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Glossary of Mortgage Terms

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Acceleration

The right of the lender to demand payment on the outstanding balance of a loan.

ARM
Adjustable Rate Mortgage

A mortgage that has a fixed rate of interest for only a set period of time, usually one, three or five years. During the initial period, the interest rate is lower, and after that period it will adjust based on an index.

Amortization Schedule

A schedule of how the loan is intended to be repaid. For example, a typical amortization schedule will include the amount borrowed, the interest rate, and the term. The result will be a month-by-month breakdown of how much every month is paid in interest versus how much is paid down on the principal.

APR
Annual Percentage Rate

A measure of the cost of credit expressed as a yearly rate. It includes interest as well as other charges. APR can be a helpful metric for borrowers to use in comparing the costs of different mortgage loans and products offered by different mortgage lenders.

Appraisal

Appraisals are conducted to give an estimate of the value of a property. They are conducted by certified professionals who evaluate a piece of property based on a physical inspection and the selling price of comparable houses that have recently been sold.

Appreciation

An increase in property value.

Balloon Loan or Mortgage

A mortgage that typically offers low rates for an initial period of time usually five, seven, or ten years.

Bi-Weekly Mortgage

Compared to typical mortgages that are paid once a month, bi-weekly mortgages are paid *twice* a month. More frequent payments reduce interest costs and decrease the length of the mortgage.

Cap

A limit on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage.

Capital or Cash Reserves

An individual's savings, investments, or assets.

CFPB
Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (CFPB) is a regulatory agency charged with overseeing financial products and services that are offered to consumers.

Clear Title

A property title that has no defects. Properties with clear titles are marketable for sale.

Closing

The final step in purchasing a property where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other parties such as attorneys. At the closing, the seller receives payment for the property. Also known as settlement.

Closing Costs

Closing costs are the costs involved with buying a house, typically including attorney fees, recording fees and other costs associated with the mortgage closing.

CD
Closing Disclosure

The final disclosure of prepaid and closing costs of the mortgage, provided to borrowers by their lender, which enables them to compare the initial estimate of costs disclosed in the Loan Estimate (LE). Borrowers generally receive the CD at least 3 days prior to closing and again at closing.

Collateral

Security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

Construction Mortgage

These are used when a borrower is having a house built. The lender will advance cash based on the construction schedule of the builder.

Credit Score

A score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 - 840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.

DTI
Debt-to-Income Ratio

One of many ratios used to estimate whether a borrower will be able to repay a loan. In this calculation, the lender compares the monthly debt payments of the borrower, including the new mortgage, to the borrower's monthly income. The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the riskier the loan for the lender.

Default

The inability to make timely mortgage payments or otherwise comply with mortgage terms.

Discount Points

 

Down Payment

The amount of the purchase price that the buyer pays at the time of closing. Generally, lenders require a specific down payment in order to qualify for a mortgage.

Earnest Money

Money put down by a potential buyer to show that they are 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. During the contingency period, the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction.

Encumbrance

Anything that affects title to a property, such as loans, leases, easements, or restrictions.

Equity

The difference between the value of the home and the borrowed principal still outstanding. As a borrower makes payments and the value of the home increases, the equity of the home generally increases.

Escrow

Funds held in an account to be used by the lender to pay for home insurance and property taxes. The funds may also be held by a third party until contractual conditions are met and then paid out.

FCRA
Fair Credit Reporting Act

he Fair Credit Reporting Act (FCRA) is the act that regulates the collection of credit information and access to your credit report. It was passed in 1970 to ensure fairness, accuracy, and privacy of the personal information contained in the files of the credit reporting agencies.

Fair Housing Act

A law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

FHA
Federal Housing Administration

An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment

Fixed Rate Mortgage

A mortgage where the interest rate and the term of the loan are set for the life of the loan.

Flood Insurance

A type of property insurance that covers a dwelling for losses sustained by water damage, as it specifically relates to flooding. This type of insurance is required on some properties and not on others.

Funding Fee

he Department of Veteran's Affairs (VA) charges a Funding Fee to most veterans who obtain a VA mortgage loan to help sustain the VA home loan program. Only veterans receiving VA disability are exempt from paying this fee. The VA Funding Fee is a percentage of the principal loan amount and is due at closing.

Good Faith Estimate

An estimate by the lender of the closing costs of the mortgage. While not exact, it's a way to inform buyers of what is needed from them at the time of closing of the loan. This was replaced by the Loan Estimate (LE).

Home Equity Loan

A loan backed by the value of a home. If the borrower defaults or does not pay the loan, the lender has some rights to the property.

Homeowner's Insurance

Prior to closing, the homeowners must secure property insurance on the new home.

Interest

An amount charged to a borrower for the use of borrowed money.

Interest Rate

The interest charge over a period of time (usually per year) expressed as a percentage of the principal.

Lien

A legal claim against property that must be satisfied when the property is sold. A lien is a defect on the title and needs to be settled before the transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.

Life Cap

A limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM).

LE
Loan Estimate

The initial estimate of prepaid and closing costs provided to borrowers by the lenders within three (3) days of applying for a mortgage. While not exact, it informs buyers of what funds are needed from them in order to close the loan. This form replaced the Good Faith Estimate (GFE) in 2015.

LTV
Loan-to-Value 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 a down payment.

Mortgage

A mortgage is a lien on a property that generally allows the lender to collect payments on the loan and to foreclose if the loan obligations are not met. The property acts as collateral for the loan. In some states, the same function is completed by a deed of trust.

Non-warrantable Condo

A non-warrantable condominium unit is a condominium complex that does not meet the eligibility for condominium mortgage loans to be sold to Fannie Mae and Freddie Mac.

Origination Fee

When applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.

PITI
Principal, Interest, Taxes, and Insurance

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.

Points

A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $95,000, one point means you pay $950 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller or may be split between them.

Prepayment

Payment of some or all of the mortgage loan before the end of the loan term; may be subject to a prepayment penalty.

Principal

The amount of money borrowed that has not yet been paid back to the lender. This does not include the interest paid to borrow that money. In other words, the principal is the original loan amount minus the total repayments of the principal made.

PMI
Private Mortgage Insurance

Insurance to protect the lender in the event of default. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance may be available through a government agency, such as the Federal Housing Administration (FHA) or the Veterans Administration (VA), or through private mortgage insurance companies (PMI).

Property Tax

A tax charged by the local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of the assessed value of the property.

Recording Fees

Charges for recording a deed or mortgage with the appropriate government agency.

RESPA
Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act (RESPA) was designed to protect and inform potential homeowners by requiring lenders and others involved in home financing transactions to provide borrowers with timely disclosures regarding the nature and costs of the real estate settlement process.

TILA
Truth in Lending Act

The Truth in Lending Act (TILA) was a federal law enacted in 1968 with the intention of protecting consumers in their dealings with lenders and creditors.

Title Insurance

Insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs.

TIP
Total Interest Percentage

The TIP is how much interest you will pay over the life of your mortgage loan compared to the amount you borrowed. The TIP is calculated by adding up all of the interest payments over the life of the loan, then dividing that total by the loan amount.

Transfer Agent

A bank or trust company charged with keeping a record of a company's stockholders and canceling and issuing certificates as shares are bought and sold.

UFMIP
Up Front Mortgage Insurance Premium

UFMIP stands for Up Front Mortgage Insurance Premium and anyone who takes out an FHA loan is required to pay the premium. This lump sum is allowed to be financed into the loan, so you don't have to actually write a check for it at closing – but make no mistake, you are still paying it.

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.

USDA
United States Department of Agriculture

A USDA home loan from the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, is a mortgage loan offered to rural property owners by the United States Department of Agriculture.

VA
Veterans Affairs

A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders. The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry).

Walk Through

The final inspection of a property being sold by the buyer to confirm that any contingencies specified in the purchase agreement such as repairs have been completed, fixture and the non-fixture property is in place and confirm the electrical, mechanical, and plumbing systems are in working order.

Warrantable Condo

A warrantable condominium unit is a condominium complex that meets the eligibility for condominium mortgage loans to be sold to Fannie Mae and Freddie Mac.