Mortgage Glossary

Confused by the alphabet soup of mortgage lingo? Use this glossary to easily find definitions of terms that will come up during the mortgage loan process.

QUICK LINKS: | A | B | C | D | E | F | H | I | J | L | M | N | O | P | R | S | T | U |

Acceleration clause: a section in a contract that allows the lender to require the borrower to repay all of a portion of an outstanding loan if specific requirements are not met

Adjustable Rate Mortgage (ARM): a mortgage where the interest rate, after an initial period, can be changed by the lender

Adjustment Interval: the time between changes in the interest rate or monthly payment on an ARM

Affordability: the capacity at which a consumer can afford and purchase a home

Agreement of Sale: a contract signed by the buyer and seller after agreeing on terms and conditions

Annual percentage rate (APR): the annual rate charged for borrowing or made by investing; expressed as a single percentage number which represents the yearly cost of funds over the term of a loan

Application: a request for a loan

Appreciation: when the value of a property increases because of changes in market conditions

Appraisal: written estimate of a property’s current market value

Assessed value: the value that is associated with a property by a public tax assessor for taxation

Assumable mortgage: a mortgage contract that grants a credit worthy buyer to assume the mortgage contract of the seller

B

Balance: the amount of money currently owed on a loan

Balloon mortgage: mortgages that are payable in full after a period that is shorter than the actual term

Balloon: the balance of a loan remaining when the contract calls for full payment

Blanket loan: a mortgage pertaining to numerous structures on one piece of land

Buyer broker: a commissioned agent who assists in negotiating contracts between buyers and sellers

C

Cap: limits the amount of an interest rate or mortgage payments may increase; included in an adjustable-rate mortgage (ARM)

Cash reserve: a requirement by some lenders where buyers need a certain amount of cash remaining after closing in order to pay the first few mortgage payments

Clear title: a title without legal claims and legal questions when referring to ownership of the property

Closing: the final transaction in order to finalize a sale; also known as “settlement”

Closing costs: expenses required when transferring ownership of a property; also known as “settlement costs”

Contingency: a certain condition(s) that is required to be met before a contract is signed

Convertible ARM: any adjustable-rate mortgage which can be converted to a fixed-rate mortgage

Covenant: a specific clause in a mortgage that allows or prohibits the borrower; could result in foreclosure if violated

D

Deed: the legal document giving title to a property

Deed of trust: a document used in certain states in place of a mortgage; the title is for a trustee as opposed to the borrower

Default: failure to make mortgage payments on time or failure to comply with other mortgage conditions

Depreciation: the decline in the value of a property; opposite of “appreciation”

Discount points: a lender’s one-time charge in order to lower a loan’s interest rate and monthly payment

Due-on-sale clause: when the lender demands repayment in full if the buyer sells the property securing the mortgage

E

Earnest money: a deposit received by the seller in order to prove that a prospective buyer is serious about purchasing a property

Easement: a right-of-way allowing people other than the owner access to a property

Equal Credit Opportunity Act (ECOA): a federal law that does not allow lenders to deny mortgages based on the borrower’s race, color, religion, national origin, age, sex, marital status or income

Equity: the difference in market value of a property versus the home owner’s outstanding mortgage balance

Equity loan: a loan depending on the borrower’s equity in their home

Escalation Clause: an agreement from the sales contract which says that the buyer agrees to increase their offer on a property if there are other offers from interested buyers

Escrow: the holding of certain documents and money by a third party until closing

F

Fair Credit Reporting Act: a consumer protection law which regulates the collection of credit information and access to credit reports

First mortgage: a mortgage in a first lien on the property which secures the mortgage

Fixed-rate mortgage: mortgage where the interest rate does not change during the length of the loan

Flood insurance: insurance that is required for homes located in designated flood areas

Forbearance: when the lender postpones foreclosure in order to give the borrower time to catch up on overdue payments

Foreclosure: a mortgaged property could be sold by the lender when a mortgage is in default

H

Hazard insurance: insurance aimed to protect the homeowner and lender against physical damage to a property from fire, wind, vandalism, etc.

Home inspection: an examination of a potential property’s structure and mechanical systems in order to evaluate safety and pinpoint any needed repairs

Homeowners insurance: an insurance policy that combines liability coverage and hazard insurance

Homeowners warranty: insurance that will cover repairs to specific parts for a house for a certain amount of time

HUD: Is a standard form used to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate. HUD refers to the Department of Housing and Urban Development

I

Interest-rate cap: a plan of an adjustable-rate mortgage that limit show much interest rates can increase every adjustment period

Inspection: a system to detect readily accessible major flaws or deficiencies in the significant components and systems of a home.

J

Joint tenancy: a form of co-ownership; each owner has equal interest and rights in the property

Jumbo mortgage: loan amounts exceeding $417, 000 and higher than the maximum county loan limit

L

Lease-purchase mortgage loan: a financing option where home buyers are allowed to lease a home with an option to buy

Lien: a legal claim against a property that is required to be paid when the property is eventually sold

Lifetime cap: an arrangement of an ARM that limits the total increase in interest rates throughout the lifetime of the loan

Loan servicing: the process where a company collects interest, principal, and escrow payments form the borrower

Loan-to-value ratio (LTV): the relationship/ratio between the amount of a mortgage and the actual value of a property

Lock: guarantees a specific interest rate and/or discount points, various standard settlement fees for a period of time before closing, and the terms of a loan as stated in the application

Lock-in: written agreement that guarantees the home buyer a specific interest rate as long as the loan is closed within a set period of time

M

Margin: the set percentage added by a lender to the index rate in order to determine the interest rate of an adjustable-rate mortgage

Mortgage: a loan used to finance the purchase of a property, usually within a specified payment period and interest rates

Mortgage broker: a company that matches borrowers with lenders for a fee

Mortgagee: the lender in a mortgage deal

Mortgage insurance premium (MIP): the fee paid by a borrower to Federal Housing Administration (or private insurer) for mortgage insurance

Mortgage note: a legal document that requires a borrower to repay a loan with a specific interest rate during a period; the agreement is part of and secured by a mortgage

Mortgagor: the borrower in a mortgage agreement

N

Negative amortization: payment terms where the borrower’s monthly payments do not cover the interest rate that is due; the loan balance increases as a result

Notice of default: a written notice to a borrower that a default has occurred; legal action may be taken

O

Origination fee: a fee paid to a lender after processing a loan application

Owner financing: a purchase where the seller is responsible for providing all or a portion of the financing

P

Payoff amount: balance plus interest due and any fees

Payment cap: a plan of some adjustable-rate mortgages that limits how much a borrower’s payments may increase regardless of how much the interest rate increases; could result in negative amortization

PITI: principal, interest, taxes, and insurance; components of a monthly mortgage

Points: a one-time fee required by the lender in order to lower the interest rate of a mortgage

Prepayment penalty: a fee charged to a borrower when they pay off a loan before it is due

Preapproval: a tentative commitment from the lender for mortgage funding. It is not, however, a guarantee that you will be approved for a mortgage

Prequalification: an initial evaluation where the lender has reviewed your financial status and thinks you are ready for a loan

Principal: the amount borrowed or the amount of a loan remaining

Private mortgage insurance (PMI): insurance from nongovernmental insurers that works to protect lenders against a loss if a borrower defaults

Purchase and sale agreement: a written contract that is signed by the buyer and the seller that lists the terms and conditions when a property is sold

R

Real Estate Settlement Procedures Act: requires that a loan originator issue a Good Faith Estimate within three days following application

Refinancing: the process of paying off a loan with the proceeds from a new loan secured by the same property

S

Second mortgage: a mortgage discussing rights that are dependent to those of the first mortgage holder

Secondary financing: a loan secured by a mortgage or trust deed where the lien is secondary to a separate mortgage or trust deed

Settlement sheet: the collection of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payment

Super Conforming mortgage: loan amounts exceeding $417, 000 up to the maximum county loan limit available in high-cost areas

Survey: a map showing the legal boundary lines of a property

T

Tenancy by entirety: when spouses are allowed to own property together as a single entity

Tenancy in common: joint ownership without the right of survivorship in a property

Title: a legal document stating the right of ownership

Title company: a company who specializes in insuring title to property

Title insurance: insurance intended to protect the lender or the buyer against loss because of disputes over ownership of a property

Title search: a check of the title records in order to ensure that the seller is the legal owner of the property and that no other liens or claims are outstanding

Transfer tax: state or local tax that is payable when the title passes from one owner to another

Truth-in-lending: a federal law requiring lenders to disclose in writing the full terms and conditions of a mortgage

U

Underwriting: the process of evaluating a loan application in order to determine the risk factor for the lender