Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes over time based on a market index.
Affordability Analysis: An analysis of a borrower’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage, the likely taxes and insurance for the home, and the allowable back-end ratio.
Amortization: The process of paying off a debt over time through regular payments.
Annual Income: The total income earned in a year before taxes and other deductions, which is considered when applying for a mortgage.
Annual Percentage Rate (APR): The annual cost of a loan to a borrower, including fees, expressed as a percentage.
Appraisal: An estimate of a property’s market value conducted by a qualified professional.
Assumption: The process of taking over the previous borrower’s mortgage agreement.
Acceleration Clause: A provision in a mortgage that allows the lender to demand payment of the remaining balance of the loan under certain conditions.
Balloon Mortgage: A mortgage with low monthly payments and a large payment due at the end of the term.
Bankruptcy: A legal proceeding involving a person or business that is unable to repay outstanding debts. This can affect the ability to obtain a mortgage.
Basis Points: A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent).
Bridge Loan: A short-term loan used until a person or company secures permanent financing or removes an existing obligation. It allows the user to meet current obligations by providing immediate cash flow.
Cap: In an adjustable-rate mortgage (ARM), a limit on how much the interest rate or mortgage payments can increase or decrease.
Cash-Out Refinance: A refinancing transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing mortgage, closing costs, points, and the amount required to satisfy any outstanding liens.
Chain of Title: The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
Clear Title: A title that is free of liens or legal questions as to ownership of the property.
Closing: The final step in the home buying process where the title is transferred to the buyer.
Closing Costs: Fees paid at the closing of a real estate transaction.
Co-Borrower: An additional individual who is both obligated on the loan and is on title to the property.
Collateral: An asset that a borrower offers to a lender to secure the loan.
Collection: The efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary.
Commission: The fee paid to a real estate agent or broker for services rendered in the sale or purchase of property, typically a percentage of the sale price.
Commitment Letter: A letter from a lender to a borrower that officially lays out the terms of the mortgage loan for which the borrower has been approved.
Conforming Loan: A mortgage that meets the funding criteria of Fannie Mae and Freddie Mac.
Construction Loan: A short-term loan for funding the building of a home.
Conventional Mortgage: A mortgage not insured by the government.
Conveyance: The act of transferring ownership of a property from one party to another.
Credit Report: A detailed report of an individual’s credit history.
Credit Score: A numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual.
Debt-to-Income Ratio (DTI): A ratio that compares an individual’s debt payments to their income.
Deed: A legal document that transfers property ownership.
Deed of Trust: A document used in some states instead of a mortgage; title is conveyed to a trustee.
Default: Failure to meet the legal obligations (or conditions) of a loan.
Discount Points: Also known as points, a type of prepaid interest or fees mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments.
Down Payment: The initial upfront portion of the total amount due.
Due-on-Sale Clause: A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
Earnest Money Deposit: A deposit made to a seller showing the buyer’s good faith in a transaction.
Easement: A right to cross or otherwise use someone else’s land for a specified purpose.
Effective Interest Rate: The cost of a mortgage annually expressed as a percentage, including interest, mortgage insurance, and the origination fee (points), taking into account the compounding of interest over the term of the loan.
Encumbrance: Any right to, or interest in, real property that may exist in third parties, which diminishes the value of the property but does not prevent transfer of title.
Equity: The difference between the home’s market value and the homeowner’s mortgage balance.
Equity Loan: A loan based on the difference between the current market value of a property and the amount still owed on the mortgage.
Escrow: An account where funds are held in trust until they can be delivered to a designated party.
FHA Loan: A loan insured by the Federal Housing Administration.
Federal Home Loan Mortgage Corporation (Freddie Mac): A government-sponsored enterprise that purchases mortgages from lenders, pools them, and sells them as securities to investors on the open market.
Federal National Mortgage Association (Fannie Mae): A government-sponsored enterprise that provides liquidity to the mortgage market by buying loans from lenders, pooling them, and selling them as securities to investors.
Fiduciary: A person who acts on behalf of another person, or persons, to manage assets.
First Mortgage: The primary lien against a property.
Fixed-Period Adjustable-Rate Mortgages: ARMs that offer a fixed interest rate for a specified period of time, after which the rate adjusts annually.
Fixed-Rate Mortgage: A mortgage with a constant interest rate throughout the life of the loan.
Flood Insurance: Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood zones.
Foreclosure: The process by which a lender takes control of a property due to non-payment.
Foreclosure Action: The legal process by which a defaulted borrower’s property is auctioned off to pay off the unpaid mortgage balance.
Garnishment: A legal process that allows part of a borrower’s paycheck to be withheld for payment of a debt.
Good Faith Estimate (GFE): An estimate of the costs of the mortgage loan provided by a lender to a borrower.
Gross Monthly Income: The total amount the borrower earns per month, before any expenses are deducted.
Hazard Insurance: Insurance coverage that in the event of physical damage to a property from fire, wind, vandalism, or other hazards.
Home Equity Line of Credit (HELOC): A line of credit secured by the equity in a homeowner’s property.
Home Equity Loan: A loan where the borrower uses the equity of their home as collateral.
Home Inspection: An examination of a property’s condition conducted by a qualified inspector.
Homeowners’ Association (HOA): An organization in a subdivision, planned community, or condominium that makes and enforces rules for the properties within its jurisdiction.
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 amounts.
Index: A benchmark interest rate that reflects general market conditions and is used as the basis for adjusting the interest rates on adjustable-rate mortgages.
Inspection: An examination of the structure and mechanical systems to determine a home’s quality, soundness, and safety; makes the potential homebuyer aware of any repairs that may be needed.
Interest: The cost of borrowing money.
Interest Rate Ceiling: The maximum interest rate that can charge on an adjustable-rate mortgage or loan as agreed to in the loan agreement.
Interest Rate Floor: The minimum interest rate that can charge on an adjustable-rate mortgage or loan as agreed to in the loan agreement.
Interest-Only Loan: A loan where the borrower pays only the interest for a period.
Investment Property: A property that is not occupied by the owner and is used to generate income.
Jumbo Loan: A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac.
Joint Tenancy: An equal undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the deceased’s interest in the property.
Lien: A legal claim against a property that must be paid off when the property is sold.
Loan Estimate: A document that outlines the key details of a mortgage offer.
Loan Modification: A change made to the terms of an existing loan by a lender as a result of a borrower’s long-term inability to repay the loan.
Loan Officer: A representative of a bank or other financial institution who assists borrowers in the application process.
Loan Term: The length of time you have to pay off a loan.
Loan-to-Value Ratio (LTV): The ratio of a loan to the value of the property purchased.
Lock-In Rate: A guaranteed interest rate for a mortgage for a specified period.
Market Value: The highest price a willing buyer would pay and a willing seller would accept, both being fully informed and under no pressure to act.
Maturity: The date on which the principal balance of a loan becomes due and payable.
Mortgage: A loan used to purchase a home, where the property serves as collateral.
Mortgage Broker: An individual or company that arranges mortgages between borrowers and lenders.
Mortgage Insurance: Insurance that protects the lender if the borrower defaults on the loan.
Negative Amortization: A situation in which the loan principal increases rather than decreases because the loan payments do not cover the full amount of interest due.
No-Closing-Cost Refinance: A refinance transaction in which the lender pays the closing costs. This typically involves a higher interest rate on the loan.
Origination: The process of creating a new mortgage loan, including all steps taken by a lender to attract and qualify a borrower.
Origination Fee: A fee charged by a lender to process a new loan application.
Points: Fees paid to the lender at closing to lower the interest rate.
Pre-Approval: A lender’s assessment of a borrower’s creditworthiness and how much they can afford. lenders look at your income, assets and credit score. This information determines what loans you could be approved for, how much you can borrow and what your interest rate might be.
Prepayment Penalty: A fee charged for paying off a mortgage early.
Prequalification: A mortgage prequalification is like a preapproval, but you won’t have to provide as much financial information, and your lender won’t pull your credit. A prequalification is an initial review of your finances and provides a rough estimate for an approval amount.
Principal: The amount of money borrowed or still owed on a loan.
Private Mortgage Insurance (PMI): Insurance required for conventional loans when the down payment is less than 20%.
Refinancing: Replacing an existing mortgage with a new loan under different terms.
Reverse Mortgage: A loan for seniors that allows them to convert home equity into cash.
Title: A document that shows legal ownership of a property.
Title Insurance: Insurance that protects the buyer and lender from losses due to disputes over property ownership.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.
USDA Loan: USDA loans can only be used to buy and refinance homes in eligible rural areas. To get a USDA loan, you must have a DTI of less than 41%.
VA Loan: A mortgage loan program established by the United States Department of Veterans Affairs for veterans and their families.
Variable Rate Mortgage (VRM): Another term for an adjustable-rate mortgage (ARM).
