Real Estate Financing - Home Mortgage - Home Loan Glossary
Like any other legal system, the real estate financing and mortgage business, mortgage loans and legal process sometimes uses confusing jargon. In the real estate list below are some terms explained in brief simple language.
Adjustable Rate Mortgage (ARM): Mortgage loans under which the interest rate is periodically adjusted to more closely coincide and agreed to at the inception of the loan.
Alternative Documentation: The use of pay stubs, W-2 forms, and bank statements in lieu of Verifications of Employment (VOE) and Verifications of Deposit (VOD) to qualify a borrower for a mortgage.
Amortization: The systematic and continuous payment of an obligation through installments until the debt has been paid in full.
Annual Percentage Rate (APR): A term used in the Truth-in-Lending Act to present the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of the mortgage loan as a yearly rate. It could be higher than the interest rate stated on the Note because it includes, in addition to the interest rate, loan discount points, miscellaneous fees and mortgage insurance.
Appraisal: A report made by a qualified person setting forth an opinion or estimate of property value. (Appraisal also refers to the process through which a conclusion on property value is derived.)
Appraisal Amount or Appraised Value: The fair market value of a home determined by independent appraisal. The appraisal uses local real estate market sales activity as a major basis for valuation.
Appreciation: An increase in the value of a property due to market conditions or other causes. The opposite term is depreciation.
Balloon Mortgage: A fixed-rate mortgage for a set number of years and then must be paid off in full in a single "balloon" payment. Balloon loans are popular with borrowers expecting to sell or refinance their property within a definite period of time.
Bankruptcy: Legal relief from the payment of all debts after the surrender of all assets to a court-appointed trustee. Assets are distributed to creditors as full satisfaction of debts, with certain priorities and exemptions. A person, firm or corporation may declare bankruptcy under one of several chapters of the U. S. Bankruptcy Code: Chapter 7 covers liquidation of the debtor's assets; Chapter 11 covers reorganization of bankrupt businesses; Chapter 13 covers payment of debts by individuals through a bankruptcy plan.
Cap: The limit placed on adjustments that can be made to the interest rate or payments such as the annual cap on an adjustable rate loan (ARM) or the cap on a rate over the life of the loan.
Cash-out Refinance: To refinance the mortgage on a property for more than the principal owed. This allows the borrower to get cash from the equity in their home. Loan products may vary on how much can be borrowed on a cash-out refinance.
Closing: Also known as settlement, the finalization of the process of purchasing or refinancing real estate. The closing includes the delivery of a Deed, the signing of Notes and the disbursement of funds.
Closing Costs: Costs that are due at closing, in addition to the purchase price of the property. These costs normally include, but are not limited to, origination fee, discount points, attorney's fees, costs for title insurance, surveys, recording documents, and prepayment of real estate taxes and insurance premiums held by the lender. Sometimes the seller will help the borrower pay some of these costs.
Closing Statement: An accounting of the debits and credits incurred at closing. All FHA, VA and Conventional financing loans use a Uniform Closing or Settlement Statement commonly referred to as the HUD-1.
CMT: The Constant Maturity Treasury (CMT) is published by the Federal Reserve Board based on the average yield of a variety of Treasury securities adjusted to a one-year maturity. The CMT is offered as an index for setting rates on adjustable rate mortgage programs.
Co-Borrower: A party who signs the mortgage note along with the primary borrower, and who also shares title to the subject real estate.
Collateral: Property pledged as security for a debt. For example, real estate that secures a mortgage. Collateral can be repossessed if the loan is not repaid.
Combined Loan To Value (CLTV): The mathematical relationship between the total of all loan amounts (first mortgage plus subordinate liens) and the value of the subject property.
Community Reinvestment Act (CRA): This act requires financial institutions to meet the credit needs of their community, including low and moderate-income sections of the local community. It also requires banks to make reports concerning their investment in the areas where they do business.
Condominium: A form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas. All condominiums must meet certain investor requirements.
Conforming Loan: A loan with a mortgage amount that does not exceed that which is eligible for purchase by FNMA or FHLMC. All loans are considered either as conforming or non-conforming, also known as jumbo.
Conventional Loan: A mortgage loan not insured or guaranteed by the federal government.
Conversion Option: Options to convert an adjustable rate mortgage or balloon loan to a fixed rate mortgage under specified conditions.
Conveyance: The legal document that transfers ownership of unregistered land.
Co-Signer: A party who signs the mortgage note along with the borrower, but who does not own or have any interest in the title to the property.
Creditor: A person to whom debt is owed by another person who is the "debtor".
Credit Rating: A rating given a person or company to establish credit-worthiness based upon present financial condition, experience and past credit history.
Credit Report: A document completed by a credit-reporting agency providing information about the buyer's credit cards, previous mortgage history, bank loans and public records dealing with financial matters.
Deal Structure: An Underwriters review of certain aspects of a loan application that do not meet standard guidelines.
Debt to Income Ratio: Compares the amount of monthly income to the amount the borrower will owe each month in house payment (PITI) plus other debts. The other debts may include but not limited to car payment, credit cards, alimony, child support, and personal loans. This ratio is commonly used to see if the borrower has the capacity to repay the debt.
Deed of Trust: A legal document that conveys title to real estate to a disinterested third party (trustee) who holds the title until the owner of the property has repaid the debt. In states where it is used, a Deed of Trust accomplishes essentially the same purpose as a Mortgage.
Default: Failure to comply with the terms of any agreement. In real estate, generally used in connection with a mortgage obligation to refer to the failure to comply with the terms of the Promissory Note. Most often this default is a failure to make payments, however, there are other means by which a borrower may default, such as the failure to pay real estate taxes.
Depreciation: A decline in the value of property. The opposite of appreciation.
Disbursements: All the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.
Discount Points: A percentage of the loan amount which is charged or credited by the lender upon making a mortgage loan. Loans that are made at the present market rate, with no points, are considered to be made at "par." Because of the lender's ability to charge or credit points on an individual loan, the lender is able to tailor a loan program and interest rate to fit the needs of each individual borrower. Discount points can be negotiated in the Purchase Contract to be paid by either the seller or the borrower.
Each point equals 1% of the mortgage loan. For example, a charge of 1 point on a $50,000 loan would result in a charge of $500; 1/2 point would be $250 ($50,000 x .50%).
Down Payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.
Earnest Money: Deposit made by a purchaser of real estate as evidence of good faith.
Equal Credit Opportunity Act (ECOA): Also known as Regulation B. A federal law that prohibits a lender from discriminating in mortgage lending on the basis of race, color, religion, national origin, sex, marital status, age, income derived from public assistance programs, or previous exercise of Consumer Credit Protection Act rights.
Equity: The difference between the current market value of a property and the principal balance of all outstanding loans.
Escrow Account: An account held by the lending institution to which the borrower pays monthly installments for property taxes, insurance, and special assessments, and from which the lender disburses these sums as they become due.
Fair Credit Reporting Act: Regulated the collection and distribution of information by the consumer credit reporting industry. It also affects how financial institutions collect and convey credit information about loan applicants or borrowers.
Fair Housing Act: Prohibits the denial or variance of the terms of real estate related transactions based on race, color, religion, sex, national origin, disability, or familiar status of the credit applicant. Real estate related transactions include a mortgage, home improvement, or other loans secured by a dwelling.
Federal Home Loan Mortgage Corporation (FHLMC): Also known as Freddie Mac. A publicly owned corporation created by Congress to support the secondary mortgage market. It purchases and sells conventional residential mortgages as well as residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA).
Federal National Mortgage Association (FNMA): Also known as Fannie Mae. A privately owned corporation to support the secondary mortgage market. It adds liquidity to the mortgage market by investing in home loans through the country.
FICO Score: A credit score given to a person that establishes creditworthiness based on present financial condition, experience and past credit history.
Finance Charge: The cost of credit as a dollar amount (i.e. total amount of interest and specific other loan charges to be paid over the term of the loan and other loan charges to be paid by the borrower at closing). Loan charges include origination fees, discount points, mortgage insurance, and other applicable charges. If the seller pays any of these charges, they cannot be included in the finance charge.
Financial Statement: A summary of facts showing an individual's or company's financial condition. For individuals, it states their assets and liabilities as of a given date. For a company it should include a Profit and Loss Statement (P&L) for a certain period of time and balance sheet, stating assets and liabilities as of a given date.
First Mortgage: A real estate loan that creates a primary lien against real property.
First Rate Adjustment -- First rate adjustment after: In association with an Adjustable Rate Mortgage loan, this is the number of months after which the loan has closed when the first interest rate adjustment will occur.
First Rate Adjustment -- Maximum rate decrease: In association with an Adjustable Rate Mortgage loan, this is the most the interest rate can decrease during the first adjustment period.
First Rate Adjustment -- Maximum rate increase: In association with an Adjustable Rate Mortgage loan, this is the most the interest rate can increase during the first adjustment period.
Fixed Rate Mortgage: The type of loan where the interest rate will not change for the entire term of the loan.
Floating: The term used when a purchaser elects not to lock-in an interest rate at the time of application.
Flood Insurance: Insurance that compensates for direct physical damages by or from flood to the insured property subject to the terms, provisions, conditions and losses not covered provision of the policy. It is required for mortgages on properties located in federally designated flood areas.
Freehold: The ownership of a property and the land.
Good Faith Estimate (GFE): An estimate of settlement charges paid by the borrower at closing. The Real Estate Settlement Procedures Act (RESPA) requires a Good Faith Estimate of settlement charges be provided to the borrower.
Gift Letter: A letter or affidavit that indicates that part of a borrower's down payment is supplied by relatives or friends in the form of a gift and that the gift does not have to be repaid.
Gross Income: A person's income before deduction for income taxation.
Hazard Insurance: Insurance against losses caused by perils which are commonly covered in policies described as a "Homeowner Policy".
Home Maintenance: Costs associated with maintaining a home. This may include, but not limited to, general repairs, replacement or repair of furnace, air conditioning, roof, plumbing and electrical systems.
Home Mortgage Disclosure Act (HMDA): Also known as Regulation C. The purpose of HMDA is to provide disclosure of mortgage lending application activity (home purchase or improvement) to regulators and the public. Information is collected on each application, and is recorded on a log that is compiled to produce a report on application activity by geographic designation (census tract).
Homeowners Association (HOA): A non-profit corporation or association that manages common areas and services of a Condominium or Planned Unit Development (PUD).
Homeowners Insurance: Insurance that covers damage to the insureds' residence and liability claims made against the insured subject to the policy terms, conditions, provisions, losses not insured provision and exclusions.
Housing Expense Ratio: Ratio used to determine the borrowers capacity to repay a home loan. The ratio compares monthly income to the house payment (Principal, Interest, Taxes and Insurance).
Index: In connection with ARM loans, the external measurement used by a Lender to determine future changes which are to occur to an adjustable loan program. These will typically be published rates that are independent of the Lender's control, such as a Treasury Bill.
Initial Interest Rate: The beginning interest rate at the start of an adjustable rate mortgage (ARM). It may be lower than the fully indexed rate or "going market rate" and it will remain constant until it is adjusted up or down on the adjustment date.
Interest: The amount paid by a borrower to a lender for the use of the lender's money for a certain period of time.
The amount paid by a bank on some deposit accounts.
Interest Income: The potential income from funds which would have been used for the down payment, closing costs, and any difference (increase) between monthly rental payment and monthly mortgage payment.
Interest Rate: The percentage of an amount of money that is paid for its use for a specific time; usually expressed as an annual percentage.
Judgment: Decree of a court declaring that one individual is indebted to another and fixing the amount of such indebtedness.
Jumbo Loan: A loan above the limit set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Also referred to as a non-conforming loan.
Land Registration: A legal document that records the ownership of a property and land. This is also known as a Title.
Late Charge: An additional charge a borrower is required to pay as a penalty for failure to pay a regular mortgage loan installment when due; a penalty for a delinquent payment.
Leasehold: The ownership of the property and land for a specified period, which may be sold separately from freehold, which may be owned by another person.
Legal Charge: A legal document that records the data of the rightful owner of a property or land.
LIBOR: LIBOR is an abbreviation for the "London Interbank Offered Rate," and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Interest only loans and other adjustable rate mortgage programs.
Lien: A legal claim against a property that must be paid off when the property is sold. A lien is created when you borrow money and use your home as collateral for the loan.
Life of Loan -- Maximum rate decrease: In association with an Adjustable Rate Mortgage loan, this is the most the interest can decrease over the life of the mortgage loan.
Life of Loan -- Maximum rate increase: In association with an Adjustable Rate Mortgage loan, this is the most the interest can increase over the life of the mortgage loan.
Loan Application: A source of information on which the lender bases a decision to make or not make a loan; defines the terms of the loan contract, gives the names of the borrower(s), place of employment, salary, bank accounts, credit references, real estate owned, and describes the property to be mortgaged.
Loan Balance: The amount of remaining unpaid principal balance owed by the borrower.
Loan Term: Number of years a loan is amortized. Mortgage loan terms are generally 15, 20, or 30 years.
Loan-to-Value (LTV): The ratio of the total amount borrowed on a mortgage against a property, compared to the appraised value of the property. A LTV ratio of 90 means that the borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is the lesser of the purchase price or the appraised value. For refinances the value is determined by an appraisal.
Loan-to-Value Ratio: The ratio, expressed as a percentage, of the amount of the loan (numerator) to the value or selling price of real property (denominator). For example, if you have an $80,000 1st mortgage on a home with an appraised value of $100,000, the LTV is 80% ($80,000 / $100,000 = 80%).
Lock-In: A written agreement between the lender and borrower for a specified period of time in which the lender will hold a specific interest rate, origination and/or discount point(s).
Margin: Under the terms of an adjustable rate mortgage (ARM), the margin is a set adjustment to the index. The particular loan product determines the amount of the margin.
Median Income: The middle income level. Half of the incomes would be higher than the median income and half of the incomes would be below the median income. This is not to be confused with an average income.
Mortgage: The written instrument used to pledge a title to real estate as security for repayment of a Promissory Note.
Mortgage Deed: A legal document that stated that the lender has a legal charge over the property.
Mortgage Insurance: Insurance written in connection with a mortgage loan that indemnifies the lender in the event of borrower default. In connection with conventional loan transactions, this insurance is commonly referred to as Private Mortgage Insurance (PMI).
Mortgage Note: A written promise to pay a sum of money at a stated interest rate during a specified term. It is typically secured by a mortgage.
Mortgage Servicing: Controlling the necessary duties of a mortgagee, such as collecting payments, releasing the lien upon payment in full, foreclosing if in default, and making sure the taxes are paid, insurance is in force, etc. The lender or a company acting for the lender, for a servicing fee, may do servicing. (Also called Loan Servicing.)
Mortgagee: The institution, group, or individual that lends money on the security of pledged real estate; the association, the lender.
Mortgagee Clause: This is the clause that is typically used for hazard insurance and flood insurance.
Mortgagor: The owner of real estate who pledges his property as security for the repayment of a debt; the borrower.
Net Income: The difference between effective gross income and expense including taxes and insurance. The term is qualified as net income before depreciation and debt.
Non-Conforming: A loan with a mortgage amount that exceeds that which is eligible for purchase by FNMA or FHLMC. All other loans above this amount are considered to be non-conforming or jumbo loans.
Non-Owner-Occupied Property: Property purchased by a borrower not for a primary residence but as an investment with the intent of generating rental income, tax benefits, and profitable resale.
Note: A written promise by one party to pay a specific sum of money to a second party under conditions agreed upon mutually. Also called "promissory note."
Note Rate: The interest rate on the mortgage loan.
Origination Fee: A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount.
Origination Process: Process in which a lender solicits business, gathers required information and commits to loan money, for the purchase of real estate.
Owner-Occupied Property: The borrower or a member of the immediate family lives in the property as a primary residence.
PITI: Term commonly used to refer to a mortgage loan payment. Acronym stands for Principal, Interest, Taxes, and Insurance.
PITI Ratio: Compares the amount of the monthly income to the amount the borrower will owe each month in principal, interest, real estate tax and insurance on a mortgage. Lenders use it in deciding whether to give the borrower a loan. Also called "income-to-debt" ratio.
Planned Unit Development (PUD): A housing project that may consist of any combination of homes (one-family to four-family), condominiums, and various other styles. In a PUD, often the individual unit and the land upon which it sits are owned by the unit/homeowner; however, the homeowner's association owns common facilities.
Pre-Approval: A process in which a customer provides appropriate information on income, debts and assets that will be used to make a credit only loan decision. The customer typically has not identified a property to be purchased, however, a specific sales price and loan amount are used to make a loan decision. (The sales price and loan amount are based on customer assumptions).
Pre-Qualification: A process designed to assist a customer in determining a maximum sales price, loan amount and PITI payment they are qualified for. A pre-qualification is not considered a loan approval. A customer would provide basic information (income, debts, assets) to be used to determine the maximum sales price, etc.
Prepaid Expenses or Prepaids: The term used to describe the funds the Lender requires to be deposited to establish the escrow account for taxes and insurance at the time of closing (also refers to Prepaid Interest).
Prepaid Interest: Interest that the borrower pays the lender before it becomes due.
Prepayment: A loan repayment made in advance of its contractual due date.
Prepayment Penalty: A penalty under a Note, Mortgage or Deed of Trust imposed when the loan is paid before its maturity date.
Principal and Interest: Two components of a monthly mortgage payment. Principal refers to the portion of the monthly payment that reduces the remaining balance for the mortgage. Interest is the fee charged for borrowing money.
Principal Balance: The outstanding balance of a mortgage, not counting interest.
Principal, Interest, Real Estate Tax, Insurance Payment: The total mortgage payment which includes principal, interest, taxes and insurance.
Private Mortgage Insurance (PMI): Insurance against a loss by a lender in the event of default by a borrower (mortgagor). A private insurance company issues this insurance. The premium is paid by the borrower and is included in the mortgage payment.
Processing: Gathering the loan application and all required supporting documents (including the property appraisal, credit report, credit history, and income and expenses) so that a lender can consider the borrower for a loan.
Promissory Note: A document in which the borrower promises to pay a stated amount on a specific date. The note normally states the name of the lender, the terms of payment and any interest rate.
Property Taxes: Taxes assessed on real estate. Property taxes are based on valuations by local and or state governments.
Purchase Agreement: A written agreement between a buyer and seller of real property, that states the price and terms of the sale.
Purchase Price: The total amount paid for a home.
Qualifying Income Ratios: Income analysis used by lenders in deciding whether to offer the borrower a loan. One type of analysis compares only the amount of the proposed monthly mortgage payment to the monthly income. Another compares the amount of the total monthly payments (for example car, credit card and proposed mortgage payments) to the monthly income.
Rate Index: An index used to adjust the interest rate of an adjustable mortgage loan.
Real Estate Appreciation Rate: Percentage increase in the value of real estate, expressed at an annual rate.
Real Estate Settlement Procedures Act (RESPA): A consumer protection law that requires, among other things, lenders to give borrowers advance notice of closing costs.
Realtor: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner. A real estate broker or associate must hold active membership in a real estate board affiliated with the National Association of Realtors.
Recording Fee: The amount paid to the recorder's office in order to make a document a matter of public record.
Regulation Z: Federal Reserve regulation issued under the Truth-in-Lending Act, which, among other things, requires that a credit purchaser be advised in writing of all costs connected with the credit portion of the loan.
Rental Payment: A payment made to use another's property. The amount of the rent is determined in a contract and is typically paid monthly.
Renters Insurance: Insurance against perils which are commonly covered in policies described as a "Renters Policy".
Repayment: The payment of a mortgage loan over a period of time established when the loan is originated.
Rescind: To avoid or cancel in such a way as to treat the contract or other object of the rescission as if it never existed.
Sales Contract: A written agreement between parties stating all terms and conditions of a sale.
Savings Rate: The interest rate a person expects to earn on a savings account or investment account.
Sealing Fee: A fee made when the lender releases the legal charge over the property.
Seasoned mortgage: A mortgage which has been paid in a timely manner by the mortgagor for a period of typically no less than six months, and often for more than one year. The term is associated with the secondary market, where mortgages with similar characteristics are bought and sold in bulk.
Secondary Market: An informal market where existing mortgages are bought and sold. It is the traditional aftermarket for mortgage loans that brings together lenders that sell mortgages with lenders, investors and agencies that buy mortgages.
Seller Contribution: The seller may be paying some or all of the borrower's cost. The amount of the contribution has limitations.
Selling Costs: The costs incurred in selling a home. This could include Realtor expenses and other miscellaneous expenses such as painting or minor repairs to prepare the home for sale.
Servicing: All the management and operational procedures that the mortgage company handles for the life of the loan, up through foreclosure if necessary, including: collecting the mortgage payments, ensuring that the taxes and insurance charges are paid promptly, and sending an annual report on the mortgage and escrow accounts.
Servicing Released: A stipulation in the agreement for the sale of mortgages in which the Lender is not responsible for servicing the loan.
Servicing Retained: A loan sale in which the original lender's servicing department continues to service the loan after the sale to a secondary institution or investor.
Settlement Statement: Also referred to as a HUD-1 Settlement Statement. The complete breakdown of costs involved in the real estate transaction for both the seller and buyer.
Single-Family Attached Home: A single-family dwelling that is attached to other single-family dwellings.
Single-Family Detached Home: A freestanding dwelling for a single family.
Survey: A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions and the location and dimensions of any improvements.
Subordinate Financing: An additional lien against the real estate securing borrowers first mortgage. This lien takes second priority to the first mortgage.
Subsequent Rate Adjustment -- Maximum rate decrease: In association with an Adjustable Rate Mortgage loan, this is the most the interest rate can decrease when it is scheduled for reevaluation and possible adjustment.
Subsequent Rate Adjustment -- Maximum rate increase: In association with an Adjustable Rate Mortgage loan, this is the most the interest rate can increase when it is scheduled for reevaluation and possible adjustment.
Subsequent Rate Adjustment -- Next ARM Adjustment Date: In association with an Adjustable Rate Mortgage loan, this is the date scheduled for the next possible payment adjustment.
Subsequent Rate Adjustment -- Rate Change Frequency: In association with an Adjustable Rate Mortgage loan, this is the frequency in which possible adjustments may be made to the interest rate amount for Adjustable Rate Mortgages after the initial adjustment.
Tax Rates: Tax levied by the federal government and some states based on a person's income. Federal income tax rates vary depending on a person's adjusted gross income.
Tax Savings: The amount saved on taxes by itemizing deductions on income tax returns.
Title: The evidence to the right to or ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed, which specifies in whom the legal state is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, gift or through the foreclosure of a mortgage.
Title Insurance Policy: A contract by which the insurer, usually a title company, indicates who has legal title and agrees to pay the insured a specific amount of any loss caused by clouds, claims or defects of title to real estate, which the insured has an interest as owner, mortgagee or otherwise.
(a) Owner's Title Policy: Usually issued to the landowner himself. The owner's title insurance policy is bought and paid for only once and then continues in force without any further payment. Owner's Title Insurance policies are not assignable.
(b) Mortgagee's Title Policy: Issued to the mortgagee and terminates when the mortgage debt is paid. In the event of foreclosure, or if the mortgagee acquires title from the mortgagor in lieu of foreclosure, the policy continues in force, giving continued protection against any defects of title which existed at, or prior to, the date of the policy.
Treasury Bills: Interest bearing U.S. Government obligations sold at a weekly sale. The change in interest rates paid on these obligations is frequently used as the Rate Index for Adjustable Mortgage Loans.
Truth in Lending (TIL): The name given to the federal statues and regulations (Regulation Z) which are designed primarily to insure that prospective Borrowers of credit received credit and cost information before concluding a loan transaction.
Underwriting (Mortgage Loans): The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's creditworthiness and the quality of the property itself.
Verification of Deposit (VOD): Form used in mortgage lending to verify the deposits or assets of a prospective borrower when monthly statements are unavailable or unusable.
Verification of Employment (VOE): Form used in mortgage lending to verify the employment and income of a prospective borrower when pay stubs and W2 forms are unavailable or unusable.
Verification of Mortgage (VOM): Form used in mortgage lending to verify the existing mortgage balance, monthly payments and late payments, if any.
Verification of Rent: Form used in mortgage lending to verify monthly rents paid and late payments, if any.
Additional Real Estate Financing and Home Mortgage List of Terms
Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the legal mortgage rather than to the loan.
Advance: This is the money you have borrowed plus all the additional fees.
Base Rate In UK: This is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate.
Bridging Loan: This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.
Disbursements: These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.
Early Redemption Charge / Pre-Payment Penalty / Redemption Penalty: This is the amount of money due if the mortgage is paid in full before the time finished.
Equity: This is the market value of the property minus all loans outstanding on it.
First time buyer: This is the term given to a person buying property for the first time.
Loan Origination Fee: A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.
Sealing Fee: This is a fee made when the lender releases the legal charge over the property.
Subject To Contract: This is an agreement between seller and buyer before the actual contract is made.
This real estate glossary list includes just some of the many real estate financing and home mortgage terms or home loan terms.
203(b): FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
203(k): this FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.
A
Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden).
Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)
Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.
Assumable mortgage: a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
B
Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
Bankruptcy: a federal law Whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Building code: based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
Budget: a detailed record of all income earned and spent during a specific period of time.
C
Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Certificate of title: a document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.
Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
Commission: an amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction..
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.
Cooperative (Co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
Credit history: history of an individual's debt payment; lenders use this information to gauge a potential borrower's ability to repay a loan.
Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
Credit bureau score: a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.
D
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Deed: the document that transfers ownership of a property.
Deed-in-lieu: to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.
Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.
Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.
Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
E
Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.
Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
F
Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.
Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.
G
Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.
Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
H
HELP: Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price.
Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.
Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; ,overage extends over a specific time period and does not cover the home's structure.
Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence )r inappropriate action that result in someone's injury or )property damage.
Housing counseling agency- provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.
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; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD1 Statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.
HVAC: Heating, Ventilation and Air Conditioning; a home's heating and cooling system.
I
Index. a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.
Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value.
Interest: a fee charged for the use of money .
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
J
Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.
L
Lease purchase: assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
Lien: a legal claim against property that must be satisfied When the property is sold
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan-to-value (LTV) ratio.- a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan
M
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Mortgage: a lien on the property that secures the Promise to repay a loan.
Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage broker: a firm that originates and processes loans for a number of lenders.
Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.
Mortgage insurance premium (MIP): a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance.
Mortgage Modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
O
Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.
P
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
PITI: Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
Principal: the amount borrowed from a lender; doesn't include interest or additional fees.
R
Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
REALTOR: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.
Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships
S
Settlement: another name for closing .
Special Forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Sweat equity: using labor to build or improve a property as part of the down payment
T
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.
VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
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