While buying a home can be an exciting period in your life, it can also be confusing. Please take a few moments and review some of the many terms that may come up during your mortgage process. For further information on any of the items listed here, or for information on specific terms you don't see, contact the Premium Mortgage Team directly. We are always happy to answer any questions you may have!
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
Adjustable Rate Mortgage (ARM): A mortgage type whose prevailing interest rate is tied to an economic index that fluctuates with the market.
Adjustment Date: The date on which the interest rate changes for an Adjustable Rate Mortgage (ARM).
Adjustment Period: The period of time between the adjustment dates for an Adjustable Rate Mortgage (ARM). There are hybrid ARMs that allow for longer fixed periods. For example a 3/1 ARM is fixed for the first 3 years and from there after adjusts yearly.
Amortization: A payment plan that enables the borrower to reduce his debt gradually through monthly payments of principle and interest. In other words, paying back the mortgage in equal installments to reduce the debt.
Amortization Term: The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months, so in 360 months the mortgage loan will be completely paid off.
Annual Percentage Rate (APR): An interest rate that reflects the cost of a mortgage stated as a yearly rate. The APR rate is usually higher than the stated note rate because it includes such items as interest, mortgage insurance, and loan origination fees (points).
Application Fee: A one time sum of money paid for estimated initial mortgage processing expenses such as credit report and property appraisal.
Appraisal: A written report of the estimated value of a property prepared by a certified real estate appraiser.
Appreciation: An increase in the value of a property due to changes in market conditions or other causes (such as home improvements).
Asset: Anything of monetary value that is owned by a person. Assets include real property, personal property, bank accounts, stocks, bonds, mutual funds, etc.
Assessed Valuation: The value that a taxing authority places on real property for the purpose of determining the amount of taxation for that property.
Assessment: A charge against a property for the purposes of taxation. This may be in the form of a levy for a special purpose or a tax in which the property owner pays a share of the cost of community improvements according to the assessed valuation of the property.
Balloon Mortgage: A mortgage that is usually a short-term fixed-rate loan with even monthly payments amortized over a stated term but provides for a lump sum payment to be due at the end of an earlier specified term.
Bankruptcy: A proceeding in a federal court in which a debtor who owes more than his or her assets, can relieve the debts by surrendering his or her assets to a Bankruptcy Court. After bankruptcy, the debtor is discharged and his or her unsecured creditors may not pursue further collection efforts against him or her. Secured creditors continue to be secured by the property, but they may not take any other action to collect from the debtor.
Beneficiary: The person designated to receive the income from a trust, estate, or a deed of trust. A contingent beneficiary has conditions attached to their rights.
Binder: A preliminary agreement, secured by the payment of an earnest money deposit, in which a buyer offers to purchase real estate.
Bridge Loan: A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds of that sale to be used for payment of the closing costs on a new house before the present home is sold. The mortgage payment on the present property typically is not counted when determining your ratios for your new home.
Buy-Down: A payment to the lender from the seller, buyer, or third party which will cause the lender to reduce the interest rate for either the entire life of the loan (permanent) or during the first few years of the loan (temporary).
Caps: A consumer safeguard of an Adjustable Rate Mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease.
Capital Improvement: Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.
Cash-out Refinance: A refinance transaction in which the amount of money received from the new loan is in excess of the total money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose, such as college tuition, paying off high interest rate credit card debt, etc. The maximum loan to value for a cash-out refinance is 80% to avoid the requirement of mortgage insurance.
Caveat Emptor: "Buyer Beware" - The buyer must inspect the property he or she wants to purchase and satisfy themselves that it is adequate for their needs. The seller is under no obligation to disclose defects of the property, but the seller may not actively conceal a known defect or lie about the defect if asked about it.
Certificate of Eligibility: A document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs Mortgage.
Certificate of Reasonable Value (CRV): A document issued by the Department of Veterans Affairs (VA) which establishes the maximum value and loan amount for a VA Mortgage.
Certificate of Title: A statement provided by an abstract company, title company, or attorney stating that the title to the real estate is legally held by the current owner.
Change Frequency: The frequency (in months) of payment and/or interest rate changes in an Adjustable Rate Mortgage (ARM).
Clear Title: A title that is free of liens or legal questions as to the ownership of the property.
Closing: A meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands. Also called "settlement."
Closing Costs: Expenses (over and above the price of the property) incurred by the buyers and 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 the settlement. The average cost of closing is usually about 1 to 3 percent of the mortgage amount but varies depending on the area of the country.
Closing Statement: Also referred to as the HUD1. The final statement of itemized costs incurred to close on a loan or to purchase a home.
Co-Borrower: Additional borrower(s) whose income and credit contributes to qualifying for the loan and whose name(s) appears on the loan documents with equal legal obligations.
Collateral: An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.
Commitment Fee: Any fee paid by a potential borrower to a lender for the lender's guarantee to lend money at a specified rate and within a specified time period.
Commitment Letter: A formal written offer by a lender stating the terms (such as amount, interest rate, etc.) under which it agrees to lend money to a borrower.
Common Areas: Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.
Comparables: An abbreviation for "comparable properties" which are used for comparative purposes in the property appraisal process. Comparables are properties that are similar to the property under consideration - they have reasonably the same size, location, and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.
Conforming Mortgage Loan: Also referred to as Conventional Mortgage. A mortgage loan that conforms to regulatory limits such as loan-to-value ratio, term, and other characteristics. These mortgages are eligible for sales and delivery to either Fannie Mae or Freddie Mac. Conventional Mortgages are not guaranteed or insured by any government agency.
Construction Draw Loan: A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the construction work progresses.
Construction-Permanent Loan: A construction draw loan that automatically converts to a regular mortgage (referred to as "permanent" financing) once construction has been completed.
Consumer Reporting Agency (or Bureau): An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository (see definition) as well as from other sources.
Contingency: A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
Conventional Mortgage: A mortgage that is not obtained under a federal government insured program, such as FHA or VA.
Convertible ARM: An Adjustable Rate Mortgage (ARM) that can be converted to a fixed-rate mortgage.
Credit Report: A report detailing an individual's credit history and current status of an individual's credit standing prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
Debt-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's total monthly payment obligation on long-term debts is divided by his or her income.
Deed: The legal document conveying title to a property.
Deed-in-Lieu: A deed given by the mortgagor to the mortgagee to satisfy a debt and avoid foreclosure.
Default: Failure to make mortgage payments on a timely basis or failure to comply with other requirements of the mortgage.
Delinquency: Failure to make mortgage payments when mortgage payments are due, but still within the period allowed before actual default is declared.
Department of Veterans Affairs: An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages VA Mortgages to eligible veterans.
Depreciation: A decline in the value of property brought about by age, physical deterioration, functional or economic obsolescence, etc.
Discount Point: An amount payable to the lending institution by the borrower or seller to increase the lender's effective yield. One point = 1% of the loan amount.
Down Payment: The part of the purchase price of a property that the buyer pays in cash and does is not financed with a mortgage.
Earnest Money Deposit: Money given by a buyer as part of the purchase price to show that he or she is serious about buying the house.
Effective Gross Income: Normal annual income (before taxes) including overtime that is regular or guaranteed.
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, receipt of income from public assistance programs, or past exercising of rights under the Consumer Credit Protection Act.
Escrow: Funds and documents that are set aside and held in trust by a third party, usually for payment of taxes and insurance on real property. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
Escrow Review: The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.
Escrow Disbursements: The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Escrow Payment: The portion of a mortgagor's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as "impounds" or "reserves" in some states.
Estate: The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.
Examination of Title: The report on the title of a property from the public records or an abstract of the title.
Fair Credit Reporting Act: A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record. Also, if a lender is rejecting a loan request because of adverse credit information, then the lender is required to inform the borrower of the source of that information.
Fair Market Value: The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.
Fannie Mae (Federal National Mortgage Association - FNMA): A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds. It was created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by the VA as wells as conventional home mortgages.
Federal Housing Administration (FHA): An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
Fee Simple: The greatest possible interest a person can have in real estate.
FHA Mortgage: A mortgage that is insured by the Federal Housing Administration (FHA) open to all qualified homebuyers.
FHA Mortgage Insurance: A required fee paid to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of .5% of the current loan amount, paid in monthly installments.
First Mortgage: A mortgage that is the primary lien against a property and has priority over any subsequently recorded mortgages.
Fixed Rate Mortgage (FRM): A mortgage in which the interest rate does not change during the entire term of the loan.
Foreclosure: The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt. Also known as repossession of property.
Gift Letter: A written explanation signed by the individual giving the gift stating that it is a bona fide gift of money and there is no obligation to repay the money at any time. The letter must indicate the amount of the gift and the name of the giver. Your Lender may require further documentation to confirm that such a gift transaction did occur.
Good Faith Estimate: A written explanation given to the Borrower by the Lender indicating an estimate of charges which a borrower is likely to incur during settlement.
Gross Monthly Income: Your total monthly income earned before taxes are deducted.
Hazard Insurance: Insurance protecting against damages that may materially affect the value of the property. (Fire, flood, vandalism, etc.)
Housing Expenses-to-Income Ratio: The ratio of the monthly housing payment in total (PITI - Principal, Interest, Taxes, and Insurance) divided by the gross monthly income (for conventional loans) or net effective income (for FHA/VA loans). This ratio is also sometimes referred to as the top ratio or front-end ratio.
HUD: The U.S. Department of Housing and Urban Development.
Index: A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used indices include the 1-Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost of Funds (COFI) and they are used to determine the adjustment to the interest rate on ARMs.
Interest Rate: The percentage of a loan amount charged annually for the use of the Lenders funds.
Investment Property: Real estate owned with the intent of supplementing one's income and is not intended for owner occupancy (i.e., rental houses, apartment buildings, etc.).
Jumbo Mortgage: A loan which is larger than the limit set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they may carry a higher interest rate.
Lien: An encumbrance against property as security for payment of an obligation.
Lifetime Cap: A provision of an Adjustable Rate Mortgage (ARM) that limits the highest rate that can occur over the life of the loan.
Loan-to-Value Ratio (LTV): The ratio of the amount of your loan to the appraised value of the home. The LTV will affect loan programs available to the borrower and generally, the lower the LTV the more favorable the terms of the loan programs offered by lenders.
Lock-In: A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time.
Margin: An amount, calculated in points, that a lender adds to an index to determine how much interest you will pay during a period for an adjustable rate mortgage.
Mortgage: A legal document that pledges a property to the lender as security for payment of the loan for that property.
Mortgage Broker: An individual who assists in the arranging of funding for clients with lenders. The broker, himself, does not loan the money but rather "shops" dozens of Lenders to obtain the best mortgage for the buyer.
Mortgage Insurance (MI): A type of insurance that protects the Lender in the event that a Buyer defaults on their mortgage. It is written by a third party insurance company and usually covers only the first 20% of the Lenders potential loss.
Mortgagee: The mortgage lender.
Mortgagor: The mortgage borrower.
Negative Amortization: This type of amortization occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan.
No Income Verification Loan (NIV): A loan that does not require income verification.
Non-Conforming Loan: Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a rate and origination fee premium.
Note: A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.
Origination Fee: A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. It is usually stated as a percentage of the loan amount, such as one percent (or point).
PITI: Principal, interest, taxes and insurance which are the components of a monthly mortgage payment.
Points: Charges levied by the mortgage lender and usually payable at closing. 1 point = 1% of the face value of the mortgage loan. Some points may be tax deductible. For more information contact your accountant.
Prepaid Expenses: Those expenses of property which are paid in advance (and placed in escrow accounts) of their due date and will usually be prorated upon sale, such as taxes, insurance, etc.
Prepayment Penalty: A charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule.
Primary Residence: A residence which the borrower intends to occupy as the principle residence (where they will live most of the time).
Principal: The amount of debt, not including interest.
Processing: The preparation of a mortgage loan application and supporting documentation to be delivered to a lender for their consideration.
PUD (Planned Unit Development): A planned combination of diverse land uses, such as housing, recreation, and shopping all in one contained development or subdivision.
Purchase Contract: An agreement between the buyer and the seller of the property, which sets forth the price and terms of the sale. Also known as a sales contract.
Qualifying Ratios: The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.
Rate Cap: A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan on Adjustable Rate Mortgages (ARMs).
Real Estate Settlement Procedures Act (RESPA): A Federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. (Good Faith Estimate) It also establishes guidelines on escrow account balances and the disclosure of settlement costs.
Recording Fees: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Refinancing: The process of paying off one loan with the proceeds from a new loan using the same property as security.
Second Mortgage: A mortgage made inferior to the first mortgage and is always subordinate to the first mortgage.
Term: The time limit within which a loan must be repaid.
Title: The document that provides legal evidence that the person has the right to the possession of the land.
Title Insurance: Insurance that covers the title of your home.
Title Search: An investigation of public records into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.
Total Debt Ratio: Monthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.
Truth-in-Lending Act: A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.
Underwriting: Analysis of risk and setting of an appropriate rate and term for a mortgage on a given property for given borrowers.
Veteran's Administration (VA): A government agency guaranteeing mortgage loans with no down payment to qualified veterans.
VA Mortgage Funding Fee: A premium of up to 3.0% (depends on down payment amount) which is paid on a VA-backed loan.
Verification of Deposits (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.
