Glossary

A selection of common mortgage terms defined, for your reference.
 

Adjustable Rate Mortgage (ARM)
A home loan, usually amortized over thirty years, featuring a low interest rate that is typically fixed for a specified period of 1-10 years at the beginning of the loan term.  After that initial fixed period, the interest rate (and, correspondingly, the monthly payment) can increase or decrease annually or semi-annually based on market conditions until the loan is paid in full.

Agreement for Sale
A legally binding contract obligating a certain party to purchase a property from a certain seller.  Also called sales contract, sale binder, or purchase contract.
 

Amortization
Gradual elimination of debt by means of regular installment payments over a specified period of time.

Annual Percentage Rate (APR)
A term used pursuant to the Truth-in-Lending Act to represent the cost of a mortgage, expressed as a percentage. The APR reflects the finance charges you pay either at closing or over the life of the loan. Since the APR includes origination fees, monthly mortgage insurance, some title work, prepaid interest, and other common charges, as well as the interest to be paid, the APR should typically be higher than the interest rate on the loan.

Appraisal
A written report by a qualified property appraiser to provide his/her opinion of a property’s fair market value.

Appraised Value
A qualified opinion of a property's market value, based on an appraiser's inspection and analysis of the property.

Appreciation
An increase in value of a property. This occurs over time when real estate prices go up or improvements to a property raise its value.

Assumption
An agreement between a buyer and a seller in which the buyer takes over the payments on the seller’s existing mortgage.

Borrower
A person who receives a loan and who is obligated to repay the loan in full with interest.

Broker
A person who receives a commission or fee for bringing buyer and seller together and assisting in the negotiation of contracts between them.

Closing
The signing of promissory documents and subsequent transfer of loan proceeds; the conclusion of a transaction.  Depending upon typical regional practices, a closing in your area may or may not be attended by all parties, and may occur at a title company, lender office, or anywhere a Notary Public is present.

Closing Costs
The cost of obtaining a mortgage, typically paid at closing.

Contingency
A condition that must be met before a contract is binding. For example, if a buyer is under contract to purchase a home subject to a financing contingency, that buyer must prove s/he has approval for a home loan by a particular date or the contract is void.

Contract for Sale
A contract between a purchaser and a seller to convey a title of the seller’s real property to the purchaser.

Credit Report
A catalogue of an individual’s borrowing and payment history as reported by past and present creditors to the three major credit repositories (bureaus), Equifax, Experian, and TransUnion.

Credit Score
A rating given to a person to predict his/her ability and willingness to repay obligations based upon one's past payment history and other factors.

Debt-to-Income Ratio
Long-term debt expenses shown as a percentage of gross monthly income. Long-term debt includes monthly obligations that must be paid over time, such as credit cards, auto loans, student loans, business losses, and mortgages. Lenders use this ratio to qualify borrowers for mortgage loans.

Deed of Trust
A document between borrower and lender that agrees to transfer the property to a third-party, the Trustee, in the event the borrower defaults on Note payments; associates the Warranty Deed to the subject property with the promissory Note signed by the borrower.  In many states, including Missouri, xthis document is used in place of a legal mortgage to secure the payment of a Note.

Default
Occurs when a borrower no longer makes payments on the mortgage under the terms of the mortgage contract, or Note. When a borrower defaults on a loan, the lender has the right to seize the property and sell it to pay off the borrower’s debt.

Discount Points
A finance charge expressed as a percentage of the loan amount (one “point” is one percent of the loan amount), paid by the borrower to the lender at closing to secure an interest rate that is lower than the current market rate for a mortgage.

Down Payment
The difference between the purchase price of a piece of property and the amount of the mortgage loan taken out to buy it.

Earnest Money
A good-faith deposit paid from buyer to seller, usually upon presentation of an offer to purchase a piece of property, to express the buyer’s commitment to complete the transaction.

Equity
The difference between fair-market value and the amount presently owed on a property.

Escrow
Funds on deposit with a third party as a guarantee for a contractual obligation.  In mortgage lending, funds for a variety of purposes can be placed in escrow, from impound deposits to ensure timely payment of taxes, insurance, and/or mortgage insurance; to earnest money on deposit with a realtor or title company; to funds reserved to repair a roof, for example, of a newly-purchased property if poor weather prevented repair prior to closing; to the funds from a home rehabilitation loan to be distributed as work is completed.

Fair-Market Value (FMV)
The price that an interested, but not desperate, buyer would be willing to pay and an interested, but not desperate, seller would be willing to accept for a piece of real property on the open market, assuming a reasonable period of time for an agreement to arise.

Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development, the main activity of which is to facilitate homeownership by insuring residential mortgage loans made by private lenders against borrower default.

FHA Loan
A loan insured by the Federal Housing Administration, typically offering lower downpayment requirements and more relaxed underwriting guidelines than a conventional mortgage.

Good Faith Estimate
A document mandated by the Real Estate Settlement Procedures Act (RESPA) providing an estimate of all lender charges associated with obtaining a mortgage loan at a particular rate of interest by a specified settlement date, which document the lender must provide a prospective borrower no more than three days after application for a loan is made.

Gross Monthly Income
In mortgage lending, a person’s stable, consistent monthly income from all qualified sources, after employment-related expenses but before income taxes and other deductions.

Home Inspection
Strongly recommended by real estate professionals and lenders, a home inspection involves a licensed home inspector analyzing the condition of the property’s systems, structure, and other considerations.  Other inspections (sewer lateral, pest, radon, etc.) are often also available.

Impounds
Funds on deposit with a mortgage servicer to ensure timely payment of property taxes, insurance, mortgage insurance, etc.  Typically, a borrower pays 1/12 of the annual tax and insurance for a property along with his/her monthly mortgage payment, and the escrow servicer retains those funds to pay the items when they come due.

Index
A variable statistical indicator, usually expressed as an interest rate, that measures changes in the market value of a particular investment vehicle.  Rates for ARM loans during their adjustment period correspond to a benchmark interest rate that serves as indicies, such as the Constant Maturity Treasury (CMT) or London Interbank Offered Rate (LIBOR).  The adjusted rate for an ARM is typically calculated by taking the relevant index value at the adjustment date and adding a margin value.

Inflation Risk
The chance that value of assets or income will decrease as inflation causes the purchasing power of the currency to decrease.  Since specie does not hold intrinsic value, the more cash is printed and enters into circulation, the further the currency is debased.  If there are more dollars out there, each dollar is worth less, so it costs more dollars to purchase commodities, such as food, housing, and health care.

Interest
Money paid to the lender for the use of the lender's money.

Interest Rate
Money paid to the lender for use of the lender’s money, expressed as a percentage of the amount borrowed.

Lender
Any person or entity that lends money at interest.

Lien
A claim on the property of another as security against the payment of a just debt.

Loan
A sum of money a home buyer will borrow from a lender to pay for a home purchase or refinance, allowing repayment in installments over time.

Loan Commitment
The lender’s conditional approval of a mortgage loan application file, including documentation related to both the borrower and the subject property, to fulfill a financing contingency present in the homebuyer’s purchase contract.  Depending upon the rules in your state, a loan commitment may or may not legally bind the lender to provide financing.  Though all major underwriting conditions will have been fulfilled by loan commitment, you may be asked to provide additional incidental items to your lender between loan commitment and closing.

Loan-to-Value Ratio
The relationship between the amount of a home loan and the fair market value of the subject property. For example, if a home worth $100,000 has a $90,000 mortgage against it, the loan-to value ratio is 90%.

Margin
A constant used in calculating the adjusted rate of an ARM after the initial fixed period.  The adjusted interest rate is the sum of the relevant index at the date of adjustment plus the margin, which is determined by the borrower and lender prior to the funding of the loan and is usually 2-3%.

Mortgage Insurance (MI, PMI)
Coverage that allows mortgage lenders to recover part of their financial loss if a borrower fails to repay a loan in full.   Since mortgage insurance provides lenders with a safety net to lend at a high loan-to-value ratio, it enables buyers to purchase a home with a much smaller down payment than is usually permitted for a conventional loan.

Mortgagee
A lender to whom property is conveyed as security for a loan.

Mortgagor
One who borrows money, giving as security a mortgage or deed of trust on real property.

Negative Amortization
Occurs when the monthly payments on the mortgage do not cover all of the monthly interest charges, which are then compounded to the principal balance.  Though common in high-growth regions during the real estate boom in the early-to-mid 2000’s, loans with a negative amortization feature have fallen out of vogue and are largely unavailable.

Origination Fee
The fee charged by a lender to process and underwrite a loan and prepare loan documents.

PITI
Principal, interest, taxes, and insurance are the components of a mortgage payment if the loan program requires that those costs be impounded.  PITI is the total mortgage payment on any property for underwriting purposes.

Points
A percentage of the loan amount paid to a lender for making a loan. A point is one percent of the loan amount. See also "Discount Points," above.

Power-of-Attorney
A legal document authorizing one person or entity to act on behalf of another.

Prepayment penalty
Money charged by the lender for an early repayment of debt, usually only if 20% or more of the debt balance is paid off within the first two to three years of the Note date.  Though a common feature of mortgages several years ago, most mortgages offered today do not carry a prepayment penalty.

Preapproval
The detailed review of all of a potential borrower’s income, asset, and credit documentation by a qualified underwriter with respect to a particular loan program and maximum purchase price prior to the potential homebuyer viewing homes with a realtor.  The difference between preapproval and loan commitment is that the lender has not analyzed a collateral property before issuing a preapproval, and the interest rate for a preapproval has not been locked since no subject property has been identified.

Prequalification
The cursory review of a borrower’s stated income, assets, and credit with respect to a particular loan program and maximum purchase price prior to the potential homebuyer viewing homes with a realtor.  This may or may not involve the lender’s review of substantiating income or asset documentation, and this type of review is usually performed by the loan officer and does not legally bind the lender to provide financing.

Principal
The amount of money loaned, excluding interest, or the remaining balance of a loan, excluding interest.

Realtor
A real estate sales person or service professional who is licensed to show houses to prospective buyers, negotiate real estate contracts, and list homes for sale in the Multiple List Service (MLS); a member of the National Association of Realtors.

Refinancing
Obtaining a new mortgage loan on a property already owned, often to pay off and/or replace existing loans on the property.

Reverse Mortgage
A mortgage available to home owners age 62 ½ or older, which allows them to convert a portion of equity in their homes to cash in the form of a lump-sum payment and/or installments over time, but never requiring the homeowner to make mortgage payments to the lender.

Servicer
The entity responsible for collecting and applying mortgage payments, administering escrow accounts, and managing delinquencies.  After a mortgage loan closing, the loan file may be transferred from your lender to a specialized servicer, to which you will then make your monthly mortgage payment.

Settlement
The closing of a real estate transaction and/or mortgage loan.

Teaser Rate
An introductory interest rate on a loan, usually a variable-interest home equity line of credit, which is discounted for a certain fixed period, usually a few months to a year, after which the interest rate increases to market rate.

Title
The rights of ownership in a piece of real property. In the case of real estate, the documentary evidence of ownership is the title deed. Title may be acquired through purchase, inheritance, gift, or by a lienholder through foreclosure.

Title Insurance
A policy that insures a home buyer against defects in the title to the subject property. For example, if the title company missed a lien belonging to a former owner of a property in its title search and the new owner was sued to pay off the old lien after closing, the title insurance would pay off the lien, having insured the new owner against defects in his/her ownership interest.

Underwriter
An employee of the lender, a contract underwriting service company, or a mortgage insurer who performs the risk analysis involved in making a loan under a particular loan program to a potential home buyer based on the applicant's credit, employment, assets, and other factors.

VA Loan
A loan insured by the Department of Veterans Affairs, intended to encourage lenders to offer long-term, low down payment mortgages to eligible veterans and military spouses by guaranteeing that the lender will not suffer a loss if the borrower defaults.

Verification of Employment (VOE)
A document completed and signed by a borrower's employer verifying his/her job title, income details, and likelihood of continued employment.  The lender usually orders a VOE as a condition for loan approval and again right before closing to confirm there has been no change to the borrower’s income situation.