Mortgage School House

This Section Is Under Construction

Glossary of
Mortgage Terms


Abstract of Title: An abstract of title is used in certain parts of the country when determining if there are any previous claims on the subject property in question. The abstract is a written record of the historical ownership of the property and helps to determine whether the property can in fact be transferred from one party to another without any previous claims.

Acceleration: A loan accelerates when it's paid off early, usually at the request or demand of the lender. This is usually associated with an acceleration clause within a loan document that states what must happen when a loan must be paid immediately, but most usually applies to late payments or to transfer of the property without the lender's permission or by nonpayment.

Adjustable Rate Mortgage: Obviously, an adjustable rate mortgage, or ARM, is a loan program where the interest rate may change throughout the life of the loan. It adjusts based on terms agreed to between the lender and the borrower but typically may only change once or twice a year.

Amortization: Amortization is the length of time it takes for a loan to be fully paid off, by predetermined agreement. These payments are at regular intervals. Sometimes called fully amortized loan. Amortization terms can vary but generally accepted terms run in five year increments, from ten to forty years.

Annual Percentage Rate: The annual percentage rate, or APR, is the cost of money borrowed expressed as an annual rate. The APR is a useful consumer tool to compare different lenders but unfortunately it is often not used correctly. The APR can only work when comparing the same exact loan type from one lender to another.

Appraisal: An appraisal is a report that helps to determine the market value of a property. This report can be done in various degrees as required by a lender, ranging from simply driving by the property to a full-blown inspection complete with photographs of the real estate with full color pictures. Appraisals compare similar homes in the area that would substantiate the value of the property in question.

APR: See Annual Percentage Rate.

ARM: See Adjustable Rate Mortgage.

Assumable Mortgage: Homes sold with assumable mortgages let buyers take over the terms of the loan along with the house being sold. Assumable loans may be fully or non-qualifying assumable, meaning buyers take over the loan without being qualified or otherwise evaluated by the original lender. Qualifying Assumable loans mean that while buyers may assume terms of the existing note, they must qualify all over again as if they were applying for a brand new loan.

AUS: See Automated Underwriting System.

Automated Underwriting System: An AUS is a software application that electronically issues a preliminary loan approval. This is a complex approval matrix that reviews credit reports, debt ratios, and other factors that go into a mortgage loan approval.

Automated Valuation Model: The AVM is an electronic method of evaluating a property's appraised value based upon scanning public records for recent home sales and other data in the subject property's neighborhood. Not yet widely accepted as a replacement for full blown appraisals but many see AVM's eventually replacing traditional appraisals altogether.

AVM: See Automated Valuation Model.

Balloon Mortgage: A type of mortgage where the remaining balance must be paid in full at the end of a pre-set term. A 5-year balloon mortgage might be amortized over a thirty-year period but the remaining balance is due, in full, at the end of five years.

Basis Point: A basis point is 1/100 of a discount point. It typically takes one full discount point to get 1/4 percent change in rate. A move of 50 basis points would cause a 30-year fixed mortgage rate to change by 1/8 percent.

Bridge Loan: A bridge loan is a short-term loan primarily used ot pull equity out of one property for a down payment on another. this loan is paid off when the original property sells. since these are short-term loans, sometimes just a few weeks, usually only retail banks will offer them. Usually the borrower doesn't make any monthly payments and only pays off the loan when the property sells.

Bundling: Bundling is the act of putting together several real estate or mortgage services in one package. Instead of paying for an appraisal here or an inspection there, some or all of the buyer's services are packaged together. Usually this is to offer discounts on all services, although when they're bundled it's hard to parse all the services out to see whether you're getting a good deal or not.

Buydown: Paying more money to get a lower interest rates is called a permanent buydown, and is used in conjunction with discount points. The more points, the lower the rate. A temporary buydown is fixed rate mortgage that starts at a reduced rate for the first period, and then gradually increases to its final not rate. A temporary buydown for two years is called a 2-1 buydown. For three years, it's called a 3-2-1 buydown.

Cash-Out: Cash-out refinance means taking equity out of a home in the form of cash during a refinance. Instead of just reducing your interest rate during a refinance and financing your closing costs, you finance even more, putting the additional money in your pocket.

Closing Cost: Closing costs are the various fees involved when buying a home or obtaining mortgage. The fees, required to issue a good loan, can come directly from the lender or may come from others in the transaction.

Collateral: Collateral is property owned by the borrower that's pledged to the lender as security in case the loan goes bad. A lender makes a mortgage with the house as collateral.

Comparable Sales: Comparable sales are that part of an appraisal report that lists recent transfers of similar properties in the immediate vicinity of the house being bought. Also called "comps."

Conforming Loan: A conventional conforming loan is a Fannie Mae or Freddie Mac loan that is equal to or less that the maximum allowable loans limits established by Fannie and Freddie. These limits are changed annually.

Conventional Loan: A conventional loan mortgage uses guidelines established by Fannie Mae or Freddie Mac and is issued and guaranteed by lenders.

Correspondent Banker: Correspondent bankers are mortgage bankers that don't intend to keep your mortgage loan and instead sell your loan to another pre-selected mortgage banker. Smaller mortgage bankers, those perhaps with regional presence but not a national one, can shop various rates from other correspondent mortgage bankers that have set up an established relationship to buy and sell loans from one another. They operate much like a broker, except correspondent bankers use their own money to fund loans.

Credit Report: A credit report shows the payment histories of a consumer along with their property addresses and any public records.

Credit Scores: Credit scores are numbers that are derived from a consumers credit history. The numbers are based upon various credit details in a consumer's past and upon the likelihood of default. Different credit patterns are assigned different numbers and different credit activity may have a greeter or lesser impact on the score. The higher the credit score, the better the credit.

Debt Consolidation: Debt consolidation means paying off all or part of one's consumer debt with equity from a home. Can be part of a refinanced mortgage or a separate equity loan.

Debt Ratio: Gross monthly payments divided by gross monthly income are called the debt ratio. It is expressed as a percentage. There are typically two debt ratios to be considered: the housing ratio - sometimes called the front ratio - is the total monthly house payment plus any monthly tax, insurance, PMI, or home owners association dues divided by gross monthly income. The total debt ratio - also called the back ratio - is the total housing payment plus other monthly consumer installment or revolving debt, also expressed as a percentage. Loan debt ratio guidelines are usually denoted as 32/38, with 32 being the front ratio and 38 being the back ratio. Ratio guidelines can vary from loan to loan and lender to lender.

Deed: A deed is a written document evidencing each transfer of ownership in a property.

Deed of Trust: A deed of trust is a written document giving an interest in the home being bought to a third party, usually the lender, as security to the lender.

Delinquent: Delinquent means being behind on a mortgage payment. Delinquencies typically begin to recognized as 30+ days delinquent, 60+ days delinquent, and 90+ days delinquent.

Discount Points: Discount points, also called "points," are represented as a percentage of a loan amount. One point equals 1 percent of a loan balance. Borrowers pay discount points to reduce the interest rate of a mortgage. Typically each discount point paid reduces the interest rate by 1/4 percent. It is a form of prepaid interest to a lender.

Document Stamp: Certain states call in a doc stamp, and it is evidence - usually with an ink stamp - of how much tax was paid upon transfer of ownership of property. Doc stamp tax rates can vary based upon locale, and not all states have doc stamps.

Down Payment: The down payment is the amount of money initially given by the borrower to close a mortgage, and it equals the sales price less financing. It's the very first bit of equity you'll have in the new home.

Easement: An easement is a right of way previously established by a third party. Easement types can vary but typically involve the right of a public utility to cross your land to access an electrical line.

Equity: Equity is the difference between the appraised value of a home and any outstanding loans recorded against the house.

Escrow: Escrow can mean two things depending upon where you live. On the West Coast, for example, when a home goes under contract it "goes into escrow". In other parts of the country, an escrow is a financial account set up by a lender to collect monthly installments for annual tax bills and / or hazard insurance policy renewals.

Escrow Account: See Impound Accounts.

Escrow Agent: On the West Cost, the escrow agent is the person or company that handles the home closing, ensuring documents are assigned correctly and property transfer has legitimately changed hands.

Fair and Accurate Credit Transaction Act: The FACTA is new law that replaces the Fair Credit Reporting act or FCRA, and governs how consumer information can be stored, shared, and monitored for privacy and accuracy.

Fair Credit Reporting Act: The FCRA was the first consumer law that emphasized consumer rights and protections relating to their credit reports, their credit applications, and privacy concerns.

Fannie Mae: See Federal National Mortgage Association.

Farmers Home Administration: The FmHA provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere. These loans are typical for rural properties that might be larger in acreage than a suburban home as well as for working farms.

Federal Home Loan Mortgage Corporation: The FHLMC, or Freddie Mac, is a corporation established by the U.S. Government in 1968 to buy mortgages from lenders made under Freddie Mac guidelines.

Federal Housing Agency: The FHA was formed in 1934 and is now a division of the Department of Housing and Urban Development (HUD). It provides loan guarantees to lenders who make loans under FHA guidelines.

Federal National Mortgage Association: The FNMA, or Fannie Mae, was originally established in 1938 by the U.S. Government ot buy FHA mortgages and provide liquidity in the mortgage market place. It is similar in function to Freddie Mac. In 1968 it charter was changed and it now purchases conventional mortgages as well as government ones.

Federal Reserve Board: The Federal Reserve Board, among other things, sets overnight lending rates for banking institutions. They don't set mortgage rates.

Fee Income: Fee income consists of the closing costs received by a lender or broker that is outside of the interest rate or discount points. Fee income can be in the form of loan processing charges, underwriting fees, and the like.

FHA: See Federal Housing Agency.

FICO: FICO stands for the company that invented the most widely used credit scoring system: Fair, Isaac and Company.

Final Inspection: This is the last inspection of a property, showing that a new home being built is 100 percent complete or that a home improvement is 100 percent complete. this lets the lender know that their collateral and tier loan are exactly where they should be.

Fixed Rate Mortgage: A fixed rate mortgage is a loan whose interest rate does not change throughout the term of the loan.

Float: Float refers to activity deciding not to "lock" or guarantee an interest rate while a loan is being processed. This is usually done because the borrower believes the rates will go down.

Float-Down: Float-down is a mortgage loan rate that can drop as mortgage rates drop. Usually comes in two types of float, one being during construction of a home and the other being during the period of an interest rate lock.

Flood Certificate: A flood certificate shows whether a property or part of a property lies above or below any local flood zones. These flood zones are mapped over the course of several years by the Federal Emergency Management Agency, or FEMA. The certificate identifies the property's exact legal location, adn a flood line's elevation. There is a box that simply asks "Is the property in a Flood Zone, Yes or No?" If the property is in a flood zone, the lender will require special flood insurance that is not usually carried under a standard homeowners hazard insurance policy.

Foreclosure: A foreclosure is the bad thing that happens when the mortgage isn't repaid. Lenders begin the process of forcefully recovering their collateral when borrowers fail to make loan payments. The lender takes your house away.

Freddie Mac: See Federal Home Loan Mortgage Corporation.

Fully Indexed Rate: The fully indexed rate is the number reached when adding a loan's index and the margin. This rate is how adjustable note rates are compiled.

Funding: Funding is the actual transfer of money from a lender to a borrower.

Gift: When a down payment and closing costs for a home are given to the borrower instead of the funds coming from their own accounts, it is called a gift. Usually such gifts can only come from family members or foundations established to help new home-owners.

Gift Funds: Gift funds are monies given to a borrower for the sole purpose of buying a home. These funds are not to be paid back in any form and are usually given by a family member or a qualified nonprofit organization.

Ginnie Mae: See Government National Mortgage Association.

Government National Mortgage Association: The GNMA, or Ginnie Mae, is a U.S. government corporation formed to purchase government loans like VA and GHA loans from banks and mortgage lenders. Think of it as Fannie or Freddie, only it buys government loans.

Good Faith Estimate: A good faith estimate is a list of estimated closing costs on a particular mortgage transaction. this estimate must be provided to the loan applicants within 72 hours after receipt of a mortgage application by the lender or broker.

Hazard Insurance: Hazard insurance is specific type of insurance that covers against certain destructive elements like fire, wind, and hail. It is usually an addition to homeowners insurance, but every home loan has a hazard rider.

HELOC: See Home Equity Line of Credit.

Hold-Back: A hold-back is a contingency fund associated with a construction or remodel and is there for any change orders that might occur during the process. A change order is what happens when you simply change your mind. The hold-back helps pay for the change when changing your mind costs more than the loan. A typical hold-back amount is 10 percent of the original loan.

Home Equity Line of Credit: HELOC is a credit line using a home as collateral. Customers write checks on the line whenever they need to and pay only on balances withdrawn. It is much like a credit card, but secured by the property.

Homeowners Insurance: A homeowners insurance policy covers not just hazard items but also other things, such as liability or personal property.

Hybrid Loan: A hybrid loan is a cross between and ARM and a fixed rate. the rate is fixed for a predetermined number of years before turning into an adjustable rate mortgage, or ARM.

Impound Accounts: Impound accounts are set up by a lender to deposit a monthly portion of annual property taxes or hazard insurance. As taxes or insurance come up for renewal, the lender pays the bill using these funds. Also called an escrow account.

Index An index is used as the basis to establish an interest rate, usually associated with a margin. Most anything can be an index, but most common are U.S. treasuries or similar instruments. See fully indexed rates.

Inspection: Inspection is a structural review of the house to determine defects in workmanship, damage to the property, or required maintenance. Does not determine value of the property. A pest inspection, for example, looks for termites, wood ants, etc.

Intangible Asset: An intangible asset is an asset not by itself but by with it represents. A publicly traded stock is an intangible asset. It's not the stock itself that has the value, but what the stock represents in terms of income.

Intangible Tax: An intangible tax is a state tax on personal property.

Interest Rate: The interest rate is the amount charged to borrow money over a specified period of time.

Jumbo Loan: A jumbo loan is a mortgage that exceeds current conforming loan limits. For 2006 anything above $417,000 is considered "jumbo."

Junior Lien: A junior lien is a second mortgage or one that subordinates to another loan. Not as common a term as it used to be. You're likely to hear simply "second" mortgage or "piggy back."

Land Contract: A land contract is an arrangement where the buyer makes monthly payments to the seller but the ownership of the property does not change hands until the loan is paid in full.

Land-To-Value: Land-to-Value is an appraisal term that calculates the value of the land as a percentage of the total value of the home. If the land exceeds the value of the home it's more difficult to find financing without good comparable sales. Also called "Lot-to-Value."

Lender Policy: Lender policy is title insurance that protects a mortgage from defects or previous claims of ownership.

Liability: Liability is an obligation or bill on the part of the borrower. It works like an automobile loan. When you pay off the car, you get the title. Liabilities can be those that show up on a credit report, such as student loans or a car payment, but can also be anything else that one is obligated to pay. It's the ones on the credit report that are used to determine debt ratios.

LIBOR Index: See London Interbank Offered Rate.

Loan: A loan is money granted to one party with the expectation of it being repaid.

Loan Officer: A loan officer is the person typically responsible for helping mortgage applicants get qualified and assisting in loan selection and loan application. Loan officers can work at banks, credit unions, and mortgage brokerage houses or for bankers.

Loan Processor: A loan processor is the person who gathers the required documentation for a loan application for loan submission. Along with your loan officer, you'll work with this person quite a bit during your mortgage process.

Loan-to-Value Ratio: LTV is express as a percentage of the loan amount when compared to the valuation of the home determined by an appraisal. If a home was appraised at $100,000 and the loan amount was $70,000, then the LTV would be 70 percent.

Lock: A lock is the act of guaranteeing an interest rate over a predetermined period of time. Loan locks are not loan approvals; they're simply the rate your lender has agreed to give you at loan closing.

London Interbank Offered Rate: The LIBOR Index is a British index similar to our Federal Funds rate, where British banks borrow money from one another over short periods to adhere to reserve requirements.

LTV: See Loan-to-Value Ratio.

Margin: Margin is a number, expressed as a percentage, that is added to a mortgage's index to determine the rate the borrower pays on the note. An index can be a 6-months CD at 4.00 percent and the margin can be be 2.00 percent. the interest rate the borrower pays is 4 + 2, or 6.00 percent. A fully indexed rate is the index plus the margin.

Market Value: In an open market, the market value of a property is both the highest the borrower is willing to pay and the least the seller is willing to accept at the time of contract. Property appraisals help justify market value by comparing similar home sales in the subject property's neighborhood.

Mortgage: A mortgage is a loan with the property being pledged as collateral. The mortgage is retired when the loan is paid in full.

Mortgage-Backed Securities: Mortgage-backed securities are investments securities issued by Wall Street firms that are guaranteed, or collateralized, with home mortgages taken out by consumers. These securities can then be bought and sold on Wall Street.

Mortgage Bankers: Mortgage bankers are lenders who use their own funds to lend money. Historically these funds would have come from the savings accounts of other bank customers. But with the evolution of mortgage banking that's the old way of doing business. Even though bankers use their own money it may come from other sources such as lines of credit or through selling loans to other institutions.

Mortgagee: The mortgagee is the person or business making the loan, also called the lender.

Mortgage Insurance (MI): See Private Mortgage Insurance.

Mortgagor: The mortgagor is the person(s) getting the loan, also called the borrower.

Multiple Listing Service: Multiple listing service, or MLS, is a central repository where real estate brokers and agents show homes and search for homes that are for sale.

Negative Amortization: Negative amortization, or neg-am, is an adjustable rate mortgage that can have two interest rates, the contract rate or the fully indexed rat. The contract rate is the minimum agreed upon rate the consumer may pay, sometimes the contract rate is lower than the fully indexed rate. The borrower has a choice of which rate to pay, but if the contract rate is lower than the fully indexed rate, the difference is added back to the loan. If your contract payments are only $500 but the fully indexed rate is $700 and you pay only the contract rate, $200 is added back into your original loan amount. Not for the feint of heart nor for those with little money down.

NINA: NINA, which stands for No Income, No Asset mortgage refers to the level of documentation required for a mortgage loan. This type of loan does not require that the borrower prove or otherwise document any income or asset whatsoever.

Nonconforming: Nonconforming mortgages are loans whose amounts are above current Fannie or Freddie limits. See also Jumbo Loan.

Note: A note is a promise to repay. It may or may not have property involved and may or may not be a mortgage.

Origination Fee: An origination fee is usually expressed as a percentage of the loan amount, a fee charged to cover costs associated with finding. documenting, and preparing a mortgage application.

Owner's Policy: Title insurance made for the benefit of the homeowner.

Par: Par is an interest rate that can be obtained without paying any discount points and which does not have any additional yield beyond its rate. For instance, you get a 30-year quote of 7.00 percent with one point, or 7.25 percent with zero points, or 7.50 percent with zero points plus an additional yield to you of $1,000 toward closing costs. Here the 7.25 percent at zero points is the par rate.

Piggyback Mortgage: See Second Mortgage.

PITI: PITI means principal, interest, taxes, and insurance. These figures are used to help determine front debt ratios.

Pledged Asset: A pledged asset is an appraisable property or security that is collateralized to make a mortgage loan. Sometimes a pledged asset can be a stock or mutual fund. A lender can make a mortgage loan and use the mutual fund as part of the collateral. If the borrower fails to make the payments, all or part of the pledged asset can go to the lender.

PMI: See Private Mortgage Insurance.

Points: See Discount Points.

Prepaid Interest: Prepaid interest is daily interest collected from the day of loan closing to the first of the following month.

Prepayment Penalty: A prepayment penalty is paid to the lender if the loan is paid off before its maturity or if extra payments are made on the loan. Sometimes defined as "hard" or "soft," where a hard penalty is automatic if the loan is paid off early or if extra payments are made at any time or for any amount whatsoever. A soft penalty only lasts for a couple of years and may allow extra payments on the loan not to exceed a certain amount.

Principal: The outstanding amount owed on a loan, not including any interest due, is called the principal.

Private Mortgage Insurance: PMI is typically required on all mortgage loans with less than 20 percent down. It is an insurance policy, paid by the borrower with benefits paid to the lender. It covers the difference between the borrower's down payment and 20 percent of the sales price. If the borrower defaults on the mortgage, this difference is paid to the lender.

Quit Claim: A quit claim is a release of any interest in a property from one party to another. Does not release the obligation of the mortgage.

Refinance: Refinance means obtaining a new mortgage to replace an existing one. There is also a "rate-and-term refinance," where only the outstanding principal balance, interest due, and closing costs are included in the loan.

Realtor: A Realtor is a member of the National Association of Realtors. This is a registered trademark, and not all real estate agents are Realtors.

Rescission: Rescission is withdrawing from a mortgage agreement. Refinanced mortgage loans for a primary residence have a required three-day "cooling off" period before the loan becomes official. If for any reason you decide not to take the mortgage, you can "rescind" and the whole deal's off.

Sales Contract: Your written agreement to sell or purchase a home, signed by both the seller and buyer, is called a sales contract.

Secondary Market: The secondary market is a financial arena where mortgages are bought and sold, either individually or grouped together into securities backed by those mortgages. Fannie Mae and Freddie Mac are the backbone for the conventional secondary market. Other secondary markets exist for nonconforming loans, sub-prime loans, and others.

Second Mortgage: Sometimes called a "piggyback" mortgage, a second mortgage assumes a subordinate position behind a first mortgage. If the home goes into foreclosure, the first mortgage would be settled before the second could lay claim.

Seller: The seller is the person transferring ownership and all rights for your home in exchange for cash or trade.

Settlement Statement: A settlement statement is also called the Final HUD-1. It shows all financial entries during the home sale including sales price, closing costs, loan amounts, and property taxes. Your initial good faith estimate will be your fist glimpse of your settlement statement. This statement is one of the final documents put together before you go to closing and is prepared by your attorney or settlement agent.

Sub-Prime Loans: Sub-prime loans are made to people with less than "prime" credit. There are various stages of sub-prime credit, from loans for those with simply "tarnished" credit that can't quite get a conventional mortgage, to those with seriously damaged credit, like people in or just out of bankruptcy, with collection accounts, or with judgments and liens against them.

Survey: A survey is a map that shows the physical location of the structure and where it sits on the property. It also designates and easements that run across or through the property.

Title Insurance: Title insurance protects the lender the seller, and/or the borrower against any defects or previous claims to the property being transferred or sold.

Title: Title is ownership in a property.

Title Exam / Title Search: This is the process where public records are reviewed to research any previous liens on the property.

VA No-No: VA No-No is the name given to a type of VA loan where the borrower not only puts no money down but also pays no closing costs.

Verification of Deposit: A VOD is a form mailed to a bank or credit union that asks the institution ot verify that a borrower's bank account exits, how much is in it, how long they've had it, and what the average balance was over the previous two months.

Wrap-Around Mortgage: A wrap-around mortgage is a method of financing where the borrower pays the former owner of the property each month in the form of a mortgage payment. The former owner will then make a mortgage payment to the original mortgage holder.