Mortgage Glossary

Common Mortgage Terms

  
A-Credit
“A” credit refers to a consumer’s credit rating. Typically, “A” credit consumers have credit scores that range from good to excellent. Lenders offer these consumers the best mortgage rates available. Also known as Prime Credit.

Adjustable Rate Mortgage (ARM)
A mortgage on which the interest rate, after an initial period (ie: 1, 3, 5 yrs), can fluctuate according to an index which reflects the cost to the lender of borrowing on the credit markets plus the lender spread (index + spread = rate). Among the common indices: 1 yr Treasury, LIBOR or COFI. 

Affordability
A consumer's capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house, and be approved for the mortgage required to pay that amount.

Alt-A
A mortgage risk categorization that falls between prime (“A” Credit and sub-prime, but is closer to prime. Also referred to as "A minus".

Amortization
The repayment of principal and interest payments scheduled over the term of the loan.

Amortization schedule
A table showing a schedule of mortgage payments, broken down by interest and principle followed by the remaining loan balance.

Annual percentage rate (APR)
The Annual Percentage Rate, measures the cost of credit to the borrower. It takes into account the interest rate, origination costs, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but doesn’t include other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.

Application fee
A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan.

Appraisal
A written estimate in the form of formal report that estimates a property's current market value according based on similar homes on the market. Prepared by an appraiser.

Approval
Approval means the borrower meets the investor eligibility guidelines. An approval is also known as a commitment from the lender based on satisfying the approval conditions that accompany the approval.

Automated underwriting
A computer-driven process for informing the loan applicant whether the applicant will be approved by the underwriting department. The quick decision is based on information provided by the applicant to the loan officer and is subject to review by the underwriter. Most pre-approvals are based on this automated underwriting decision.

Automated underwriting system (AUS)
An online decision tool used by mortgage lenders to determine borrower eligibility. The AUS provides a comprehensive analysis and guides lenders on what conditions to collect. The most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.

Automated valuation model (AVM)
An automated method for estimating the value of a property. AVMs may use transaction price data covering similar properties, tax assessment data, and/or algorithms that relate value to property characteristics, such as number of bedrooms and lot size.

Bridge loan
A short-term loan that "bridges" the period between temporary and permanent conventional financing. Construction and Lot loans are common bridge loans while a home is in a project phase.

Buy-down (Rate)
Buy down is a cost (points/origination fee) in exchange for a lower interest rate. There are two types – Permanent and Temporary. Permanent includes the length of the term while temporary buydowns adjust after the introductory period.

Cash-Out Refi
Refinancing the current mortgage while withdrawing the available equity in excess of the current mortgage balance.

Closing
On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.

Closing Disclosure
This form replaces the Good Faith Estimate form. It lists the settlement charges the borrower must pay at closing. The lender is obliged to provide the borrower within three business days of receiving the loan application

Co-Borrowers
One or more persons who have signed the note, and are equally responsible for repaying the loan.

COFI
Cost of funds index.

Conforming mortgage
A loan that conforms to Fannie Mae and Freddie Mac guidelines and limits of $424,100 (most areas). Also, commonly referred to the FNMA/ FHMLC mortgage limits and conventional mortgage financing. Click here to find more information: What are the new Fannie Mae loan limits in my county?

Construction financing
A private mortgage used to finance the process and construction of a new home. Not to be confused with the finance of a builder constructed home which qualifies for Conventional, Government and Portfolio Finances.  

Conventional mortgage
A home mortgage that is neither FHA-insured nor VA-guaranteed.

Down payment
The minimum investment required by a mortgage lender. Calculated by the difference between the value of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%. Sometimes includes your closing costs on a purchase.

Equity
The difference between the value of the home and the balance of outstanding mortgage loans on the home.

Escrow
A place of custody by a third part where specified conditions have been set. In a purchase and refinance, escrow is handled by an officer who follows the conditions of a contract and disbursement of funds. Escrow is also known as the custodial account handling annual disbursement of taxes and insurance. This account is held by the servicing bank in care for the borrower.

Fannie Mae
One of two Federal agencies that purchase conventional home loans from originators. (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.

FHA mortgage
A mortgage on which the lender is insured against loss by the US Department of Housing & Urban Development. The borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low. See what is an FHA loan ?

Float
Allowing the mortgage rate to fluctuate with market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing.

Float-down Policy
A rate lock option to reduce the rate if market interest rates decline during the lock period. Not all lenders offer a float down policy. If they do, significant improvements in rate, typically .250% or better are required.

Foreclosure
The legal process by which a lender acquires possession of the property when the borrower has defaulted on loan payments.

Freddie Mac
One of two Federal agencies that purchase conventional home loans from lenders. The other is Fannie Mae.

Gift of equity
A gift of equity refers to selling of a property below market value and gifting the difference in equity to the buyers. Lenders will allow the gift as a down payment. Typically, gifts are usually between family members.

Good faith estimate (old)
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application. This form has been replaced by the Closing Disclosure form.

Grace period
The period between the due date of a mortgage payment and the date when late fees start to accrue. This period is typically between the 1 and the 15th of the month.

HARP Program
HARP – introduced by FHFA in March 2009 amid a national economic crisis – is a mortgage refinance program designed to help homeowners who are current on their mortgages but have little or no equity in their home. Without HARP, these borrowers typically would not be able to refinance. HARP enables them to refinance into more affordable or shorter-term mortgages without new or additional mortgage insurance. Visit:  What is HARP?

Hazard insurance
Insurance required by the lender to protect the both the investor and homeowner from accidental damage to the home. They minimum requirement is the lower of the replacement value determined by the insurance agent or your outstanding loan amount.

Home equity line of credit (HELOC)
A revolving credit line secured by the equity in the home, usually in second position behind the first mortgage, where the borrower can draw against the approved limit. Home equity lines are sometimes originated as standalone 2nd mortgages or purchase money (piggy back loans). Line of credits have several withdrawal features that include – card access or checks for convenience. See my page: 2nd mortgage options .

Housing expense ratio
The ratio calculated by the housing payment (Principle, Interest, Taxes and Insurance – Mortgage Insurance and HOA if applicable) and the total effective income. This ratio is used by lenders for qualifying.

Impounds
Same as Escrow.

Interest-only mortgage
A mortgage that does not require principle payments to be included in the monthly mortgage payment. Payment is calculated as simple interest.

Interest rate
The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding or amortized over a term of a loan.

Jumbo mortgage
A mortgage outside conforming loan limits. Typically, a jumbo mortgage is considered a portfolio type loan.

Loan-to-value ratio
Ratio calculated by dividing the loan amount and sales price or appraised value. If there are multiple liens/loans on the property, a combined loan to value ratio (CLTV) can also be calculated.

Lock
Aka Rate Lock. An option of protecting a mortgage interest rate available to the borrower during the contract period while the mortgage application is in processing. Rate lock options vary by lender but typically include 30, 45, 60 and 90 day options. This is the opposite of floating a mortgage interest rate.

Manufactured housing
A manufactured home is any home factory-built in the U.S. to the HUD Title 6 construction standards (commonly known as ‘the HUD-code’). A manufactured home is built on a permanent chassis to ensure transportability. However, typically a manufactured home is not moved from its initial installed site.

Mortgage
A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Mortgage Banker
A term for a lender or originator licensed as a correspondent lender. This means the lender originates, underwrites and funds the loan. The mortgage loan is then sold in the secondary market to the corresponding bank. The servicing rights may be retained or sold as well.

Mortgage broker
An independent contractor who offers the loan products of multiple wholesale lenders. This means the broker originates the loan but does not underwrite or fund the loan directly.

Mortgage insurance
Not to be confused with Hazard Insurance. This type of insurance protects the investor against loss in the event of borrower default. There are two types – Lender Paid and Borrower Paid. Additionally, several options exist but the most common types are Single Premium (Onetime fee) and Monthly. FHA requires both and are borrower paid.

Non-conforming mortgage
A mortgage that does not meet the purchase requirements of Fannie Mae or Freddie Mac. Also, known as Jumbo Mortgages or Portfolio financing.

Non-warrantable condo
A condominium that does not meet Fannie Mae/Freddie Mac/HUD requirements.

Note
A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.

Option fee
An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5% of the price, which is credited to the purchase price when the option is exercised but is lost if it is not.

Origination fee
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.

Par Rate
The mortgage interest rate at zero points or zero origination fee. In the secondary market, it is the security rate that trades at a price of 100.

Permanent buydown
Paying points as a way of reducing the interest rate for the duration of the term.

Piggyback mortgage
Refers to a second mortgage that is originated simultaneously along with a 1st mortgage. Please visit my mortgage resource page for more info.

PITI
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.

PMI
Private mortgage insurance, as distinguished from insurance provided by government under FHA and VA.

Points
Points, also known as “discount points,” are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can, in turn, lower your monthly mortgage payments. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000)

Portfolio lender
A lender that holds the loans it originates in its portfolio rather than selling them in the secondary market like conventional/government loans.

Pre-approval Letter
A conditional commitment made by a lender reassuring all parties involved in a purchase transaction that the buyer is eligible for financing.

Pre-paid daily interest
Interest from the day of closing to the first day of the following month.

Prepayment penalty
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.

Purchase Money Second Mortgage
Aka piggy back mortgage. A mortgage in second position used as partial down payment. Typically used to avoid mortgage insurance when the total down payment is less than 20%. For purchase money second options, click here!

Refinance
The process of paying off an old mortgage while securing a new rate and term. There are two types of refinances – Rate and Term / Cash Out refinance. Visit my refinance resource page.

Reverse mortgage
A financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income.

Right of rescission
Refers to a period (3 days) after borrower signs official refinance documents where the right to cancel is reserved.

Second mortgage
A mortgage in second position. There are several types of second liens – Piggy back, purchase money second and home equity loans and lines. Visit my second mortgage page.

Secondary markets
Refers to the open market where mortgage-backed securities are bought and sold.

Seller contribution
Also, known as seller concessions referring the amount of seller paid closing costs. Each mortgage program has its own limit and range between 3% - 9% of loan amount. Keep in mind that any unused funds will be forfeited.

Servicing
Loan servicing is the process by which a company (mortgage bank, servicing firm, etc.) collects interest, principal and escrow payments from a borrower.

Short sale
An agreement between a buyer and seller agreeing to a market value transaction in which the seller owes more than the sales price. The transaction is subject to approval of the investor/servicing lender.

Streamline refinancing
A refinance that simplifies the traditional mortgage process by waiving certain documentation. The most common streamline mortgage is offered by FHA . They offer credit and appraisal waiver options.

Subordinate financing
Most commonly known as a second lien or second mortgage. Visit my second mortgage resource page.

Title insurance
Insurance against loss arising from problems connected to the title to property.

Truth in Lending (TIL)(Old Form)
An old form replaced by the Closing Disclosure that disclosed the annual percentage yield which specified the terms and cost of your mortgage.  

Underwriting
The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.

VA mortgage
A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA) . The loan may be issued by qualified lenders. The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). Visit my mortgage page for more information.

Waive escrows
Also, known as “no impounds.” This is the option to avoid creating an escrow account where the servicing lender manages the disbursement of taxes and insurance.
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