenders and banks.

Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.

Federal National Mortgage Association (FNMA): commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Fannie Mae purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This provides funds for one in seven mortgages.

Fee Simple: The most common form of ownership where the vestee owns both the land and the structures.

FHA Loan: A loan insured by the Federal Housing Administration.

FHA Mortgage Insurance: Requires a small fee (up to 3 percent 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 through the FHA.

Fixed-Rate Mortgage: A mortgage with a set interest rate over the life of the loan.

Flood Insurance: This insurance on the property that covers losses due to flooding. It is required by the lenders for homes located is a flood zone. Standard homeowner’s policies do not cover losses from floods.

Foreclosure: The legal procedure in which the property used to secure the debt is sold by the lender to pay a defaulted loan.

Free and Clear: This means the property is paid for and has no outstanding loans or liens attached.

Good Faith Estimate (GFE): Is a document that includes the breakdown of approximated closing cost of a mortgage loan.

Government National Mortgage Association (GNMA): Commonly known as Ginnie Mae, provides sources of funds for home loans that are insured or guaranteed by the federal government.

Grant Deed: This is the most common type of title transfer deed. A Grant Deed contains warranties against prior conveyances or encumbrances.

Gross Monthly Income: The total amount the borrower earns or receives each month, before any taxes or expenses are subtracted.

Guarantee: A promise by someone to honor the obligations of a contract is the original person is unable.

Hazard Insurance: This insurance protects the homeowner and lender from specified losses, such as fire, windstorm and the like, but it would not cover things like earthquakes, riots, or flood damage.

Homestead:  Real property that is owned by a person or persons as a residence. In most states is exempt from forced sale for collection of debt, but it can still be foreclosed upon if the borrowers default on the mortgage. Property tax exemptions are also available in some states.

Joint Tenants: A form of holding title where the owners have 100% rights of survivorship unless overridden by a will.

Jumbo Loan: A loan which is larger (more than $424,100) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Land Contract: An agreement between the seller and the buyer where the title is withheld until a time where the required payments have been completed.

Leasehold Estate: A kind of real estate ownership where the lessor does not hold title to the property but has use of the property subject to the terms of the lease.

Legal Description: A method of locating and cataloging a piece or parcel of land, which is acceptable in a court of law. You can find it on the deed and tax records. This is different from your address.

Lien: A claim on the property for the payment debt.

Loan Risk: The rate category assigned to the loan, which rates the risk of delinquency and loss in the future.

Loan-To-Value Ratio (LTV): The relationship between the loan amount and the value of the property.

Margin The percentage points added by the lender to the index to calculate the ARM interest rate.

Market Value: The highest price that a buyer would pay and that a seller would accept on a property in an open and competitive market.

Mortgage Escrow Accounts: An amount added to the mortgage payment and held by the lender to property taxes and insurance for the Borrower.

Mortgage Insurance: Money paid to insure the mortgage against default when the down payment is less than 20%.

Mortgagee: The lender

Mortgagor: The borrower or homeowner

Negative Amortization: When the monthly payments do not cover the interest cost, the interest that is not paid is added to the loan balance.

Non-Assumption Clause: The section of a mortgage contract that forbids the assumption of the loan without the approval of the lender.

Non-Owner Occupied: A property that is not used as the residence by the owner.

Notary Public: A person, designated by the state, that can certify the identity of a person signing documents.

Note: This is short for “promissory note”. This is the loan contract.

Obligations: Any debt, or payments the borrower is required to pay.

Origination Fee: The fee charged by a lender to prepare loan documents, perform credit checks, and appraise a property if needed.

Owner Occupied: The property used as the owner's residence.

Owners Policy: A policy of the title insurance which protects the buyer against problems with the title.

P & I: Principal and Interest of the loan payment

P & L (Profit and Loss): The business statement of gross income, cost of goods, operating costs and net profit or loss.

P.I.T.I.: Principal, interest, taxes and insurance

Points: One point is equal to one percent of the principal amount of a loan.

Power of Attorney: The authority in which a person authorizes another person to act on their behalf.

Pre-Approval: The Buyer has started the loan process and an underwriter has approved their income, funds and credit.

Preliminary Title Report: The initial title report generated at the start of the mortgage process that tells the lender about any lien that are on the property and what will need to be done to gain clear title.

Prepaid Interest: The interest payment that is collected at closing, that covers the time between funding and the beginning of the first 30-day period covered by the first payment.

Prepaids: Funds that need to be deposited to create an escrow account. Typically used to pay property taxes and insurance.

Prepayment Penalty: Money charged for an early repayment of debt.

Prepayment: A privilege in a mortgage allowing the borrower to make payments before their due date.

Pre-Qualified: The buyer has talked with a mortgage professional regarding their financial situation and they have been pre-qualified based on what they have disclosed. No attempt has been made to verify any of the borrower’s information. Pre-Qualification is only an indication of what the buyer should qualify for.

Principal: The balance of the debt, not counting the interest.

Private Mortgage Insurance (PMI): This is an insurance policy that pays the lender if the buyer defaults on the mortgage. It is typically required by lenders in cases where the buyer does not have a 20% down payment.

Purchase Agreement: The contract between the buyer and seller of the property.

Quit Claim: A deed operating as a release; intended to pass any title, interest or claim, which the grantor may have in the property, but it does not contain any warranty of a valid interest or title in the grantor.

Rate Lock: Choosing to have a set rate for a specific length of time.

Ratios: The relationship between a buyer’s expense and debt, and their income.

Real Estate Settlement Procedures Act (RESPA): RESPA is a federal law that allows consumers to review information on known and estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after the application.

Realtor: A real estate broker or real estate sales agent holding a valid license from the state, membership in a in a local real estate board affiliated with the National Association of Realtors and pledged to follow the Realtor Code of Ethics.

Rescission: The right set forth by the Truth in Lending Act (TILA) that grants a borrower the right to cancel a home equity loan or line of credit with a new lender, or to cancel a refinance transaction done with another lender other than the current mortgagee within three days of closing.

Reconveyance: The release of lien filed with the county recorder by the trustee.

Recording Fees: Funds paid to the lender for recording the sale with the county clerk.

Refinance: A new mortgage on a property that does not change ownership.

Request for Reconveyance: Verification given by the beneficiary to the trustee that the conditions of the lien have been fulfilled and request that the lien be canceled.

Statement of Information: This is the form that the customer fills out for the title company providing identification information. This allows the title company to eliminate debts and liens owed by people with similar names.

Second Mortgage: A mortgage that is entered after the primary loan. Called a second due to it being in second lien position.

Servicing: The steps the lender performs to keep the loan in good standing, such as collecting payments, and paying the property taxes and insurance from the escrow account.  

Submission: This is when the complete loan application package submitted for approval to the underwriting department.

Substitution of Trustee: A document from the beneficiary, that changes the trustee on a trust deed.

Surety Bond: A bond which insures against harm to a party by a lien that is still attached to the property. This is usually used when the original deed was lost or the beneficiary cannot be located.

Survey: A measurement of land prepared by a state licensed land surveyor showing the location of the land, its dimensions, and the location and dimensions of any building.

Suspended: This is when the underwriter cannot approve or deny the loan. More information is needed.

Tenants in Common: An ownership interest in a property by two or more individuals without rights of survivorship.

Title Insurance: The policy insuring the lender and/or the buyer that the liens on the title report are correct. Any damages arising from a lien other than those disclosed is payable by the title insurance company.

Title Search: An examination of the municipal records of a property to determine the legal ownership and if there are any outstanding claims against the property.

Title: A document that gives evidence of the ownership of property.

Trust Deed: The Trust Deed assigns the note as a lien on the property. This is the document that conveys the ability to collect from the proceeds of the property.

Truth-in-Lending: A federal law requiring disclosure of the Annual Percentage Rate(APR) to home buyers shortly after they apply for the loan.

Underwriting: The decision to make or deny a loan, and on what terms, based on a number of factors such as; credit, employment, other assets, as well as property condition and value

VA:  United States Department of Veterans Affairs.

VA Loan: A special loan program that features a low-or no-down payment loan guaranteed by the Department of Veterans Affairs. It is available to qualified persons based on military service or certain other considerations.

VA Mortgage Funding Fee: A fee of up to 2% of the VA-backed loan amount that is Paid either at closing or added to the amount financed.

Variable Rate Mortgage (VRM): See Adjustable Rate Mortgage.

Verification of Deposit (VOD): A document form the borrower's bank verifying the status and balance of the borrower’s accounts.

Verification of Employment (VOE): A document from the borrower's employer verifying employment and salary.

Wraparound: Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate.

Zoning: The dividing of the land within a municipality into zones in which certain land uses are permitted or prohibited. Examples include residential, industrial, or commercial.