Mortgage Glossary

Acceleration Clause: A contractual provision that gives the lender the right to demand repayment of the entire loan balance in the event that the borrower misses a payment or violates one or more other clauses in the note.

ARM: Adjustable Rate Mortgage. A mortgage loan that is subject to periodic changes in interest rate. These changes can occur monthly, every 6 months or annually. Many ARM’s are fixed for a certain period and then subject to periodic changes. The most common fixed periods are 1 year, 3 years, 5 years, 7 years and 10 years. ARM’s in the United States are based on a financial index plus a margin. The margin always stays the same, but the index changes with market conditions. Common indexes are the LIBOR (London Interbank Offered Rate), COFI (Cost of Funds Index) and MTA (Monthly Treasury Average).

Amortization: The paying off of the mortgage loan in regular installments over a period of time.

APR: Annual Percentage Rate. The total cost of your mortgage loan expressed as an annual interest rate. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees. Traditionally APR is calculated from fees that are related to a financing transaction that may not be related to a cash transaction. APR is meant to express the “true cost” of financing since it represents the interest rate based on what it costs the borrower to attain the loan and can be used to shop loans from different lenders using just one single number.

Appraisal: An opinion of a property’s fair market value by a licensed real estate appraiser. Appraisals are usually ordered by the lender but are paid for by the borrower.

Assumable Mortgage: A mortgage that can be transferred by the seller to a buyer upon the buyer’s qualification. VA and FHA loans are assumable but because the seller forfeits any equity in the home most do not exercise the assumability clause of the mortgage note, preferring to sell the home at fair market value and realizing the profit from the sell.

Automated Underwriting: A computer-driven process for quickly pre-approving a borrower based on credit scores collected from the three major credit bureaus and the income and asset information provided by the borrower. Although an automated underwriting approval is a good indication of the borrower’s qualification for a mortgage loan, final decision is still rendered by human underwriters who verify all documented income and asset information against what was used for the automated pre-approval.

Back-end Ratio: Also known as DTI, or Debt-to-Income Ratio. This is the ratio of all debts (mortgage and consumer) to the total income of the borrower(s). The back end  ratio is usually equal to or less than 45% of a borrower’s gross income.

Balloon Mortgage: A mortgage loan that typically offers low rates for an initial period of time (usually up to 10 years) and after that time period elapses the balance is due in full or the loan is refinanced by the borrower.

Best Effort Pricing: When you hear a mortgage loan officer talk of “best effort pricing” they are referring to a quoted mortgage interest rate on a best-case scenario, usually meaning 740-plus credit score, less than 75% LTV and purchase or no cash-out refinance on a primary residence and a 10 to 15 day lock. Many factors can increase the rate because of price adjusters such as lower dollar amount loans, higher loan-to-values, lower credit scores, a cash-out transaction compared to a no cash-out transaction, longer lock periods, type of property (single family home, duplex, fourplex, condo, etc) and whether or not it is a primary residence, second home or investment property.

Bimonthly Payment: A mortgage payment schedule where half of the monthly payment is paid on the 1st of each month and half again on the 15th.

Biweekly Payment: A mortgage payment schedule where half of the monthly payment is paid every two weeks. With this type of a payment schedule the borrower makes 13 payments a year thus paying-off the loan several years sooner saving tens of thousands of dollars in interest over the life of the loan.

Bridge Loan: A short-term loan taken-out as a “bridge” between quickly acquiring a property and obtaining long-term financing.

Buy Down: The seller pays an percentage of the loan amount to the lender so the lender provides a lower rate and lower payments for the buyer, thus making the home more affordable.

Cap: A limit in adjustable rate mortgages on how much a monthly payment or interest rate can increase or decrease at each adjustment period.

Capital Gain: The profit received upon selling a home based on the difference of the original purchase price and the total sale price.

Closing: The date on which the loan documents and mortgage deed are signed.

Co-Borrower: A person in addition to the borrower that is responsible for repayment of the mortgage loan and is listed on title.

Co-Signer: A person that signs a credit application with another person agreeing to be equally responsible for the repayment of the loan but may not be listed on title.

Commission: An amount, usually a percentage of the property sales price, that is earned by a real estate professional as a fee for negotiating the transaction. Traditionally the home seller pays the commission.

Comparative Market Analysis (COMPS): A property evaluation that determines property value by comparing similar properties sold within a stated period of time and distance from the subject property. COMPS will be used both by a real estate agent to determine a fair selling price as well as by a professional appraiser to determine the fair market value of a home.

Concessions: An amount the home that the seller agrees upon (usually paid from the equity in a home) in order to facilitate the sell through payment of the buyer’s closing costs on a mortgage loan. Concessions are also used to determine fair market value when appraising a home, i.e. Sales price – concessions = actual sales price.

Conforming loan: A loan that does not exceed Fannie Mae’s and Freddie Mac’s loan limits. Fannie Mae and Freddie Mac loans are often referred to as “conforming loans”.

Conventional Mortgage: Any mortgage loan that is not insured or guaranteed by the federal government such as FHA or VA mortgage loans. Conventional mortgage loans are usually owned by Fannie Mae or Freddie Mac.

Credit Bureau: An agency that provides financial information and payment history to lenders about potential borrowers.

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 credit worthiness.

Credit Score: A score calculated by using a person’s credit report to determine the likelihood of a loan being repaid as agreed. Scores range from about 300 – 850 with a higher score being safer for the lender and lower score being riskier.

Debt-to-Income Ratio: A formula used to qualify borrowers. The ratio expresses, as a percent, the amount of monthly debt payments in relation to the amount of monthly income of the borrower(s).

Deed in Lieu of Foreclosure: In a deed in lieu of foreclosure, the borrower conveys all interest in the home back to the bank in order to satisfy a loan that is in default and avoid foreclosure proceedings.

Deed of Trust: Also known as a Trust Deed, this is a deed wherein legal title to a home is transferred to a trustee, which holds it as security for a loan between a borrower and lender. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary of the trust deed.

Default: A default occurs when a borrower fails to meet their repayment obligations under the terms of their mortgage loan, e.g. falls behind on monthly payments. Under law in the United States a lender can not file a Notice of Default on a residential property until the borrower has missed three payments.

Discount Points: A one time charge by the lender as part of the charge for the loan expressed as a percentage of the loan amount. For instance, 1 discount point equals 1% of the loan amount. Positive discounts points are paid to reduce the interest rate of the loan while negative discount points result in a higher interest rate in exchange for lower closing costs.

FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans. FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur if a borrower defaults. This encourages lenders to make loans at favorable terms to borrowers that may not qualify for conventional mortgages.

FHA Mortgage: Backed by the Department of Housing and Urban Development (HUD) this mortgage offers Utah borrowers the ability to put as little as 3.5% down payment on a home. FHA does not actually make the loan, but rather FHA insures a percentage of the loan for a lender in case of default by the borrower. FHA insured loans are also known as a “government mortgage”.

FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on credit history.

Foreclosure: A legal process in which a mortgaged property is acquired by the lender and is sold to pay the loan of the defaulting borrower.

Front End Ratio: a percentage comparing a borrower’s total monthly cost to buy a house (mortgage principal and interest, mortgage insurance, hazard insurance, and real estate taxes) to gross monthly income. Also known as Housing Ratio. The front end  ratio is usually equal to or less than 33% of a borrower’s gross income.

Funding: The event after closing where proceeds of a mortgage loan are sent to the escrow company for distribution to lien holders and the seller. In a purchase transaction this is usually within one to two days after closing. On a refinance transaction there is a borrower’s three (3) day right of rescission period and funding occurs on the fourth day after closing.

Good Faith Estimate: Also known as a GFE, it is an estimate of all closing costs including pre-paid fees, escrow items and lender charges. A GFE must be given to the borrower within three days after submission of a loan application.

Government Mortgage: A loan insured or guaranteed by a government entity such as FHA (Federal Housing Administration) or VA (Department of Veteran’s Affairs).

Homeowner’s Insurance: An insurance policy, also called hazard insurance, that combines protection against damage to a home and its contents from fire, storms or other damages with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage. Homeowner’s policies do not usually include flood or earthquake insurance unless such riders are requested by the homeowner or required by the lender.

HomePath Home: A HomePath home is a 1 to 4 unit residential property that ahs been acquired by Fannie Mae as the result of a foreclosure on a home purchased with a Conventional loan owned by Fannie Mae. Fannie Mae becomes the owner of the property and then markets the home for sale to recoup their losses. HomePath homes can be purchased with very attractive financing terms with a HomePath Loan or other popular loan types.

HomeSteps Home: A HomeSteps home is a 1 to 4 unit residential property that ahs been acquired by Freddie Mac as the result of a foreclosure on a home purchased with a Conventional loan owned by Freddie Mac. Freddie Mac becomes the owner of the property and then markets the home for sale to recoup their losses. HomeSteps homes can be purchased with Conventional, FHA, VA, USDA Rural Development and other popular loan products.

Housing Ratio: A percentage comparing a borrower’s total monthly cost to buy a house (mortgage principal and interest, mortgage insurance, hazard insurance, and real estate taxes) to gross monthly income. The front end  ratio is usually equal to or less than 33% of a borrower’s gross income.

HUD: the U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans. HUD does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD Home: A HUD home is a 1 to 4 unit residential property that has been acquired by HUD (Department of Housing and Urban Development) as the result of a foreclosure on a home purchased with an FHA-insured mortgage loan. HUD becomes the property owner and then markets the home for sale.

HUD1 Statement: Also known as the “settlement statement,” it itemizes all closing costs including real estate commissions, loan fees, points, and escrow amounts.

Joint Tenancy (with Rights of Survivorship): two or more owners share equal ownership and rights to the property. If a joint owner dies, their share of the property passes to the other owners.

Jumbo Loan:  A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.  Jumbo loans are sometimes referred to as non-conforming loans.

Kiddie Condo: A “Kiddie Condo” loan is a FHA program where a blood relative such as a parent, grandparent, sibling, etc. can help a first-time home buyer get started in a home of their own. Kiddie Condo loans are especially popular in college towns such as Provo, Salt Lake City, Ogden and Logan because many times it is less expensive for parents to help their college student buy a place to live than to pay rent for other forms of student housing.

Lease Purchase or Lease Option: Assists home buyers in purchasing a home by allowing them to lease a home with an option to buy at the end of the lease period. The rent payment is made up of the monthly rental payment plus an additional amount that is credited to an escrow account for use as a down payment at the lease’s end.

Lien: A legal claim against a property that must be paid off when the property is sold.

Loan to Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the sales price or appraised value (whichever is less) of the home to be purchased.

Lock-In Period: The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Maturity: The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment: That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker: A company that originates mortgages exclusively for resale in the secondary mortgage market.

Mortgage Broker: An individual or company that brings borrowers and lenders together for the purpose of loan origination.

Mortgage Insurance: A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Mortgage Insurance Premium (MIP): The amount paid by a mortgagor for mortgage insurance.

Mortgage Life Insurance: A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgagor: The borrower in a mortgage agreement.

Negative Amortization: Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

Net Worth: The value of all of a person’s assets, including cash.

No Cost Mortgage: A mortgage loan where the lender fees are paid for through a slightly higher interest rate than a loan where the borrower pays the fees either in cash or finances them into the mortgage amount. The “premium” or “rebate” offered by Wall Street investors for that interest rate is used to pay for the lender fees associated with originating and closing a mortgage loan.

Non Liquid Asset: An asset that cannot easily be converted into cash.

Note: A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Notice of Default: A Notice of Default is a notification given to a borrower by the lender that they have not made their payments on-time and are now in default on their mortgage loan. A Notice of Default will give the borrower a set amount of time to bring their loan current (plus any additional legal fees) or the home will be foreclosed on.

Origination Fee: A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Owner Financing: A property purchase transaction in which the party selling the property provides all or part of the financing.

Par Rate: A quoted mortgage interest rate where the lender with neither pay a rebate to, nor require discount points from the borrower.

Payment Change Date: The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap: A limit on the amount that payments can increase or decrease during any one adjustment period.

Periodic Rate Cap: A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

PITI Reserves: A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

Points: A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Prepayment Penalty: A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-Approval: The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prime Rate: The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal: The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance: The outstanding balance of principal on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI): The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI): Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios: Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock: A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Real Estate Agent: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Real Estate Agent®
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Real Estate Agents.

Recording: The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Refinance: Paying off one loan with the proceeds from a new loan using the same property as security.

Revolving Liability: A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

Secondary Mortgage Market: Where existing mortgages are bought and sold.

Security: The property that will be pledged as collateral for a loan.

Seller Carry-back: An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.

Servicer: An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Step-Rate Mortgage: A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.

Third-party Origination: When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Total Expense Ratio: Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Treasury Index: An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending: A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Two-step Mortgage: An adjustable-rate mortgage (ARM) with one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.

VA Mortgage: A mortgage that is guaranteed by the Department of Veterans Affairs (VA). VA mortgage loans are available to eligible military veterans and do not require a down payment and do not have monthly mortgage insurance fees. VA mortgage loans are also known as a “government mortgage”.

“Wrap Around” Mortgage: A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the “Wrap Around” mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.