Loan Terminology - Mortgage Dictionary
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Acceleration clause: A provision in
a mortgage that gives the lender the right to demand payment of the
entire outstanding balance if a monthly payment is missed.
Adjustable-rate mortgage (ARM): A mortgage in which
the interest rate changes over time based on an index and a margin.
Rate changes are made at prescribed times and within prescribed limits
(caps) as defined in the mortgage contract.
Amortization: The gradual repayment of a mortgage
Amortization schedule: A timetable for payment of
a mortgage showing the amount of each payment applied to interest
and principal and the remaining balance on the loan.
Annual percentage rate (APR): The total yearly cost
of a mortgage stated as a percentage of the loan amount. This includes
the base interest rate, mortgage insurance, origination fees, and
some other related fees. See your lender for a more complete explanation
of what fees are used to calculate your APR.
Appraisal: A professional opinion of the market value
of a property.
Appreciation: An increase in the value of a house
due to changes in market conditions or other causes.
Assessed value: The valuation placed upon a property
by a public tax assessor for purposes of taxation.
Assumable mortgage: A mortgage that can be taken
over ("assumed") by the buyer when a home is sold.
Assumption: The transfer of the seller's existing
mortgage to the buyer.
Binder: A preliminary agreement, secured
by the payment of earnest money, under which a buyer offers to purchase
Cap: A provision of an ARM limiting
how much the interest rate or mortgage payments may increase.
Cash reserve: A requirement of some lenders that
buyers have sufficient cash remaining after closing to make the first
two mortgage payments.
Clear title: A title that is free of liens and legal
questions as to ownership of the property.
Closing: The occasion where a sale is finalized;
the buyer signs the mortgage, and closing costs are paid. Also called
Closing costs: Expenses (over and above the price
of the property) incurred by buyers and sellers in transferring ownership
of a property. Also called "settlement costs".
Commitment letter: A formal offer by a lender stating
the terms under which it agrees to loan money to a home buyer.
Community Home Buyer's Program: An alternative financing
option that allows households of modest means to qualify for mortgages
using nontraditional credit histories, 33 percent housing-to-income
and 38 percent debt-to-income ratios, and the waiver of the usual
two payments cash reserves at closing.
Community Home Improvement Mortgage Loan: An alternative
financing option that allows low-and moderate-income home buyers to
obtain 95 percent financing for the purchase and improvement of a
home in need of modest repairs.
Community Land Trust Mortgage Loan: An alternative financing
option that enables low- and moderate-income home buyers to purchase
housing that has been improved by a non-profit Community Land Trust,
and to lease the land on which the property stands.
Condominium: A form of property ownership in which
the homeowner holds title to an individual dwelling unity plus an
interest in common areas of a multi-unit project.
Contingency: A condition that must be met before
a contract is legally binding.
Conventional mortgage: Any mortgage that is not insured or
guaranteed by the federal government.
Convertible ARM: An adjustable-rate mortgage that
can be converted to a fixed-rate mortgage under specified conditions.
Cooperative: A form of common property ownership
in which the residents of an apartment building do not own their own
units, but rather own shares in the corporation that owns the property.
Covenant: A clause in a mortgage that obligates or
restricts the borrower and which, if violated, can result in foreclosure.
Credit report: A report of an individual's credit
history prepared by a credit bureau and used by a lender in determining
a loan applicant's creditworthiness.
Deed: The legal document conveying
title to a property.
Deed of trust: The document used in some states instead
of a mortgage; title is conveyed to a trustee rather than to the borrower.
Default: Failure to make mortgage payments on a timely
basis or to comply with other conditions of a mortgage.
Delinquency: A loan in which a payment is overdue but not
yet in default.
Deposit: Cash paid to the seller when a formal sales
contract is signed.
Depreciation: A decline in the value of a property; the opposite
Discount: The difference between face value of an
installment note and mortgage or deed of trust, and the present cash
Disbursements: payments made during the course of
an escrow or at closing.
Down payment: The part of the purchase
price which the buyer pays in cash and does not finance with a mortgage.
Due-on-sale clause: A provision in a mortgage allowing
the lender to demand repayment in full if the borrower sells the property
securing the mortgage.
Earnest money: A deposit given to the
seller to show that a prospective buyer is serious about buying the
Easement: A right of way giving persons other than
the owner access to or over a property. A common example is a utility
easement, which gives the power company the right to put power lines
and poles over properties to deliver electricity.
Eminent Domain: A Government right to acquire private
property for public use by condemnation, and the payment of just compensation.
Encroachment: Generally construction onto the property
of another, as of a wall, fence, building, etc.
Encumbrance: A claim, lien, charge, or liability
attached to and binding real property.
Equal Credit Opportunity Act (ECOA): A federal law
that prohibits lenders from denying mortgages on the basis of the
borrower's race, color, religion, national origin, age, sex, marital
status, or receipt of income from public assistance programs.
Equity: The difference between the market value of
a property and the homeowner's outstanding mortgage balance. If your
home is worth $100,000 and you owe $65,000, you are said to have 35%
equity in your home.
Equity loan: A loan based on the borrower's equity in his
or her home.
Escrow: The holding of documents and money by a neutral
third party prior to closing; also, an account held by the lender
into which a homeowner pays money for taxes and insurance.
Fair Credit Reporting Act: A consumer
protection law that sets up a procedure for correcting mistakes on
one's credit record.
Federal Home Loan Bank Board: The board which charters
and regulates federal savings and loan associations, as well as controlling
the system of Federal Home Loan Banks.
Federal Tax Lien: A lien attached to property for
nonpayment of a federal tax.
Fee Simple: An estate under which the owner is entitled
to unrestricted powers to dispose of the property, and which can be
left by will or inherited.
Federal Housing Administration: A federal Agency
which insures first mortgages, enabling lenders to loan a very high
percentage of the sale price.
FHA loan: A mortgage insured by the Federal Housing
Administration. See the FHA Loan Primer for more details.
First mortgage: The mortgage that has first claim
(or "lien") in the event of a default.
Fixed-rate mortgage: A mortgage in which the interest
rate does not change during the entire term of the loan.
Flood insurance: Insurance required for properties
in federally designated flood areas.
Forbearance: The lender's postponement of foreclosure
to give the borrower time to catch up on overdue payments.
Foreclosure: The process by which a mortgaged property
may be sold when a mortgage is in default.
Graduated payment mortgage (GPM): A
mortgage that starts with low monthly payments that increase at a
predetermined rate. Be aware that most GPM's include a negative amortization
General Lien: A lien such as a tax lien or judgment
lien which attaches to all property of the debtor rather than the
lien of, for example, a trust deed, which attaches only to a specific
Ginnie Mac (GNMA): Government National Mortgage Association.
A federal association working with FHA which offers special assistance
in obtaining mortgages, and purchases mortgages in a secondary capacity.
Grandfather Clause: The clause in a law permitting
the continuation of a use, business, etc., which, when established,
was permissible but, because of a change in the law, is now not permissible.
Ground Rent: Rent paid for vacant land. If the property
is improved, ground rent is that portion attributable to the land
Hazard insurance: Insurance to protect the homeowner
and the lender against physical damage to a property from fire, wind,
vandalism and other hazards.
Homeowner's insurance: An insurance policy that combines
liability coverage and hazard insurance.
Homeowner's warranty: A type of insurance that covers
repairs to specified parts of a house for a specific period of time.
Interest: The fee, or rent, charged
by the lender for borrowing money.
Interest rate cap: A provision of an ARM limiting
how much interest rates my increase in a given adjustment period.
See also "Lifetime cap". Joint tenancy: A form of co-ownership
giving each tenant equal interest and equal rights in the property,
including the right of survivorship.
Joint Tenancy: An undivided interest
in property, taken by two or more joint tenants. The interests must
equal, accruing under the same conveyance, and beginning at the same
time. Upon death of a joint tenant the interest passes to the surviving
joint tenants, rather than to the heirs of the deceased.
Judgment: The decision of a court of law. Money judgments,
when recorded, become a lien on real property of the defendant.
Late charge: The penalty a borrower
must pay when a payment is made after the due date.
Lease-Purchase Mortgage Loan: An alternative financing option
that allows low- and
moderate-income home buyers to lease a home from a nonprofit organization
with an option to buy, and with each month's rent payments consisting
of "PITI" payments on the first mortgage, plus an extra
amount that is earmarked for a savings account in which money for
a down payment accumulates.
Lien: A legal claim against a property that must be paid
when the property is sold.
Lifetime cap: A provision of an ARM that limits the total
increase in interest rates over the life of the loan.
Loan commitment: See "Commitment letter".
Loan Servicing: The collection of mortgage payments from
borrowers and the related responsibilities of a loan servicer, such
as foreclosure, tax and insurance escrow, etc.
Loan-To-Value Ratio (LTV) is the proportional relationship
of a mortgage loan to the value of a home, expressed as a percentage.
For instance: A $100,000 home purchased with a $75,000 mortgage would
have an LTV of 75 percent.
Lock-in: A written agreement guaranteeing
the home buyer a specified interest rate provided the loan closes
with that buyer within a set period of time. The lock-in also usually
specifies the number of points to be paid at closing as well.
Margin: The set percentage the lender
adds to the index rate to determine the current interest rate of an
Mortgage: A legal document that pledges a property to the
lender as security for payment of a debt, usually a loan on the house
Mortgage banker: A company that originates mortgages exclusively
for resale in the secondary market.
Mortgage broker: A company that for a fee matches borrowers
Mortgage insurance: See "Private Mortgage Insurance".
Mortgage insurance premium (MIP): the fee paid by a borrower
to FHA or a private insurer for mortgage insurance.
Mortgage note: A 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.
Mortgagee: The lender in a mortgage agreement.
Mortgagor: The borrower in a mortgage agreement.
Negative amortization: Payment terms
under which the borrower's monthly payments do not cover the interest
due; as a result, the balance due is added to the loan balance making
it rise - thus "negative amortization".
Notice of default: A formal written notice to a borrower
that a default has occurred and that legal action may be taken.
Origination fee: A fee paid to a
lender for processing a loan application; it is stated as a percentage
of the mortgage amount (1% is generally known as one point).
Owner financing: A purchase in which the seller provides
all or part of the financing.
Payment cap: A provision of some
ARMs limiting how much a borrower's payments may increase regardless
of how much the interest rate increases; be aware that on some ARMs
this may lead to "negative amortization".
PITI: Stands for principal, interest, taxes and insurance
-- the components of a monthly mortgage payment.
Points: A one-time charge by the lender to increase or decrease
the stated interest rate on a loan. To decrease the interest rate,
the borrower "pays" points, to increase the interest rate,
the borrower "receives" points. All interest rate/point
combinations are virtual financial equivalents.
Prepayment penalty: A fee charged to a borrower who pays
off a loan before it is due. Some loan programs contain a prepayment
penalty, others do not - check with your loan officer for details.
Prequalification: The process of determining how much money
a prospective home buyer will be eligible to borrow before a loan
is applied for.
Principal: The amount borrowed or remaining unpaid; also,
that part of the monthly payment that reduces the outstanding balance
of a mortgage.
Private mortgage insurance (PMI): Insurance provided by a
nongovernmental insurer that protects lenders against a loss if a
borrower defaults. Usually required on all loans with an "LTV"
of more than 80%.
Purchase and sale agreement: A written contract signed by
the buyer and seller stating the terms and conditions under which
a property will be sold.
Qualifying ratios: Guidelines applied
by lenders to determine how large a loan to grant the homebuyer. The
debt-to-income ratio is your current monthly debt on loans and credit
cards divided by your gross income. The housing-to-income ratio is
your new housing payments divided by your gross income.
Radon: A radioactive gas found in
some homes that in sufficient concentrations can cause health problems.
Your lender may require a radon check on your home.
Rate lock: See "Lock-in".
Real estate agent: A person licensed to negotiate and transact
the sale of real estate on behalf of either the borrower or seller,
or in some cases both partied.
Real Estate Settlement Procedures Act: A consumer protection
law that requires lenders to give borrowers advance notice of closing
costs, including an "APR".
Refinancing: The process of paying off one loan with the
proceeds from a new loan secured by the same property. This is most
often done to get the better interest rates offered by the new loan.
Rent with option to buy: See "Lease-Purchase
Retire (a loan). To pay off a loan.
Mortgages can be retired either at the end of their term or sooner.
However, in some states early retirement of a loan may carry a pre-payment
Second Mortgage: A mortgage that
has rights that are subordinate to the rights of the first mortgage.
As such, these loans are often less secure and may demand a slightly
higher interest rate.
Secondary mortgage market: The buying and selling of existing
Seller take-back: An agreement in which the owner of a property
provides financing, often in combination with an assumed mortgage.
Settlement: See "Closing".
Settlement Sheet: The computation of costs payable at closing
which determines the seller's net proceeds and the buyer's net payment.
Subsidized second mortgage: An alternative financing option
for low- and moderate- income households that also includes a down
payment and a first mortgage, with funds for the second mortgage provided
by city, county, or state housing agencies, foundations, or nonprofit
corporations. Payment on the second mortgage is often deferred, carries
no or low interest rates, and part of the debt may be forgiven for
each year the family remains in the home.
Survey: A drawing showing the legal boundaries of a property,
it's fixtures, and any easements or encroachments.
Tenancy by entirety: A type of joint
ownership of a property available only to a husband and wife.
Tenancy in common: A type of joint ownership in a property
without right of survivorship.
Title: A legal document establishing the right of ownership.
Title company: A company that specializes in title searches
and insuring title to property.
Title insurance: Insurance to protect the lender (lender's
policy) or the buyer (buyer's policy) against loss arising from disputes
over ownership of a property.
Title search: A check of the title records to ensure that
the seller is the legal owner of the property and that there are no
liens or other claims outstanding.
Transfer tax: State or local tax payable when title passes
from one owner to another.
Truth-In-Lending: A federal law that requires lenders to
full disclose, in writing, the terms and conditions of a mortgage,
including the APR and other charges.
Underwriting: The process of evaluating
a loan application to determine the risk involved for the lender.
VA Loan: A loan that is guaranteed by the Veterans
VA Mortgages: are guaranteed by the
Department of Veterans Affairs for honorably discharged
veterans. Current guidelines allow veterans to borrow
up to $184,000 with no down payment. Larger loans would
be possible with a down payment, though lenders are reluctant
because investors usually won't buy large VA mortgages.
Veterans pay a 2.0 percent funding fee, a one percent
origination fee, an appraisal fee and other closing costs.
The VA funding fee is waived if the veteran has a service-related
disability. Points on the loan are paid by the seller.
Underwriting requirements are more liberal than for FHA
or conventional mortgages, so it's easier to qualify for
a VA loan. To qualify, veterans must have served at least
181 days during peace-time and have been honorably discharged.
Veterans who entered the military after September, 1980,
must have 24 months of service. Vets serving during wartime
need only 90 days of service. Unmarried surviving spouses
of veterans who died in service are eligible for VA loans.
Zero Cost Loan: A
loan that pays for all non-recurring closing costs, except for transfer
tax. Not applicable in a purchase transaction in a county where the
buyer customarily pays title and escrow fees