Glossary

Mortgage terms, in plain English.

Search the term you ran into — we'll explain what it means and why it matters.

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1003: Uniform Residential Loan Application.

A

A & D Loan: Acquisition and development loan — a loan for the purchase of raw land for the purpose of development.
Abstract Title: A written history of the ownership of a parcel of land.
Acceleration Clause: Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should you default on your loan.
Acknowledgment: A declaration by a notary, certifying, by way of personal knowledge or written identification, the identity of the signer.
Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also known as the renegotiable rate mortgage, the variable rate mortgage, or the Canadian rollover mortgage.
Adjustment Interval: On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three, or five years, depending on the index.
Affidavit: A sworn statement in writing.
American Land Title Association (ALTA): An organization of title companies specializing in Real Property Law which has standardized forms and coverage on a national basis.
Amortized / Amortization: Amortization refers to the principal portion of the loan payment and is the loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. A fully amortized loan will be completely paid off at the end of the loan term.
Annual Percentage Rate (APR): An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely higher than the stated note rate because it takes into account points and other credit costs. APR lets homebuyers compare different mortgages based on annual cost.
Appraisal: An estimate of the value of real property, made by a qualified professional called an appraiser.
Assumption: The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Must be approved by the lender and allowed by the note.

B

Back End: The debt-to-income ratio calculated using principal, interest, taxes, insurance and consumer credit obligations divided by gross monthly income. Expressed as a percentage.
Balloon: Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Beneficiary: The entity funding the loan. This is the entity to which the loan is owed.
BK / Bankruptcy: A reorganization or discharge of debts. Could also be referred to as Chapter 7, 11, or 13.
Broker: An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Buy Down: When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

C

Cap: The highest rate that an adjustable rate mortgage may reach. Can be expressed as the actual rate or as the amount of change allowed above the start rate.
Cash Out: Any funds disbursed directly to the borrower.
Certificate of Occupancy: A certificate issued by local city government to a builder, stating that the building is in proper condition to be occupied.
Certified Copy: A true copy, attested to be true by the officer holding the original. It should have a stamp and signature stating that it is a true copy.
Clear-to-Close: Loan is ready to be closed with no additional conditions.
Closing: The meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands. Also called settlement.
Closing Costs: Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge, and other costs assessed at settlement. Typically 3–6% of the total mortgage amount.
Commitment: An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Community Property: Property owned in common by a husband and wife, which was not acquired as separate property. A classification of property peculiar to certain states.
Comp / Comparable: A property with the same basic characteristics as the property you are attempting to find the value of. Should have been sold recently and be as similar as possible.
Condominium: A property owned as a group, with rights to occupy specific units of the structure. An overseeing board, often called a Homeowners Association, governs the property.
Construction Loan: A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Consumer Credit: Credit owed by the individual, not secured by real estate.
Conventional Loan: A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FMHA).
Conversion Clause: A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the loan term.
Credit Ratio: The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA) or gross monthly income (Conventional).
Credit Report: History of the buyer's past credit performance.
Credit Score: The score given to an individual to determine credit worthiness. Sourced from bureaus such as Experian, Equifax, and TransUnion.

D

D.R. / Debt Ratio: The customer's monthly obligations divided by their monthly gross income. See also Back End.
Deed: Legal document which conveys the title to a property.
Deed of Trust: A document used to pledge real property to secure a debt. In some cases a deed of trust can replace a mortgage.
Default: Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Deferred Interest: See Negative Amortization.
Delinquency: Failure to make payments on time. Can lead to foreclosure.
Department of Veterans Affairs (VA): An independent agency of the federal government which guarantees long-term, low- or no-down-payment mortgages to eligible veterans.
Derog Letter: A letter written by the borrower giving an explanation for any derogatory credit.
Derog: Short for derogatory; refers to negative credit items.
Discharge: Following a completed bankruptcy proceeding, discharged debts are no longer owed or collectable. Lenders will require copies of the discharge papers.
Discount Points: Prepaid interest assessed at closing by the lender. Each point equals 1% of the loan amount (e.g., two points on a $100,000 mortgage cost $2,000).
Dismissal: If a bankruptcy is dropped without being completed, a Bankruptcy Dismissal document will be needed to proceed with the loan.
Down Payment: Money paid to make up the difference between the purchase price and mortgage amount. Typically 10–20% on Conventional loans, and 0–5% on FHA and VA loans.
Due-On-Sale Clause: A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance if the mortgage holder sells the home.

E

Earnest Money: Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Easements: An interest in property, owned by another, that entitles the holder to a specific limited use or privilege, such as the right to cross or build adjoining structures on the property.
Encroachment: A fixture of a piece of property which intrudes on another's property.
Equal Credit Opportunity Act (ECOA): A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of public assistance.
Equity: The difference between the fair market value and current indebtedness; also referred to as the owner's interest.
Escrow Instructions: Instructions to the escrow agent giving the parameters and contingencies involved in the transaction and agreed upon by both parties.
Escrow Waiver: Request for a borrower to pay their own taxes and insurance. Rarely granted with less than a 25% equity position.
Escrow: A neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement. May also refer to an account held by the lender for taxes or insurance.

F

Farmers Home Administration (FMHA): Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Mortgage Corporation (FHLMC): Also called Freddie Mac — a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA): A division of HUD. Its main activity is insuring residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA): Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA.
Fee Simple: The most common form of ownership where the vestee owns both the land and the structures.
FHA Loan: A loan insured by the Federal Housing Administration, open to all qualified home purchasers, with size limits generous enough for moderately-priced homes.
FHA Mortgage Insurance: Requires a fee (up to 3% of the loan amount) paid at closing or added to monthly payments to insure the loan. Also includes an annual fee of 0.5% of the current loan amount.
Fixed-Rate Mortgage: A mortgage on which the interest rate is set for the term of the loan.
Flood Insurance: A mandatory insurance for some homeowners whose property is built in a designated flood zone.
Foreclosure: A legal procedure in which property securing debt is sold by the lender to pay a defaulting borrower's debt.
Free and Clear: The property is completely paid for and has no liens attached.
Functional Obsolescence: A detraction from the property value due to the design or material being less functional than the norm.

G

GFE: Good Faith Estimate of buyer's loan charges.
Government National Mortgage Association (GNMA): Also known as Ginnie Mae — provides sources of funds for residential mortgages insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM): A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. Has negative amortization built into it.
Grant Deed: The most common form of title transfer deed. Contains warranties against prior conveyances or encumbrances.
Gross Monthly Income: The total amount the borrower earns per month, before any expenses are deducted.
Guarantee: A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to do so.

H

Hazard Insurance: A form of insurance that protects the insured from specified losses such as fire and windstorm; does not cover earthquake, riot, or flood damage.
Homestead: The dwelling of the head of the family. Some states grant statutory exemptions, protecting homestead property against the rights of creditors.
Housing Expenses-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by net effective income (FHA/VA) or gross monthly income (Conventional).

I

Impound: That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Index: A published interest rate against which lenders measure the difference between the current rate on an ARM and that earned by other investments, used to adjust the ARM rate up or down.
Interest Bearing: A form of interest calculation where the loan is charged at a daily or monthly rate on the current outstanding balance.
Investor: Money source for a lender.

J

Joint Tenants: A form of holding title where the owners have 100% rights of survivorship unless redirected by a will.
Jumbo Loan: A loan which is larger than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these agencies, they usually carry a higher interest rate.

L

Land Contract: An agreement between seller and buyer where the title is withheld until the required payments have been completed.
Leasehold Estate: A kind of real estate ownership where the lessor does not hold title to the property but has use of the property subject to the terms of the lease.
Legal Description: A method of geographically locating a piece or parcel of land, acceptable in a court of law.
LIBOR: London InterBank Offered Rate — the base interest rate paid on deposits between banks in the Eurodollar market.
Lien: A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan Committee: Generally the underwriting process.
Loan Risk: The rate category assigned to the loan, which estimates the probable risk of delinquency and loss in the future.
Loan-To-Value Ratio (LTV): The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.

M

Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Market Value: The highest price a buyer would pay and the lowest price a seller would accept on a property. May differ from actual sale price.
Mortgage Escrow Accounts: The account set by the lender to pay taxes and insurance on behalf of the borrower.
Mortgage Insurance: Money paid to insure the mortgage when the down payment is less than 20%. See PMI or FHA Mortgage Insurance.
Mortgagee: The lender.
Mortgagor: The borrower or homeowner.

N

Negative Amortization: Occurs when the monthly payments do not cover all of the interest cost. The uncovered interest is added to the unpaid principal balance, meaning a borrower may owe more than at the beginning of the loan.
Net Effective Income: The borrower's gross income minus federal income tax.
Non-Assumption Clause: Statements in the mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
Non-Owner Occupied: A property not used as a residence by the owner of the property.
Notary Public: A person, designated by the state, who can certify the identity of a person when signing various documents.
Note: Short for promissory note. Gives the parameters of the loan and legally obligates the borrower to pay back the debt.

O

Obligations: Any debt, or recurring payment the borrower is obligated to pay, including mortgage payments.
Origination Fee: The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the loan amount.
Owner Occupied: Designation given to property used as the owner's residence.
Owners Policy: A title insurance policy which protects the buyer against problems with the title.

P

P & I: Principal and Interest — the principal and interest portions of the monthly mortgage payment.
P & L / Profit and Loss: A statement of a business's gross income, cost of goods, operating costs, and net profit or loss.
P.I.T.I.: Principal, interest, taxes, and insurance — the complete monthly cost associated with financing a property.
P.U.D.: Planned Unit Development. Property owned as a group, where individuals own the specific piece of land and structure they occupy, but also have a divided interest in a common area.
Piggy Back Loan: Financing obtained, subordinate to the first mortgage, to facilitate closing the first mortgage. Also known as Secondary Financing.
Points: A point is equal to one percent of the principal amount of a mortgage. See also Discount Points.
Power of Attorney: An authority by which one person enables another to act on his or her behalf. Can be limited to specific areas or be general.
Pre-Approval: The buyer has actually begun the application process and an underwriter has approved their income, funds, and credit. Beware of any conditions on the approval.
Prelim / Preliminary Title Report: The title report generated at the beginning of the application process. Tells the mortgage company what liens are on the property and advises what's needed for clear title.
Prepaid Interest: The portion of interest, collected at loan closing, which covers the time period between funding and the beginning of the first 30-day period covered by the first payment.
Prepaids: Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, PMI, and special assessments.
Prepayment Penalty: Money charged for an early repayment of debt. Allowed in some form in 36 states and the District of Columbia.
Prepayment: A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Pre-Qualified: Buyer has discussed their financial situation with a loan expert. No attempt has been made to verify the information. Only an indication of what the buyer should qualify for.
Principal: The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI): Required when down payment is less than 20%. Includes an initial premium of 1.0–5.0% of the mortgage amount and may require an additional monthly fee depending on the loan's structure.
Purchase Agreement: The agreement made between the buyer and seller of a property, containing the purchase price and contingencies of the sale.

Q

Quit Claim: A deed operating as a release; intended to pass any title, interest or claim, which the grantor may have in the property, but not containing any warranty of a valid interest or title in the grantor.

R

Rate Float: Assuming market risk on an interest rate in the hopes that it will go lower prior to closing.
Rate Lock: Choosing to have no change to a rate for a specific length of time.
Ratios: How a buyer's housing expense and debt picture relates to their income.
Real Estate Settlement Procedures Act (RESPA): A federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement.
Realtor: A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Rescission: The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Recon / Reconveyance: A release of lien filed with the county recorder by the trustee.
Recording Fees: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
REFI: Slang for refinance — a new mortgage on a property that does not change ownership.
Request for Reconveyance: Verification given by the beneficiary to the trustee that the conditions of the lien have been fulfilled and request that the lien be canceled.
Reverse Annuity Mortgage (RAM): A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.

S

S.I. / Statement of Information: The form the customer fills out for the title company giving further identification. Allows the title company to eliminate debts and liens owed by people with similar names.
Second Mortgage: A mortgage which is entered after the primary loan. Called a second due to it being in second lien position to the first mortgage. See also Secondary Financing.
Secondary Financing: Financing obtained, subordinate to the first mortgage, to facilitate closing the first mortgage. Also known as a piggyback loan.
Servicing: All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, and the like.
Settlement Costs: See Closing Costs.
Settlement: See Closing.
Shared Appreciation Mortgage (SAM): A mortgage in which a borrower receives a below-market interest rate in return for which a lender (or another investor such as a family member) receives a portion of the future appreciation in the value of the property.
Submission: A complete loan application package submitted for approval to the underwriting department.
Subordination Agreement: The agreement detailing the contingencies of subordination, filed with the county recorder. If a lien holder agrees to accept a lien position after that of a later recorded lien.
Substitution of Trustee: A document, filed by the beneficiary, which changes the trustee on a particular trust deed.
Surety Bond: A bond which insures against harm to a party (usually the lender or owner) by a lien still attached to the property. Usually used when the original deed was lost or the beneficiary cannot be located.
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 building.
Suspended: The underwriter cannot yet approve or deny the loan. More information is required.

T

Tenants in Common: A percentage interest in a property by two or more individuals without rights of survivorship.
Term Mortgage: See Balloon Payment Mortgage.
Title Insurance: The insurance policy insuring the lender and/or the buyer that the liens are as stated in the title report. Any claim arising from a lien other than that disclosed is payable by the title insurance company.
Title Search: An examination of municipal records to determine the legal ownership of property. Usually performed by a title company.
Title: A document that gives evidence of an individual's ownership of property.
Trust Deed: The Trust Deed attaches the note as a lien on the property. The document which conveys the ability to collect from the proceeds of the property.
Truth-in-Lending (TIL): A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.
Two-Step Mortgage: A mortgage in which the borrower receives a below-market interest rate for a specified number of years (typically 7 or 10), and then receives a new interest rate adjusted to market conditions. Also called Super Seven or Premier mortgage.

U

Underwriting: The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors, and the matching of this risk to an appropriate rate and term or loan amount.

V

VA: Veterans Administration.
VA Loan: A long-term, low- or no-down-payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee: A premium of up to 2 percent (depending on the size of the down payment) paid on a VA-backed loan. Can be paid at closing or added to the amount financed.
Variable Rate Mortgage (VRM): See Adjustable Rate Mortgage.
Verification of Deposit (VOD): A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE): A document signed by the borrower's employer verifying his/her position and salary.

W

Wraparound: Results when an existing assumable loan is combined with a new loan, resulting in an interest rate between the old rate and the current market rate. Payments are made to a second lender or the previous homeowner, who then forwards them to the first lender.

Z

Zoning: The division of a city or county into areas (zones) specifying the uses allowable for the real property in these areas.

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