Mortgage Glossary

The many terms used in the house-buying process can be confusing. Here’s some terms and definitions that can help in your research.

Adjustable Rate Mortgage (ARM)

A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the loan. These types of loans usually start off with a lower interest rate but can subject the borrower to payment uncertainty.

Amortization

The process of paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.

Annual Percentage Rate (APR)

The APR is found on the Truth In Lending Statement, which is a legal size page that goes hand in hand with the Good Faith Estimate(GFE). APR is a measure of the cost of credit, expressed as a yearly rate. It includes interest, as well as other charges. Because all lenders are supposed to follow the same rules to ensure the accuracy of the annual percentage rate, it helps provide consumers with a better basis for comparing the cost of loans, including mortgage plans. Items on the Good Faith Estimate marked with the letters “PFC” is used in calculating the APR by subtracting these amounts from the loan amount giving you the “AMOUNT FINANCED” located on the Truth in Lending. The APR is not your interest rate. Your interest rate is found at the top of the Good Faith Estimate.

Assumption or Assumable Mortgage

Some loans allow the buyer of a home to assume the sellers existing mortgage. FHA & VA loans are assumable with restrictions.

Appraisal

An estimate of the value of your home and property by a state licensed appraiser. The appraisal value is usually determined by a comparison of other similar properties that have recently sold in your area.

Balloon Mortgage

A mortgage loan that requires a large payment due upon maturity (for example, at the end of 10 years.

Biweekly Payment

A mortgage paid twice a month instead of once a month, reducing the amount of interest to be paid on the loan.

Closing Costs

Most of the fees listed on your Good Faith Estimate are considered closing costs. Fees such as escrows, prepaid homeowners insurance, prepaid interest, etc. are sometimes called closing costs, but are actually “Prepaid Items” even though you have to pay them at closing along with the other closing fees. The Good Faith Estimate provides you with an estimate of your fees. Please submit the Online Pre-Qualification form to us so we can email you a Good Faith Estimate for your review.

Chapter 7 Bankruptcy

A bankruptcy that requires assets be liquidated in exchange for the cancellation of de

Chapter 13 Bankruptcy

This type of bankruptcy sets a payment plan between the borrower and the creditor monitored by the court. The homeowner can keep the property, but must make payments according to the court’s terms within a 3 to 5 year period.

Charge-Off

The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.

Collections

The efforts a lender takes to collect past due payments.

Co-Signer

A person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.

Conventional Loan

A private sector loan, one that is not guaranteed or insured by the U.S. government.

Debt-to-Income Ratio

A comparison or ratio of gross income to housing and non-housing expenses.

Deed

A legal document under which ownership of a property is conveyed.

Delinquency

Failure to make a payment when it is due. A Loan is generally considered delinquent when it is 30 or more days past due.

Earnest Money

Money given to the seller and usually held by the Title Company as a deposit on the purchase of the home.

Equity

Money given to the seller and usually held by the Title Company as a deposit on the purchase of the home.

Escrow Account

An account where a homeowner’s regular installments to convert taxes and home insurance are held in trust until due.

Escrow Analysis

A periodic review of escrow accounts to make sure that there are sufficient funds to pay the taxes and insurance on a home when they are due.

Fannie Mae Federal National Mortgage Association (FNMA)

This is a quasi-governmental agency that purchases and sells conventional mortgages and sets the regulations used to underwrite and approve loans. Fannie Mae regulates & operates the DU automated underwriting system.

FHA Loans

The Federal Housing Administration is a federal organization to administer low down payment home loans.

FICO Score

FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on credit history. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850. Learn more about credit scores and mortgage rates here.

Fixed Rate Mortgage

A mortgage loan with a fixed interest rate that remains the same for the life of the loan.

Freddie Mac Federal Home Loan Mortgage Corporation (FHLMC)

This is a quasi-governmental agency that purchases conventional mortgages and sets the regulations used to underwrite and approve loans. Freddie Mac regulates & operates the LP automated underwriting system.

Foreclosure

The legal process by which a property may be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure occurs when the loan becomes delinquent because payments have not been made or when the borrower is in default for a reason other than the failure to make timely mortgage payments.

Ginnie Mae Government National Mortgage Association (GNMA)

This agency buys and sells insured or guaranteed by VA or FHA loans.

Good Faith Estimate (GFE)

This is an estimate of all the fees and costs for your loan. Some fees may change during the loan process, such as property taxes or homeowners insurance, since many times the borrower doesn’t know the actual amounts for these items when applying for the loan.

Gross Income

Money earned before taxes and other deductions. Sometimes it may include income from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.

Hazard Insurance

Insurance that is generally required under mortgage contacts to pay for loss or damage to a person’s home or property.

HUD1 Statement

Also known as the “settlement sheet,” or “closing statement” it itemizes all closing costs; must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, points, and escrow amounts.

Interest Only Mortgage

A mortgage where the borrower pays only the interest and none of the outstanding principal balance on a loan for a specified amount of time.

Interest Rate

This is the monthly principal and interest payment rate. Taxes and insurance need to be included to arrive at the total monthly payment. Not to be confused with the APR or Annual Percentage Rate.

Investment Property

A property not considered to be a primary residence that is purchased in order to generate income, profit from appreciation, or take advantage of certain tax benefits.

Judgment

A legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.

Jumbo Loans

Loans with a loan amount greater than the Conforming loan limits set by Fannie Mae and Freddie Mac.

Lender Placed Insurance

Insurance placed on a home or property by a lender to protect their interest in the collateral which secures the loan.

LTV or Loan-To-Value

The ratio expressed as a percentage of the loan amount to the sales price or appraised value, whichever is less. A $100,000 sales price with 20% down means the LTV is 80%.

Mortgage Insurance

Insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan. Mortgage insurance (or MI) typically is required if the borrower’s down payment is less than 20% of the purchase price.

Mortgage

A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself.

Origination Fee

This fee is paid to us for the loan. Often expressed as a percentage of the loan. Each “point” is equal to 1% of the mortgage loan amount. For example, if you get a mortgage loan for $100,000, one point is equal to 1% of $100,000 or $1000.

PITI: 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.

Pre-Approval

A lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections underwriting guidelines.

Prepaids or Prepaid Items

Sometimes referred to with closing costs, the prepaids are escrows for taxes and insurance, prepaid interest, mortgage insurance, etc. Refer to your Good Faith Estimate for your prepaid items.

Refinance

Refinancing is the process of replacing an existing mortgage with a new one by paying off the existing debt with a new, loan under different terms.

RESPA: Real Estate Settlement Procedures Act

A law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.

Servicer

A firm that works on behalf of the lender in support of a mortgage, including collecting mortgage payments, ensuring payment of taxes and insurance, managing escrow accounts, managing communications with the borrower, and loss mitigation or foreclosure as necessary.

Survey

A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Surveys are conducted by licensed surveyors and are normally required by the lender in order to confirm that the property boundaries and features such as building and easements are correctly described in the legal description of the property.

Title

The documented evidence that a person or organization has ownership of real property.

Title Insurance

Title insurance is issued by a Title Company to insure the borrower against errors in the title to your property.

VA Loans

Loans provided to qualified veterans by the Department of Veteran Affairs. No down payment is required, but a VA Funding Fee is required unless the veteran is exempt. Exemptions for the VA Funding fee are usually provided to veterans with service related disabilities of 10% or more.

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