Abstract of Title: A written record of the historical ownership of the property that helps to determine whether the property can in fact be transferred from one party to another without any previous claims. An abstract of title is used in certain parts of the country to determine whether or not there are previous claims on the subject property in question.
Acceleration: A loan accelerates when it is paid off early, usually at the request or demand of the lender. An acceleration clause within a loan document states under what circumstances a loan must be paid immediately. Usually acceleration applies to nonpayment, late payments, or the transfer of the property without the lender’s permission.
Adjustable-Rate Mortgage (ARM): A loan program where the interest rate may change throughout the life of the loan. An ARM adjusts based on terms agreed upon between the lender and the borrower, but typically the interest rate may only change once or twice a year.
Alternate Credit: Items such as your telephone bill, which you must pay each month but which will not appear on your credit report. In relation to mortgage loans, while such items aren’t reported as installment or revolving credit, they can establish your ability and willingness to make consistent payments in a responsible manner; also referred to as nonstandard credit.
Amortization: A predetermined agreement that stipulates the length of time it takes for a loan to be fully paid off by payments made at regular intervals. Amortization terms can vary, but generally accepted terms run in five-year increments, from ten to forty years; also referred to as a fully amortized loan
Annual Percentage Rate (APR): The cost of money borrowed, expressed as an annual rate. The APR is a useful consumer tool to compare different lenders, but unfortunately, it is often not used correctly. The APR can only work when comparing the exact same loan type from one lender to another.
Appraisable Asset: Any item of which the value can be determined by a third third-party expert. For example, your car is an appraisable asset. Funds from items that can be appraised and sold can be used to buy a house.
Appraisal: A report that helps to determine the market value of a property. An appraisal can be done in various ways, as required by a lender, from simply driving by the property to ordering a full-blown inspection, complete with full-color photographs. Appraisals compare similar homes in the area to substantiate the value of the property in question.
Appraisal Management Company (AMC): An independent, third party who receives appraisal orders from lenders or mortgage brokers, which then places the appraisal order and manages the appraisal ordering and receiving process.
APR: See Annual Percentage Rate.
ARM: See Adjustable Rate Mortgage.
Assumable Mortgage: Homes sold with assumable mortgages let buyers take over the terms of the loan along with the house being sold. Assumable loans may be fully or non-qualifying assumable, meaning buyers take over the loan without being qualified or otherwise evaluated by the original lender. Qualifying assumable loans mean that while buyers may assume terms of the existing note, they must qualify all over again as if they were applying for a brand-new loan.
Automated Valuation Model (AVM): An electronic method of evaluating a property’s appraised value; this is done by scanning public records for recent home sales and other data in the subject property’s neighborhood. Although not yet widely accepted as a replacement for full-blown appraisals, many in the industry expect AVMs to eventually replace traditional appraisals altogether.
AVM: See Automated Valuation Model.
Balloon Mortgage: A type of mortgage where the remaining balance must be paid in full at the end of a preset term. A five-year balloon mortgage might be amortized over a thirty-year period, but the remaining balance is due, in full, at the end of five years.
Bridge Loan: A short-term loan primarily used to pull equity out of one property for a down payment on another. This loan is paid off when the original property sells. Since they are short-term loans, sometimes lasting just a few weeks, usually only retail banks offer them. Usually the borrower doesn’t make any monthly payments, and only pays off the loan when the property sells.
Buydown (permanent and/or temporary): Paying more money to get a lower interest rate is called a permanent buydown, and it is used in conjunction with discount points. The more points, the lower the rate. A temporary buydown is a fixed rate mortgage that starts at a reduced rate for the first period, and then gradually increases to its final rate. A temporary buydown for two years is called a 2-1 buydown. For three years it’s called a 3-2-1 buydown.
Cash Out: A refinance mortgage that involves taking equity out of a home in the form of cash during a refinance. Instead of just reducing your interest rate during a refinance and financing your closing costs, you finance even more, putting the additional money in your pocket.
Clear to Close: One of the most anticipated stages of loan approval. This stage is where all conditions of the loan approval have been met and loan documents can then be prepared for the final closing.
Consumer Financial Protection Bureau (CFPB): Created as part of the original Dodd-Frank Wall Street Reform ACT, the CFPB is the governing authority for creditors including mortgages, credit cards and student loans.
Closer: The person who helps to prepare the lender’s closing documents. The closer forwards those documents to your settlement agent’s office, where you will be signing closing papers. In some states, a closer can be the person who holds your loan closing
Closing Costs: The various fees involved during the process of buying a home or obtaining a mortgage. The fees, required to issue a good loan, can come directly from the lender or may come from others in the transactions.
Closing Disclosure: The final settlement document provided to the borrowers three days prior to the scheduled closing date, includes the down payment, total fees, monthly payment and interest charges.
Collateral: Collateral is property owned by the borrower that’s pledged to the lender as security in case the loan goes bad. A lender makes a mortgage with the house as collateral.
Comparable Sales: Comparable sales are that part of an appraisal report that lists recent transfers of similar properties in the immediate vicinity of the house being bought; also referred to as comps.
Conforming Loan: A conventional conforming loan is a Fannie Mae or Freddie Mac loan that is equal to or less than the maximum allowable loan limits established by Fannie Mae and Freddie Mac. These limits are changed annually.
Conventional Loan: A mortgage loan that uses guidelines established by Fannie Mae or Freddie Mac and is issued and guaranteed by lenders.
Cost Estimate: Provided to the borrowers within three days from receipt of a completed loan application, this estimate lists expected closing costs the borrowers will encounter at the settlement table.
Credit Report: A report which shows the payment histories of a consumer, as well as the individual’s property addresses and any public records.
Credit Repository: A place where credit histories are stored. Merchants and banks agree to store consumers’ credit patterns in a central place that all merchants and banks can access.
Credit Score: A number derived from a consumer’s credit history, and which is based upon various credit details in a consumer’s past, and upon the likelihood of default. Different credit patterns are assigned different numbers and different credit activity may have a greater or lesser impact on the score. The higher the credit score, the better the credit.
Debt Consolidation: Paying off all or part of one’s consumer debt with equity from a home. Debt consolidation can be part of a refinanced mortgage or a separate equity loan.
Debt Ratio: Gross monthly payments divided by gross monthly income, expressed as a percentage. There are typically two debt ratios to be considered: 1) The housing ratio—sometimes called the front-end or front ratio—is the total monthly house payment, plus any monthly tax, insurance, private mortgage insurance, or homeowner’s association dues, divided by gross monthly income. 2) The total debt ratio—also called the back-end or back ratio—is the total housing payment plus other monthly consumer installment or revolving debt, also expressed as a percentage. Loan debt ratio guidelines are usually denoted as 32/38, with 32 being the front ratio and the 38 being the back ratio. Ratio guidelines can vary from loan to loan and lender to lender.
Deed: A written document proving every transfer of ownership in a property.
Deed in Lieu: An abbreviated term for deed in lieu of a foreclosure. A deed in lieu is initiated and carried out by the borrower who transfers all interest in the subject property to the lender.
Deed of Trust: A written document giving an interest in the home being bought to a third party, usually the lender, as security to the lender.
Delinquent: Being behind on a mortgage payment. Delinquencies typically begin to be recognized as 30+ days delinquent, 60+ days delinquent and 90+ days delinquent.
Discount Points: Also called points, discount points are represented as a percentage of a loan amount. One point equals one percent of a loan balance. Borrowers pay discount points to reduce the interest rate for a mortgage. Typically each discount point paid reduces the interest rate by ¼ percent. It is a form of prepaid interest to a lender.
Document Stamp: Evidence—usually with an ink stamp—of how much tax was paid upon transfer of ownership of property. Certain states call it a doc stamp. Doc stamp tax rates can vary based upon locale, and not all states have doc stamps.
Down Payment: The amount of money initially given by the borrower to close a mortgage. The down payment equals the sales price less financing. It’s the very first bit of equity you’ll have in your new home.
Easement: A right of way previously established by a third party. Easement types can vary but typically involve the right of a public utility to cross your land to access an electrical line.
Equity: The difference between the appraised value of a home and any outstanding loans recorded against the house.
Escrow: Depending upon where you live, escrow can mean two things. On the West Coast, for example, when a home goes under contract it goes into escrow (see also Escrow Agent). In other parts of the country, an escrow is a financial account set up by a lender to collect monthly installments for annual tax bills and/or hazard insurance policy renewals.
Escrow Account: See Impound Account.
Escrow Agent: On the West Coast, the escrow agent is the person or company that handles the home closing, ensuring that documents are assigned correctly and property transfer has legitimately changed hands.
FACTA: See Fair and Accurate Credit Transactions Act.
Fair and Accurate Credit Transactions Act (FACTA): A new law that replaces the Fair Credit Reporting Act, or FCRA, and governs how consumer information can be stored, shared, and monitored for privacy and accuracy.
Fair Credit Reporting Act (FCRA): The first consumer law that emphasized consumer rights and protections relating to their credit reports, their credit applications, and privacy concerns.
Fannie Mae: See Federal National Mortgage Association.
FCRA: See Fair Credit Reporting Act.
Federal Home Loan Mortgage Corporation: The FHLMC, or Freddie Mac, is a corporation established and owned by the U.S. government in 1968 to buy mortgages from lenders made under Freddie Mac guidelines.
Federal Housing Administration (FHA): Now a division of the Federal Housing Finance Agency, the FHA was formed in 1934 and provides loan guarantees to lenders who make loans under FHA guidelines.
Federal Housing Finance Agency (FHFA): Established as the result of the Housing and Economic Recovery Act of 2008, this agency controls Fannie Mae, Freddie Mac, HUD and the Federal Home Loan Banks.
Federal National Mortgage Association: The FNMA, or Fannie Mae, was originally established in 1938 by the U.S. government to buy FHA mortgages and provide liquidity in the mortgage marketplace. It is similar in function to Freddie Mac. In 1968, the Fannie Mae charter was changed and the association now purchases conventional mortgages as well as government ones.
Federal Reserve Board: The head of the Federal Reverse Banks that, among other things, sets overnight lending rates for banking institutions. Also known as The Fed, the Federal Reserve Board does not set mortgage rates.
Fed Funds Rate: The rate banks charge one another to borrow money overnight.
Fed: Shorthand name for the Federal Reserve Board.
FHA: See Federal Housing Administration.
FICO: See Fair Isaac Corporation.
Fair Isaac Corporation (FICO): The company that invented the most widely used credit scoring system.
Final Inspection : The last inspection of a property, which verifies that a newly built home is 100% complete or that a home improvement project is 100% complete. Final inspection lets lenders know that their collateral and their loan are exactly where they should be.
Fixed Rate Mortgage: A loan whose interest rate does not change throughout the term of the loan.
Flood Certificate: A certificate that shows whether a property or part of a property lies above or below any local flood zones. These flood zones are mapped over the course of several years by the Federal Emergency Management Agency (FEMA). The certificate identifies the property’s exact legal location and a flood line’s elevation. There is a box that simply asks, “Is the property in a flood zone, yes or no?” If the property is in a flood zone, the lender will require special flood insurance that is not usually carried under a standard homeowner’s hazard insurance policy.
Foreclosure: An unfortunate event that happens when the mortgage isn’t repaid. Lenders begin the process of forcefully recovering their collateral when borrowers fail to make loan payments. In short, the lender takes the house away.
Freddie Mac: See Federal Home Loan Mortgage Corporation.
Gift: When the down payment and closing costs for a home are given to the borrower instead of the funds coming from their own accounts. Usually such gifts can only come from family members or foundations established to help new homeowners.
Gift Affidavit: A form signed whereby someone swears that the money they’re giving you is indeed a gift, not a loan, and is to be used for the purchase of a home. Lenders like to see that form, as well as a paper trail of the gift funds being added to the borrowers own funds.
Gift Funds: Monies given to a borrower for the sole purpose of buying a home. These funds are not to be paid back in any form and are usually given by a family member or a qualified nonprofit organization.
Government National Mortgage Association: The GNMA, or Ginnie Mae, is a U.S. government corporation formed to purchase government loans like Veterans Affairs (VA) and FHA loans from banks and mortgage lenders.
Good Faith Estimate: Replaced as a result of TRID by the Cost Estimate, this is a list of estimated closing costs on a particular mortgage transaction. This estimate must be provided to the loan applicants within three business days after receipt of a mortgage application by the lender or broker.
Hazard Insurance: A specific type of insurance that covers against certain destructive elements such as fire, wind, and hail. It is usually an addition to homeowners insurance, but every home loan has a hazard rider.
HELOC: See Home Equity Line of Credit.
Home Equity Line of Credit (HELOC): A credit line which uses a home as collateral. Customers write checks on this line of credit whenever they need to, and pay only on balances withdrawn. A HELOC is much like a credit card, but secured by the property.
Homeowners Insurance: An insurance policy that covers not just hazard items, but also other things, such as liability or personal property.
Home Valuation Code of Conduct (HVCC): Established as a national lending rule which prohibits lenders or mortgage brokers from influencing property values by communicating directly with an appraiser; HVCC provides rules for ordering, compensating and selecting an appraiser.
Impound Account: An account that is set up by a lender to deposit a monthly portion of annual property taxes or hazard insurance. As taxes or insurance come up for renewal, the lender pays the bill using these funds. Also referred to as an escrow account.
Inspection: A structural review of the house to determine defects in workmanship, damage to the property, or required maintenance. An inspection does not determine value of the property. A pest inspection, for example, looks for termites or wood ants.
Installment Account: Borrowing one lump sum and agreeing to pay back a certain amount each month until the loan is paid off. A car loan is an example of an installment loan.
Interest Rate: The amount charged to borrowed money over a specified period of time.
Interest Rate Reduction Loan (IRRL): A Veterans Affairs (VA) refinance loan program that has relaxed credit guidelines. Also referred to as a streamline refinance.
IRRL: See Interest Rate Reduction Loan.
Jumbo Loan: A mortgage that exceeds current conforming loan limits.
Junior Lien: A second mortgage or one that subordinates to another loan. Not as common a term as it used to be. You’re more likely to hear the terms second mortgage or piggyback.
Land Contract: An arrangement where the buyer makes monthly payments to the seller but the ownership of the property does not change hands until the loan is paid in full.
Land-to-Value: An appraisal term that calculates the value of the land as a percentage of the total value of the home. If the land exceeds the value of the home it’s more difficult to find financing without good comparable sales. Also referred to as lot-to-value.
Lease-Purchase Agreement: An option whereby a buyer leases a home until the buyer has saved up enough money for a down payment to qualify for a conventional mortgage; also referred to as rent-to-own.
Lender Policy: Title insurance that protects a mortgage from defects or previous claims of ownership.
Liability : An obligation or bill on the part of the borrower. It works like an automobile loan. When you pay off the car, you get the title. Liabilities such as student loans or a car payment can show up on a credit report, but they can also be anything else that you are obligated to pay. Those liabilities on the credit report are used to determine debt ratios.
Lien: A legal claim or prior interest on the property you’re about to buy. Borrowing money from another source in order to buy a house could mean that someone else has a lien on that property.
Loan: Money granted to one party with the expectation that the money will be repaid.
Loan Originator: The person who is typically responsible for helping mortgage applicants become qualified for a loan, and who assists in loan selection and loan application. Loan originators can work at banks, credit unions, and mortgage brokerage houses or for bankers.
Loan Processor: The person who gathers the required documentation for a loan application and for loan submission. Along with a loan originator, borrowers will work with the loan processor quite a bit during the mortgage process.
Loan Underwriter: The person responsible for ultimately saying yes or no on a loan file. The underwriter compares loan guidelines with what you have documented in the file.
Loan-to-Value Ratio (LTV): A ratio expressed as a percentage of the loan amount when compared to the valuation of the home determined by an appraisal. If a home was appraised at $100,000 and the loan amount was $70,000, then the LTV would be 70%.
LTV: See Loan-to-Value Ratio.
Market Value: In an open market, the market value of a property is both the highest the borrower is willing to pay and the least the seller is willing to accept at the time of contract. Property appraisals help justify market value by comparing similar home sales in the subject property’s neighborhood.
Mortgage: A loan with the property being pledged as collateral. The mortgage is retired when the loan is paid in full.
Mortgage Brokers: Companies that set up a home loan between a banker and a borrower. Similar to how an independent insurance agent operates, brokers don’t have money to lend directly, but they have experience in finding various loan programs that can suit the borrower. Brokers don’t work for the borrower but instead provide mortgage loan choices from other mortgage lenders.
Mortgagee: The person or business making the loan; also referred to as the lender.
Mortgagor: The person(s) getting the loan; also referred to as the borrower.
Multiple Listing Service (MLS): A central repository where real estate brokers and agents show homes and search for homes that are for sale.
Nonconforming: Loans whose amounts are above current Fannie Mae or Freddie Mac limits. See also Jumbo Loan.
Note: A promise to repay. It may or may not have property involved and it may or may not be a mortgage.
Note Modification: A process where a mortgage lender modifies the current structure of the outstanding note, often to assist a borrower who may be having difficulties making their regular mortgage payment as reflected by the original note.
Notice of Default (NOD): Delivered by certified letter from the mortgage lender to the borrower when two successive mortgage payments have been missed. A legal process filing, the NOD becomes a public record, recorded in the county or parish where the property resides.
Origination Fee: A fee charged to cover costs associated with finding, documenting, and preparing a mortgage application, and usually expressed as a percentage of the loan amount.
Owner’s Policy: Title insurance made for the benefit of the homeowner.
Payment Shock: A term used by lenders referring to the percentage difference between what you’re paying now for housing and what your new payment would be. Most loan programs don’t have a payment shock provision, but for those that do, a common percentage increase is 150%.
Principal, Interest, Taxes, and Insurance (PITI): These figures are used to help determine front debt ratios. In condos, townhouses or co-ops homeowner’s association dues replace the payment for insurance.
Portfolio Loan: A loan made by a direct lender, usually a bank, and kept in the lender’s loan portfolio instead of being sold or underwritten to any external guidelines.
Pre-foreclosure: A definition of a property where foreclosure is imminent; Often associated with an impending or current Notice of Default (NOD).
Prepaid Interest: Daily interest collected from the day of loan closing to the first of the following month.
Principal: The outstanding amount owed on a loan, not including any interest due.
Quit Claim: A release of any interest in a property from one party to another. A quit claim does not, however, release the obligation on the mortgage.
Rate-and-Term Refinance: Refinancing to get a new rate. The process includes changing the interest rate and changing the term, or length, of the new note. Refinancing requires a full approval process exactly as the purchase loan was issued.
Realtor: A member of the National Association of Realtors and a registered trademark. Not all real estate agents are realtors.
Recast: A term applied to ARMs and used when extra payments are made to the principal balance. When your note is recast, your monthly payment is calculated for you.
Refinance: Obtaining a new mortgage to replace an existing one. There is also a rate-and-term refinance, where only the outstanding principal balance, interest due, and closing costs are included in the loan.
Reissue: When refinancing, there may be discounts if you use the same title agency. Reissue of an original title report can cost much less than a full title insurance policy.
Rescission: To withdraw or rescind from a mortgage agreement. Refinanced mortgage loans for a primary residence have a required three-day cooling off period before the loan becomes official. If for any reason you decide not to take the mortgage, you can rescind and the whole deal’s off.
Reserves: A borrower’s assets after closing. Reserves can include cash in the bank, stocks, mutual funds, retirement accounts, IRAs, and 401(k) accounts.
Revolving Account: A credit card or department store account on which you typically have a credit limit and on which you make no payments until you charge something.
Sales Contract: A written agreement to sell or purchase a home, signed by both the seller and buyer.
Second Mortgage: Sometimes called a piggyback mortgage, a second mortgage assumes a subordinate position behind a first mortgage. If the home goes into foreclosure, the first mortgage would be settled before the second could lay claim. See also Junior Lien.
Seller: The person transferring ownership and all rights for a home in exchange for cash or trade.
Settlement Statement: Also called the Final HUD-1, this statement shows all financial entries during the home sale, including sales price, closing costs, loan amounts, and property taxes. Your initial good faith estimate will be your first glimpse of your settlement statement. This statement is one of the final documents put together before you go to closing and is prepared by your attorney or settlement agent.
Short Sale: When a property changes hands from seller to buyer, the lender has agreed to accept less for their outstanding mortgage note than the current balance or payoff amount and the seller is released from all future obligation to repay the mortgage and any delinquent amounts.
Survey: A map that shows the physical location of a structure (e.g., a house) and where it sits on the property. A survey also designates any easements that run across or through the property.
Title Insurance: Protection for the lender, the seller, and/or the borrower against any defects or previous claims to the property being transferred or sold.
Title: document showing legal ownership in a property.
Title Exam/Title Search: The process where public records are reviewed to research any previous liens on the property.
Underwater Mortgage: A term used to describe a piece of leveraged real estate where the mortgage balance exceeds the current property value.
Veterans Affairs (VA) Loan: Government mortgage guaranteed by the Department of Veterans Affairs.
VA No-No: A type of VA loan where the borrower not only puts no money down, but also pays no closing costs.
Verification of Deposit (VOD): A form mailed to a bank or credit union that asks the institution to verify that a borrower’s bank account exists, how much money is in the account, how long the borrower has had the account, and what the average balance was over the previous two months.
VOD: See Verification of Deposit.
Wrap-Around Mortgage: A method of financing where the borrower pays the former owner of the property each month in the form of a mortgage payment. The former owner will then make a mortgage payment to the original mortgage holder. This kind of mortgage is not allowed without initial lenders permission.