Glossary of Mortgage Lending Terms

San Diego residents, dive into our extensive mortgage glossary of home financing, from adjustable-rate mortgages to credit scores. Whether you're a first-time homebuyer or a seasoned investor, our glossary provides valuable insights to help you make informed decisions in the complex realm of mortgages.

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A 

Acceleration Clause

Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.

Additional Principal Payment

A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Adjusted Basis

The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.

Adjustment Date

The date that the interest rate changes on an adjustable-rate mortgage (ARM).

Adjustment Period

The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).

Affordability Analysis

An analysis of a buyer's ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

Amortization

The gradual repayment of a mortgage loan, both principle and interest, by installments.

Amortization Term

The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR)

The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.

Appraisal

A written analysis prepared by a qualified appraiser and estimating the value of a property.

Appraised Value

An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

Asset

Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Assignment

The transfer of a mortgage from one person to another.

Assumability

An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

Assumption Fee

The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.

B

Balance Sheet

A financial statement that shows assets, liabilities, and net worth as of a specific date.

Before-tax Income

Income before taxes are deducted.

Biweekly Payment Mortgage

A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.

C

Cap

Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.

Certificate of Eligibility

A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)

A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

Change Frequency

The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).

Closing

A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."

Closing Costs

These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

Closing Disclosure

A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table.

Compound Interest

Interest paid on the original principal balance and on the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau)

An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.

Conventional Mortgage

A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.

Credit Report

A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.

Credit Risk Score

A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Isaac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

D

Deed of Trust

The document used in some states instead of a mortgage. Title is conveyed to a trustee.

Default

Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Delinquency

Failure to make mortgage payments on time.

Deposit

This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Discount

In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.

Down Payment

Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

E

Effective Gross Income

A borrower's normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Equity

The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow

An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

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 part 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.

F

Fannie Mae

A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.

FHA Mortgage

A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

FICO Score

FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.

First Mortgage

The primary lien against a property.

Fixed Installment

The monthly payment due on a mortgage loan including payment of both principal and interest.

Fixed Rate Mortgage

A mortgage on which the interest rate is set for the term of the loan.

Fully Amortized ARM

An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

G

Good Faith Estimate (GFE)

A written estimate of the settlement costs the borrower will likely have to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), the lender is required to provide this disclosure to the borrower within three days of receiving a loan application.

Graduated Payment Mortgage (GPM)

A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

H

Hazard Insurance

Protects against damages caused to property (such as fire or theft). Borrowers are usually required to have hazard insurance on the property that secures a mortgage.

Home Equity Line of Credit (HELOC)

A loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount.

Home Inspection

A thorough inspection by a professional that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.

Homeowners' Association

A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to common elements.

Housing Expense Ratio

The percentage of a borrower's gross income that can be used for housing expenses (including mortgage payment, taxes, insurance).

HUD-1 Settlement Statement

A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.

I

Index

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable-rate mortgage (ARM) and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest

The fee charged for borrowing money.

Interest Rate

The rate of interest in effect for the monthly payment due.

J

Joint Tenancy

A form of ownership or taking title to property which means each party owns the whole property and that ownership is not separate. In the event of the death of one party, the survivor owns the property in its entirety.

Judgment

A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor's real property as collateral for the judgment's creditor.

L

Late Charge

The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Loan Application

A document that provides financial information and facts about the borrower and the requested mortgage.

Loan Origination

How a lender refers to the beginning of the loan process, which involves submitting a loan application and documentation related to the borrower's credit, employment, financial history, and a property appraisal.

Loan Origination Fee

A fee the lender charges for processing a borrower's loan application. This fee is usually in the form of points.

Loan Servicer

An organization that collects principal and interest payments from borrowers and manages borrowers' escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Loan-to-Value (LTV) Ratio

The ratio of the loan amount to the appraised value or sales price (whichever is lower). For example, if you have a $100,000 mortgage on a $120,000 home, the LTV ratio is 83.33%.

Lock-In

A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a certain period of time. The lock-in also usually specifies the number of points to be paid at closing.

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 that a buyer would pay for a property and the lowest price a seller would accept.

Maturity

The date on which the principal balance of a loan becomes due and payable.

MIP (Mortgage Insurance Premium)

If you get a Federal Housing Administration (FHA) loan, the FHA collects a one-time upfront mortgage insurance premium (MIP) and annual premiums, usually paid monthly. This insurance protects the lender by providing a layer of coverage on the loan if you fail to make your payments. The MIP amount varies depending on the terms of the loan, including the principal, the interest rate, and the loan-to-value ratio. The upfront premium is paid when the borrower gets the loan. The premium is added to the loan amount and becomes part of the ongoing monthly premium.

Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Broker

A firm that originates and processes loans for a number of lenders.

Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance (PMI).

Mortgage Insurance Premium (MIP)

The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.

Mortgagee

The lender in a mortgage agreement.

Mortgagor

N

The borrower in a mortgage agreement.

Negative Amortization

An increase in the mortgage debt, which occurs when the monthly payment is not large enough to cover the entire principal and interest due. The remaining unpaid interest is added to the loan balance, causing the homeowner to owe more than the original amount of the loan.

Net Effective Income

The borrower’s gross income minus federal income tax.

No Cash-Out Refinance

A refinance transaction in which the borrower does not receive any cash but is allowed to take out any remaining balance on the mortgage.

Non-Assumption Clause

A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

Note

A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

O

Origination Fee

The fee charged by a lender to prepare all the documents associated with your mortgage.

P

PITI

Principal, interest, taxes, and insurance - the components of a monthly mortgage payment.

PITI Reserves

A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.

Points (Loan Discount Points)

Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount. Paying points can lower your interest rate.

Pre-Approval

A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved.

Pre-Qualification

This is a lender's estimate of what you could afford to borrow and/or what you qualify for.

Prepayment

Payment of mortgage loan, or part of the loan, before due date.

Principal

The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Promissory Note

A written promise to repay a specified amount over a specified period of time.

R

Rate Lock

A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time.

Real Estate Agent

An individual who is licensed by the state and who acts on behalf of his or her client, the buyer or seller. The real estate agent who does not have a broker's license must work for a licensed broker.

Realtor®

A real estate agent, broker, or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.

Refinancing

The process of obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

RESPA

The Real Estate Settlement Procedures Act is a federal law that gives consumers the right to review information known as the closing settlement cost statement before the closing.

Revolving Liability

A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.

Right of First Refusal

A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.

Risk-Based Pricing

When the terms and conditions of a loan (such as the interest rate, fees, and other charges) are based on the risk the lender believes the borrower presents.

S

Second Mortgage

A mortgage made subsequent to another mortgage and subordinate to the first one.

Secured Loan

A loan that is backed by collateral.

Settlement

See Closing.

Shared Appreciation Mortgage (SAM)

A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation.

Shared Equity Mortgage (SEM)

A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.

Single-Family Home

A detached house intended for the use of one 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 buildings.

Sweat Equity

Equity created by a purchaser performing work on a property being purchased.

T

Tax Lien

A claim against a property for unpaid taxes.

Tenancy in Common

A type of joint tenancy of property without right of survivorship. Each tenant's portion of ownership is determined by the size of his share of the purchase in relation to the total purchase price.

Title

A legal document evidencing a person's right to or ownership of a property.

Title Insurance

Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Truth-in-Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

U

Underwriting

The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

V

VA Mortgage

A mortgage that is guaranteed by the Department of Veterans Affairs (VA).

Variable Rate Mortgage

Another term for an adjustable-rate mortgage (ARM), which has an interest rate that changes periodically according to the loan terms.

W

Walk-Through

A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.

Warranty

A promise by the seller to pay for repairs to correct specified problems with a property that are discovered after the sale.

Y

Yield

The effective interest rate paid on a mortgage-backed security, taking into account the projected life of the loan and the timing of principal payments.