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Learn the lingo

Use our glossary to get better acquainted with the language of home lending.

A
Adjustable-rate mortgage (ARM)
This is a type of mortgage in which your interest rate and monthly payments could change throughout the life of the loan, as your rate is based on the fluctuations of an index.
For example:
A 5/1 adjustable rate mortgage (ARM) will have payments spread over a 30-year term and will have a fixed rate for the first 5 years. From there, the rate could adjust up or down once a year for the remaining term.
Amortization
Amortization is the process of making regular payments to pay off a debt over time. The payments cover both the principal and the interest on the account, with the interest charges typically becoming smaller and smaller, and the principal repayments becoming larger and larger, over the payment schedule.
Amortization term
The amount of time (expressed in months) required to amortize or pay off a loan. For example, for a 15-year fixed-rate mortgage, the amortization term is 180 months.
Annual adjustment cap
This limits how much the variable interest rate on an adjustable rate mortgage (ARM) loan can increase or decrease each year.
Annual percentage rate (APR)
This is the annual cost of a loan to a borrower, expressed as a percentage. It includes the amount and timing of interest paid on the loan as well as other charges or fees (such as mortgage insurance, certain closing costs, discounts points and loan origination fees) to reflect the total cost of the loan.
Appraised value
An informed estimate of the value of a property made in connection with an application for a loan secured by a home. It is usually performed by a professional appraiser.
Appreciation
An increase in the value of property over time, based on factors such as the home’s location, condition and the selling price of similar homes in the area.
B
Basis point
This is an amount equal to 1/100th of a percentage point. For example, a credit or fee calculated as 50 basis points of $100,000 would be 0.50% or $500.
C
Cash to close
The amount a homebuyer is required to pay at the closing of the loan, which typically includes down payment and closing costs.
Cash-out refinance
A type of refinance mortgage transaction in which the new loan amount exceeds the total of the principal balance of the existing first mortgage and any secondary mortgages or liens, along with closing costs and points for the new loan — resulting in cash-back to the borrower.
Ceiling rate
The maximum contractual interest rate a lender can charge on an adjustable-rate mortgage (ARM).
Certificate of eligibility
A document certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) loan. It is issued by the federal government.
Closing
Also called a settlement, this is the procedure at the end of a loan origination in which property ownership and loan funds change hands and legal documents (e.g., deed and mortgage) are filed in the public record.
Closing costs
Closing costs are usually about 2 percent to 6 percent of the mortgage amount and can include a loan origination charge, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement.
Closing cost credit
Money given or credited to a buyer at closing, reducing their cash required to close.
Closing disclosure (CD)
The Closing Disclosure is a form that provides final details about the mortgage loan you have selected. It includes important details such as: loan amount, interest rate, estimated monthly payment and closing costs. Lenders are typically required to give you the Closing Disclosure (or “CD” as it is sometimes called) at least three business days prior to the closing date to allow you time to review.
Collateral
A property pledged as security for repayment of a loan, which ultimately could be sold to satisfy the debt should the borrower default.
Commitment Letter
A Mortgage Commitment Letter is a statement from a lender to the borrower which confirms that the borrower has a lender’s commitment to secure financing, based on initial underwriting approval. It details the terms of the loan as well as any conditions that must be satisfied prior to final approval and closing of the loan.
Conventional loan
Conventional loans are mortgages offered through private lenders and are not guaranteed or insured by any government agency. There are two types of conventional loans: conforming - which meet certain guidelines set by Fannie Mae and Freddie Mac and non-conforming - which do not. Conventional loans are offered in a variety of rates and terms including fixed and adjustable.
Credit bureau
There are 3 major credit bureaus—Equifax, Experian and TransUnion—that gather, record, update and store financial and public records of individuals who have been granted credit. They provide this information via a credit report to lenders and other authorized users for a fee. You, however, are legally entitled to receive 1 free credit report each year from each of these agencies.
When reviewing your credit profile in conjunction with your loan application, we use information from your credit report, along with your credit score, to make a credit decision.
Credit limit
Under a line of credit, this is the maximum amount you can borrow.
Credit report
A record of an individual’s debts and payment habits, which can help lenders determine whether or not a potential borrower is a good business risk.
Credit score
Generated by a credit bureau using a statistical system, a credit score (from around 300 to over 800) is used to rate the credit of an applicant according to various characteristics relating to creditworthiness. The higher the credit score, the more credit worthy the applicant is considered to be.
Creditworthiness
The measure or estimate of a borrower’s ability to properly pay back a debt.
D
Debt
Debt is money that is owed to an individual or institution, such as credit card balances, mortgage loans, auto loans and personal loans.
Debt consolidation
Debt consolidation is the process of replacing several debts with one single debt to simplify repayment and to possibly provide interest savings and/or the reduction of monthly payments.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes to paying your monthly debt payments, and it is calculated by adding the recurring monthly payments of accounts like credit cards, auto loans, student loans and housing (rent or mortgage) and dividing that by your gross (before tax) monthly income. A good rule of thumb is to keep your DTI ratio to 36% or less.
For example:
$2,000 total monthly debts / $6,000 monthly pre-tax income = 33% DTI Ratio.
Default
This is the failure to make mortgage payments on time or to meet other terms of a loan, which can lead to foreclosure.
Documentation
In most cases, lenders will require borrowers to complete a loan application and provide information—for example, proof of their income, assets and employment—demonstrating their creditworthiness. “Documentation” means providing documents like W-2s, tax returns and bank statements that support the information provided in an application.
Down payment
Money paid toward the purchase of a home to make up the difference between the purchase price and mortgage loan. Typical down payments often range between 3% and 20% of the sales price and can depend on many factors—such as your loan program, lender and credit history.
Draw
The process of obtaining an advance against your available line of credit on a home equity line of credit.
Draw period
The span of time during which a borrower can obtain advances (also called draws) from an available line of credit. After the draw period ends, borrowers may be able to renew the credit line or may be required to pay the outstanding balance in full or in monthly installments over the remaining term.
E
Earnest money deposit
This type of deposit is typically made when a purchase agreement is signed. It is made toward a down payment as a sign of good faith.
Equity
Equity is the difference between the fair market value of your home and your outstanding mortgage balances and other liens.
Escrow account
An account set up by a lender in which funds are deposited (usually monthly) to pay for future real estate taxes and homeowners insurance as part of the borrower’s monthly mortgage payment, then disbursed by the lender on behalf of the borrower as payments come due.
Escrow analysis
The examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance and other bills when payments come due.
F
Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government-sponsored enterprise (GSE) that buys loans from mortgage lenders and sells them on the open market in an effort to increase the liquidity of the “secondary market” or to increase affordable lending activity, etc.
Federal Housing Administration (FHA)
The FHA is an agency of the Department of Housing and Urban Development that provides mortgage insurance for certain residential mortgages. It also sets standards for underwriting these mortgages and for construction of homes secured by these mortgages.
FHA home loan
An FHA home loan is a mortgage loan from an FHA-approved lender and insured by the Federal Housing Administration (FHA). FHA loans are principally designed for low-to-moderate income borrowers and typically require lower minimum down payments and credit scores than many conventional loans.
First mortgage
A mortgage that is the primary mortgage lien against a property.
Fixed-rate mortgage
A home loan with a predetermined interest rate that typically does not change for the entire term of the loan.
Floating rate
Floating the rate is typically used to refer to when an applicant has submitted an application, but has not yet decided to lock the interest rate and has not yet closed on the loan. Thus, the interest rate can change until it is locked at some point before closing.
Flood insurance
A type of insurance that protects against property loss or damage due to floods. This type of insurance can sometimes be required by law when a property is located within a special flood hazard zone.
Forbearance
A period during which a borrower’s monthly loan payments are temporarily suspended or reduced. During forbearance, principal payments are postponed but interest continues to accrue.
For example:
Under certain circumstances, students can receive a forbearance that allows them to temporarily stop making federal student loan payments or temporarily reduce the amount of their federal student loan payments to help avoid default.
Foreclosure
A proceeding by which the lender takes legal ownership of a mortgaged property when the borrower fails to keep up their mortgage payments or otherwise comply with the terms of the mortgage loan.
Forfeiture
The loss of money or property due to a breach of legal obligation or violation of law.
Form 1098
A form filed with the IRS that shows how much interest and related expenses have been paid on a mortgage loan during a tax year.
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), formally known as Freddie Mac, is a government-sponsored enterprise (GSE) that buys and securitizes mortgages for resale in the secondary market.
Funding date
The date on which the proceeds from a loan become available to, or can be disbursed for, the benefit of the borrowers.
G
Good faith estimate (GFE)
An itemized list of estimated costs associated with certain home loans that the lender is required to provide to the borrower within 3 business days of the application.
Government loan
A loan backed by the government. There are numerous types of government-backed loans, the most commonly known are Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans.
Grace period
The timeframe after a payment due date when no penalty is charged.
H
Home equity line of credit (HELOC)
A HELOC is a line of credit secured by the borrower's real estate and is often used for home improvements, debt consolidation or other major expenses. The typical HELOC term is 30 years: a 10-year draw period followed by a 20-year repayment period. In most cases, you can withdraw funds up to your available credit limit for the first 10 years (your draw period).
Home equity loan
A home equity loan allows the homeowner to borrow against home equity (which is the difference between the property value and the mortgage balance(s) and other liens against it). The loan provides a lump sum at closing and is repaid in monthly installments. Most home equity loans have fixed interest rates, but some are adjustable.
Home price
The agreed upon purchase price for a home. This can sometimes be either the purchase price or the property's appraised value, whichever is the lower of the two.
Homeowners insurance
The type of insurance that protects your home against damage from fire, hurricanes and other catastrophes. It can also cover you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property.
Housing expense ratio
Housing expense ratio is calculated by summing the estimated monthly mortgage principal and interest, property taxes, homeowner’s insurance, and if applicable, mortgage insurance and association fees and then dividing the sum of monthly housing expenses by monthly pre-tax income. A good rule of thumb is to keep your housing expense ratio to 28% or less.
For example:
$1,500 monthly housing expense / $6,000 monthly pre-tax income = 25% housing expense ratio.
HUD
The U.S. Department of Housing and Urban Development (HUD) is a government agency responsible for the implementation and administration of housing and urban development programs.
I
Income
Money that an individual receives from earnings (including earnings from employment), commissions, investments, rental payments or other sources.
Indexed rate
An interest rate that is tied to a specific benchmark with rate changes based on the movement of the benchmark. Indexed interest rates are used in variable rate credit products, such as adjustable rate mortgages (ARMs).
Initial advance
When a borrower obtains an advance against available credit under their line of credit.
Initial interest rate
Also called a start rate, an introductory rate, a promotional rate or a teaser rate; this is the interest rate that applies during the first period or interval of an adjustable rate mortgage (ARM) loan’s term. It may adjust or reset at some point during the lifetime of the loan. This rate does not apply to fixed-rate loans.
Interest
Monetary earnings paid regularly at a particular rate for the use of money lent; the cost of borrowing money.
Interest cost
Interest cost is the cumulative amount of interest a borrower pays on a debt obligation over the life of the loan. With mortgage loans, this amount includes any points paid to reduce the interest rate on a loan, since points are in effect pre-paid interest.
Interest rate
The amount a lender charges in exchange for lending money, expressed as a percentage of the principal.
Interest rate adjustment period
The amount of time between interest rate changes on an adjustable rate mortgage (ARM). Most ARMs have two adjustment intervals. The first interval is typically longer, lasting anywhere from three to 10 years, during which a fixed rate of interest and payment is established. This initial interval is followed by periodic adjustments to the interest rate, which typically occur once a year.
For example:
A 5/1 adjustable rate mortgage (ARM) will have a fixed interest rate for the first 5 years. From there, the rate could adjust up or down once a year for the remaining term.
Interest rate cap
An interest rate cap is a limit on how high an interest rate can rise on variable rate debt, which can give borrowers protection against dramatic rate increases and also provide a ceiling for maximum interest rate costs. They are commonly used in variable rate mortgages and specifically in adjustable rate mortgage (ARM) loans.
Investment property
A piece of real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both. An investment property can be a long-term endeavor or an intended short-term investment such as in the case of “flipping,” where real estate is bought, remodeled or renovated, and then sold at a profit.
J
Jumbo loan
The amount of the loan exceeds limits set by the Federal Housing Finance Agency (FHFA), which would make it ineligible for sale to Fannie Mae or Freddie Mac. Also known as a non-conforming loan.
L
Lender
An individual or company that makes funds available for borrowing.
Liabilities
Liabilities refer to a person’s debts or financial obligations and may include long-term and short-term debt, as well as potential losses from legal claims, etc.
Lien
Used as security for a debt or other obligation, a lien is the legal claim of a creditor or other party on a borrower’s property until the debt or obligation is paid or satisfied.
Lien holder
An individual or entity that has a lien on a property.
Loan amount
The total amount that a borrower promises to pay back on a loan.
For example:
With a home purchase price of $250,000 and a down payment of $50,000 the difference of $200,000 becomes the loan amount.
Loan Estimate (LE)
The Loan Estimate is a form the lender must provide you within three business days of receiving your application. It includes important details about the loan you requested such as: estimated loan amount, interest rate, monthly payment and closing costs. The “LE,” as it is sometimes called, is not a commitment to lend, but an estimate to help you determine if you’d like to move forward. If you do, additional information and steps will be required.
Loan modification
A legal change to one or more of the terms of a loan. A lender may agree to a loan modification as an alternative to foreclosure if a borrower is unable to repay the loan. It usually involves a reduction in the loan's interest rate, an extension of its length of maturity, a different type of loan or a combination of these three aspects.
Loan origination
The process of creating a loan that generally includes all the steps from taking a loan application up to closing or settlement and disbursal of funds. It ends with the lender recording a mortgage against the borrower’s real property as security for repayment of the loan.
Loan-to-value ratio (LTV)
Expressed as a percentage, it is the ratio between the unpaid principal amount of your loan, and the appraised value of your collateral. For example, if you have a $160,000 first mortgage on a property with an appraised value of $200,000, the LTV is 80% ($160,000 / $200,000 = 80%).
M
Margin
Percentage points the lender adds to or subtracts from the index rate to determine interest rate adjustments. The margin is constant throughout the life of the mortgage. Applicable to adjustable rate mortgages (ARMS) only.
Maturity date
The date that all of the outstanding principal, interest and fees on a loan must be repaid in full.
Maximum loan amount
The highest amount a borrower is authorized to borrow, which may be dictated by the loan program or by the borrower’s expense ratios.
Monthly debt
Your monthly debt is the amount of all payments you are obligated to make on a monthly basis. This includes minimum required payments for: credit cards, car loans, student loans, alimony/child support, personal loans and current housing payment (rent or mortgage). It does not typically include any payments you make above the minimum required payment, such as paying your credit card balance off each month. In the context of determining home affordability, your monthly debt would typically not include your current rent or mortgage if your goal is to replace it with the new mortgage.
Monthly mortgage payment
Consisting of Principal, Interest, Property Tax and Homeowners Insurance (PITI), the monthly amount required to repay the loan (P&I) plus contribute to the escrow account to ensure sufficient funds are available to pay the annual or semi-annual property tax (T) bill and homeowners insurance (I) premiums.
Mortgage loan
Few individuals have enough savings or liquid funds to enable them to purchase property outright and therefore seek a mortgage for the difference between the purchase price and down payment. A mortgage loan can also be used by existing property owners to access funds for any purpose, while putting a lien on the property being mortgaged (e.g., Refinance). Mortgage loans are offered in a variety of sizes, rates and terms.
Mortgage application
A document submitted by one or more individuals, containing financial information for the purposes of applying for a mortgage loan.
Mortgage insurance
Frequently called private mortgage insurance (PMI), this is insurance that protects the lender if a borrower defaults on a loan. Usually, if the down payment is less than 20%, lenders will require the borrower to pay mortgage insurance. Laws or certain situations will often allow mortgage insurance to be canceled once certain conditions are met—usually when the loan to value nears 80%.
N
No closing cost loan
With this type of loan, the borrower is not required to pay cash out-of-pocket at closing for the normal closing costs. The lender will typically include the closing costs in the principal balance or will charge a higher interest rate to cover the advance of closing costs.
Non-conforming loan
Non-conforming loans do not meet guidelines set by Fannie Mae and Freddie Mac, whereas conforming loans do. A conforming loan usually offers a lower interest rate and lower fees.
Note
A legally binding written agreement in which the signer promises to pay a specific sum of money, including interest, at a specified date or dates, or on demand. Also known as a promissory note.
O
Origination fee
A fee charged by lenders to cover certain processing expenses in connection with making a mortgage loan. The origination fee is typically either a set fee (example: $995 no matter the loan amount), or a percentage of the loan amount (example: 1% of $100,000 = $1,000).
P
Payoff amount
Your payoff amount is how much you will actually have to pay to satisfy the terms of your mortgage loan and completely pay off your debt at any given time. It also includes the payment of any interest you owe through the day you intend to pay off your loan, as well as other fees you have incurred and have not yet paid. Your payoff amount is different from your current balance, which might not reflect how much you actually have to pay to completely satisfy the loan.
Per diem interest
The amount of interest that accrues on a loan every day.
PITI
An acronym for principal, interest, (property) taxes and (homeowner’s) insurance, the four elements that commonly make up a monthly mortgage payment.
Points
Mortgage points, also called discount points, are fees paid to the lender at closing to lower (or “buy down”) the interest rate on a mortgage.
Prepaid interest
Funds collected at closing that cover the interest that will accrue from the settlement day to the date your first monthly payment is due. Also known as “interim,” “odd-days” or “per diem” interest.
Preliminary approval
The process of providing some basic information to your lender about your income, assets and debts, so they can give a preliminary estimate as to how much you may be able to borrow for the purchase of a home. This is typically accomplished by submitting a complete loan application including authorization for the lender to obtain or pull your credit report.
Principal & interest
The principal is the amount of money borrowed on a loan. The interest is the charge paid for borrowing money. A typical mortgage payment consists of periodic principal and interest needed to repay a loan, plus amounts escrowed for taxes and insurance (PITI).
Principal balance
The unpaid portion of a loan. The principal balance does not include interest or any other charges.
Principal payment
Portion of a monthly payment that reduces the principal balance of a home loan.
Purchase agreement
A legal document between two parties (the buyer and seller) stating the terms and conditions under which a property will be purchased.
Q
Qualifying ratios
Limits set by lenders that state the maximum housing expense ratio, and total debt-to-income ratio a borrower can have in order to qualify for a loan.
R
Rate lock
A rate lock guarantees that the lender will honor a specific interest rate, sometimes at a specific cost, for a set period. The benefit of a mortgage rate lock is that it protects the borrower from market fluctuations.
For example:
If your lender locks in your rate for 60 days and rates jump higher within that period, you’ll still get your loan at the lesser rate. When a borrower does not lock their rate, this is known as “floating” a rate.
Realtor
A member of the National Association of Realtors, the largest industry trade association of real estate agents in the U.S., which includes residential and commercial agents and real estate brokers.
Reamortize
The process by which a lender will recalculate the remaining balance of a mortgage loan and establish a new period of amortization after which the principal balance will be zero.
Refinance
The process of paying off an existing loan with the proceeds from a new loan. A borrower may initiate a refinance to lower monthly payments, lower interest rates or save on financing costs, as well as shorten or lengthen the loan term, lock in a fixed rate or get cash out.
Repayment period
The time a borrower has to fully repay an outstanding balance, according to a loan’s payment terms.
Reserves
The amount of savings, separate from the down payment, that a borrower sets aside in case of unforeseen events or emergencies.
S
Second home
A property occupied by a person for only part of a year, in addition to his or her primary residence. The term also can mean a vacation home.
Secured loans
Loans for which the borrower pledges an asset (such as an automobile, boat, other personal property or real estate) that will serve as collateral for the loan.
Settlement
The completion of a real estate sale or purchase, or the completion of the steps needed to receive the proceeds of a loan.
Settlement agent
A person or entity (for example, attorney, title insurer, title agent or escrow agent) who conducts the settlement to transfer the title of a property and to close on the mortgage loan.
Short sale
If a homeowner can no longer afford to make payments on a mortgage and owes more than their home is worth, a “short sale” is sometimes used as an alternative to foreclosure. With a short sale the homeowner can sell the home, and the lender will agree to accept an amount less than what is owed on the loan, based on a showing of financial hardship.
Single-family residence
A detached individual housing unit that shares no wall, roof or common ground with neighboring properties, but can be part of a planned unit development (PUD).
T
Term
Typically, the timeframe between the beginning loan date and the date the entire balance of the loan is due. The most common mortgage loan term is 30 years.
Title
The legal concept that establishes ownership of property. Also, a document that evidences an individual's ownership of property.
Title insurance
A policy, usually issued by a Title Insurance company, which guarantees that an owner has title to a property and insures against errors in the title search that could otherwise affect title.
U
Underwriter
The person or entity who makes the decision to approve or deny a home loan, based on the information and documentation a borrower has provided, the loan program and lender’s approval criteria.
Underwriting
The process by which a lender decides whether they will make a loan to a potential borrower based on credit, employment, assets and other factors, and then matches the borrower to an appropriate rate, term and loan amount.
Underwater mortgage
When the market value of a home drops below the balance owed on its mortgage, it is considered “under water.” This is also known as negative equity.
V
VA loan
A mortgage that is guaranteed by the Department of Veterans Affairs (VA) for eligible veterans, reservists, National Guard or certain surviving spouses.
Variable rate
An interest rate that may change periodically, often in relation to an index or other criteria. Variable rates are a common option with Home Equity Lines of Credit (HELOC) and can differ from an adjustable rate mortgage.
W
W-2
An annual wage and tax statement provided by an employer to an employee that details the recipient’s income and the various local and federal taxes withheld from the recipient’s income.
Walk-through
The final property inspection before settlement or closing to make sure the property is in the same condition that it was at the time the contract offer was written.
Wire transfer
A domestic or international transfer of money from one person’s bank to another person’s bank account.

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