FAQs

Mortgage Glossary

Mortgage Glossary

Mortgage terms in plain English

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A

Abstract of Title
A complete historical summary of all recorded documents affecting the title of a designated parcel of real estate.

Acceleration Clause
A provision in a mortgage or note providing that the entire principal balance shall become immediately due and payable in the event of default or another predetermined event.

Adjustable Rate Mortgage (ARM)
A mortgage instrument in which the interest rate adjusts periodically according to a predetermined index and margin.

Adverse Action
Under the Equal Credit Opportunity Act, adverse action occurs when a completed application is submitted to a lender and the credit request is denied or not approved for the amount or term requested by an applicant.

Amortization (Positive)
Repayment of a debt in periodic installments of principal and interest resulting in payment in full at the end of the loan term.

Annual Percentage Rate (APR)
Total finance charges—including interest, loan fees, points and other charges—expressed as a percentage of the total amount of the loan. Under the Federal Truth-In-Lending Act (Regulation “Z”), the APR must be disclosed to the borrower within 3 business days of receipt of a loan application.

Anti-Coercion Statement
A state provision that prohibits a lender from requiring an applicant to obtain hazard insurance through a particular company.

Appraisal
The act of preparing a report by a qualified appraiser setting forth an opinion or estimate of value. The most common type of appraisal for residential properties is the Comparable Sales Approach. Two other appraisal techniques are the Cost Approach and the Income Approach. An appraisal is usually ordered by the lender or the Mortgage Broker.

Appreciation
An increase in property value caused by economic factors; the opposite of depreciation.

Arrears
Payment of an obligation at the end of the period for which it is due or levied; the opposite of payable in advance. Mortgage interest and real estate taxes are generally paid in arrears.

Assessed Value
The value placed on property for the purpose of real estate taxation.

Assessment
A levy placed against property for a special purpose.

Assignee
The party who receives an ownership interest in a mortgage.

Assignor
The party who transfers an ownership interest in a mortgage.

Assignment of Mortgage
A document that evidences a transfer of ownership of a mortgage from one investor to another.

Assumption of Mortgage
An agreement by a purchaser of real property to assume liability on an existing debt secured by a mortgage with its original terms left intact. An assumption of mortgage does not automatically release the seller of the property from liability on the accompanying note.

Attorney-in-fact
A competent party having written power of attorney to legally perform certain acts for another.

B

Balance Sheet
A financial statement showing assets, liabilities, and the net worth of a specific date.

Balloon Mortgage
A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.

Bankruptcy
A condition of financial insolvency in which a person’s liabilities exceed assets and the person is unable to pay current debts. Generally, a person must wait four years following the discharge of the bankruptcy to be eligible for a mortgage loan. Bankruptcy is reported by most credit agencies for a period of ten years.

Basis Points
A unit of measurement used to describe yield. A basis point is 1/100 of 1.0%. Example: 100 basis points = 1.0%; 75 basis points = 0. 75%; 50 basis points = 0. 5%.

Binder
A commitment to insure; a temporary report effective for a limited time until a permanent policy is issued. A title insurance binder lists all the known liens and defects affecting the title.

Biweekly Mortgage
A mortgage with payments due every two weeks totaling 26 payments a year thus reducing the cost of a 30-year mortgage to that of a 21-year mortgage.

Blanket Mortgage
A mortgage lien securing several parcels of property, frequently used by developers who have purchased a single tract of land intending to subdivide into individual parcels. The developer normally requires a “partial release” clause so that individual parcels can be released from the blanket mortgage as they are sold.

Bridge Loan (Swing Loan)
Borrowing against the equity in one’s present home to enable the purchase of another home before the existing home sells.

Buy-Down
A cash payment to a lender to reduce the interest rate a borrower must pay. Buy-downs are usually temporary and help the borrower qualify at a lower rate.

C

Certificate of Eligibility
A document used by the Department of Veteran’s Affairs (DVA) to certify a veteran’s eligibility for a VA loan.

Certificate of Reasonable Value (CRV)
A VA appraisal.

Chattel Mortgage
A mortgage on personal property.

Closing
Final settlement between the buyer and seller; the date on which title passes from the seller to the buyer.

Closing Costs (Loan)
Money paid by the borrower to affect the closing of a mortgage loan. This normally includes an origination fee, title insurance, survey, attorney’s fees, and prepaid items such as taxes and insurance escrow payments.

Closing Statement
A financial disclosure accounting for all funds received and expected at settlement. The HUD-1 settlement statement shows how costs are allocated between the buyer and the seller. The HUD-1 is not required if the buyer has no closing costs.

Cloud on Title
Any condition that adversely affects the title to real estate or curtails an owner’s rights.

Commitment
A written promise to make or insure a loan for a specified amount and on specified terms.

Conforming Loan
A mortgage loan in compliance with the underwriting criteria and current loan limits of “Fannie Mae” and “Freddie Mac”.

Construction Loan
A short-term loan where the proceeds are used to finance the actual construction of a structure. The loan is typically made in partial disbursements called “draws” as construction progresses.

Construction/Permanent Loan
A loan where proceeds will be used to finance the construction of a one-to-four family structure where the lot is already owned by the borrower.

Constructive Notice
The recording of a document or an instrument in the public records in the county where a property is located that is designed to give adequate notice to everyone.

Contingency
Something that requires competition of a certain act or the happening of a particular event. Example: financing “contingency” in a real estate contract.

Contract for Deed (Land Contract, Agreement for Deed, Installment Sales Contract)
A method of selling and financing property whereby the buyer obtains possession but the seller retains the legal title.

Conventional Mortgage
A private mortgage loan neither government insured (FHA) nor government guaranteed (VA).

Conveyance
The transfer of the title to land from one person or class of persons to another.

Covenant
A legally enforceable promise or restriction in a mortgage or deed.

Credit Report
A report of an individual’s credit history prepared by a credit bureau and used by the lender in determining a loan applicant’s credit worthiness.

Credit Scoring
A numerical measurement that reflects the ability of a borrower to manage credit.

D

Debt-to-Income Ratio (DTI)
The percentage of the borrower’s gross monthly income that is used for paying debts. The front end ratio is the percentage of your total PITI housing payment divided by your total gross monthly income. The back end ratio is the percentage of your total monthly liabilities (including housing payment) divided by your total gross monthly income.

Debt Service
The periodic payment of principal and interest as specified in a promissory note.

Deed
A written document that transfers an ownership interest in real property from a seller (grantor) to a buyer (grantee).

Deed in Lieu of Foreclosure
A deed given by a mortgagor to a mortgagee to satisfy a debt and avoid foreclosure.

Deed of Trust
An instrument used in some states in place of a mortgage. The borrower conveys legal title to a trustee who holds the title as collateral for the benefit of a lender and subsequently re-conveys the title to the borrower upon payment of the debt.

Deed Restriction
A limitation placed in a deed limiting or restriction the use of real property.

Default
Breach or non-performance of a clause in a note or mortgage which, if not cured, could lead to foreclosure.

Defeasance Clause
Upon payment in full to the lender, this clause in a mortgage requires the lender to “give back” his security interest in the property and issue to the borrower a recordable Satisfaction of Mortgage. This clause also prohibits the lender from foreclosing as long as the borrower complies with all the terms and conditions of the mortgage.

Deficiency Judgment
A personal judgment levied against the borrower for the balance of the mortgage debt when a foreclosure sale fails to generate funds sufficient to satisfy the debt.

Depreciation
A loss of value in real estate brought by age, physical deterioration, functional or economic obsolescence. Broadly, a loss in value from any cause; the opposite of appreciation.

Desktop Underwriter
Fannie Mae’s automated underwriting system designed to enable mortgage lenders to process loan applications efficiently and objectively.

Direct Endorsement Program
Authorization provided to an approved lender to originate and underwrite FHA insured loans without obtaining approval from the FHA prior to funding the loan.

Discount
The sale of a note for less than its face value. The purpose of a discount is to adjust the annual yield on the note.

Discount Point
One percent of the face amount of the loan. Discount points are a one-time charge assessed at closing by the lender to increase the lender’s yield to a competitive level.

Disintermediation
The flow of funds out of savings institutions into short-term investments in which interest rates may be higher. This shift normally results in a net decrease in the amount of funds available for long-term real estate financing.

Documentary Stamps
A tax by the Florida Department of Revenue on deeds of conveyance and mortgage notes.

Due-on Sale (Alienation) Clause
A form of acceleration clause that gives a lender the option to call a mortgage loan due upon the sale or transfer of the property. A mortgage with a Due-on-Sale clause is not assumable.

E

Easement
A right or interest in the land of another entitling the easement holder to a specific limited use, such as installing power and telephone lines, or crossing over the property. Ingress is the right to enter upon another’s land, whereas egress is the ability to move about and exit unchallenged from that land. While size and location are important aspects of an easement, the age is immaterial.

Encroachment
A physical intrusion upon the property of another. It is usually revealed by a survey.

Encumbrance
Items that affect or limit the fee simple title such as mortgages, leases, easements, and restrictions.

Equal Credit Opportunity Act (ECOA)
A federal law that deals with discrimination (Regulation “B”).

Equity (Owner’s Equity)
The difference between a property’s fair market value and the current indebtedness.

Escheat
The reversion of property to the state is the owner dies intestate and without heirs.

Escrow
Documents entrusted to a disinterested third party who assumes responsibility for disbursement of paperwork and funds.

Escrow Impounds
That portion of a mortgagor’s monthly payment held by the lender to pay for real estate taxes, hazard insurance, and mortgage insurance, as they become due.

Estate
The ownership interest of an individual in real property which is measured by its potential duration; the degree, quantity, nature, and extent of interest that a party has in real property.

Estoppel Certificate (Letter)
A written statement that bars the signer from making a claim that is inconsistent with that party’s prior statement. An estoppel certificate verifies the loan balance and is sometimes referred to as a “payoff letter”.

Exculpatory Clause
A provision in a mortgage or note in which the lender waives the right to a deficiency judgment against the borrower and the borrower is relieved of personal liability to repay the loan.

Execute
To sign or to ratify a document.

F

Fair Isaac
The developer of a credit scoring system used by many credit-reporting agencies.

Fannie Mae
A privately owned corporation created by Congress in 1938 to support the secondary mortgage market by purchasing and selling government underwritten residential mortgages. Today, Fannie Mae purchases more conventional mortgages than FHA or VA and their stock is publicly traded.

Federal Emergency Management Agency (FEMA)
A federal agency that provides assistance to victims of natural disasters. FEMA publishes Flood Insurance Rate Maps.

Federal Housing Administration (FHA)
A division of HUD. Its main activity is insuring residential mortgage loans made by private lenders.

Fee Simple Absolute
The most complete ownership in land with indefinite duration, freely transferable, and inheritable.

FICO Score
A credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Scoring has becoming widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower’s credit history into a single number.

Fiduciary
A party in a position of trust and confidence for another.

First Mortgage
A mortgage having priority over all other voluntary liens against certain property, as evidenced by recording; the earliest recorded mortgage remaining unpaid.

Fixed Rate Mortgage (FRM)
A mortgage in which the interest rate and monthly payments remain constant over the life of the loan.

Flood Certification Fee
A fee paid to an independent third party to determine whether or not property improvements are located in a flood zone.

Flood Insurance
Insurance subsidized by the federal government required for property improvements located in federally designated flood areas (A & V zones).

Forbearance
The act of refraining from taking legal action despite the fact that a mortgage is in default.

Foreclosure
The legal procedure undertaken by a mortgagee for the purpose of having property sold and the proceeds applied to the payment of a defaulted debt.

Freddie Mac
The disbursement of funds to complete a transaction that occurs when a lender provides money to close a loan, or an investor provides funds to the lender to purchase a mortgage loan.

Funding
The disbursement of funds to complete a transaction that occurs when a lender provides money to close a loan, or an investor provides funds to the lender to purchase a mortgage loan.

Funding Fee
A fee paid by the veteran to the Department of Veteran’s Affairs to provide for a partial guarantee of the veteran’s mortgage loan.

G

Ginnie Mae
A government agency (Division of HUD) that administers the mortgage-backed securities program which channels new funds into residential financing through the sale of privately issued securities carrying a Ginnie Mae guarantee.

Ginnie Mae Mortgage-Backed Securities
Securities guaranteed by Ginnie Mae that are issued by mortgage bankers, commercial bankers, savings associations, savings banks, and other institutions. The GNMA security holder is protected by the “full faith and credit of the U.S.” Ginnie Mae securities are backed primarily by FHA and VA loans.

Graduated Payment Mortgage (GPM)
A residential mortgage loan which has initial low monthly payments that increase gradually and then level off for the duration of the loan term. A GPM with an adjustable interest rate may result in initial negative amortization.

Grant
A generic term applicable to transfers of real property.

Grantee
The party who receives a deed; the buyer.

Grantor
The party who signs and gives the deed; the seller.

H

Hazard Insurance
A contract whereby an insurer, for a premium, undertakes to compensate the insured for a loss on a specific property due to fire, windstorm, and other natural hazards.

Highest and Best Use
A principle of value that focuses on the most profitable, legal use to which a property can be put.

Home Equity Line of Credit
A revolving line of credit against the equity in one’s home allowing the homeowner to borrow as needed, up to a predetermined maximum amount.

Homeowner’s Protection Act
A federal law requiring automatic cancellation of Private Mortgage Insurance (PMI) when the loan-to-value ratio is reduced to 78%.

Housing and Urban Development, Department of (HUD)
Established in 1965 to implement and administer government and urban development programs. The range of programs includes community planning, equal opportunity in housing and FHA mortgage loans.

I

Index
An economic measurement of the cost of funds used as a base to determine the periodic interest rate adjustments for Adjustable Rate Mortgages. Common indexes include Treasury Bills, both the 4th and 11th Federal Home Loan Bank District Cost of Funds, and the London Interbank Offered Rate (LIBOR).

Institutional Lender
A financial institution that invests in mortgages typically carried in its own portfolio, such as savings associations, commercial banks, life insurance companies, and pension and trust funds.

Intangible Tax
A state tax on certain items of intangible personal property such as mortgages.

Interest
Rent paid for the use of borrowed money, usually expressed as an annual percentage.

Involuntary Lien
A lien imposed against property without an owner’s consent.

J

Judgment Lien
A lien placed on property involuntarily as a result of a court action.

Junior Mortgage
Any lien subsequent to the claims of the holder of a prior senior mortgage as evidenced by the time and date of recording.

L

Leverage
The use of borrowed funds to finance the purchase of an asset; the use of another’s money to make more money.

Lien
A legal hold or claim of one person on the property of another as security for a debt or charge. A mortgage, once recorded, is a voluntary lien.

Loan
A sum of money provided by a lender to be repaid with or without interest.

Loan Processing
The assembling of a mortgage loan application and related documents for consideration by a lender.

Loan Submission
Documentation delivered to a prospective lender for review and consideration for the purpose of making a mortgage loan.

Loan-to-Value Ratio (LTV)
The relationship between the mortgage amount and the appraised market value (or sales price if lower) of the security property, and expressed as a percent.

M

Margin
The number of basis points a lender adds to the index to determine the interest rate for an Adjustable Rate Mortgage.

Metes and Bounds
The most accurate method of land description; “metes” means measurements and “bounds” means boundaries.

Mill
The measure used to express a real estate property tax rate; one-tenth of one percent.

Mortgage Insurance Premiums (MIPs)
Fees paid by FHA borrowers to obtain a loan (upfront and annual).

Mortgagee
The party in a mortgage transaction who receives and holds the mortgage as security; the lender.

Mortgage Insurance
An insurance policy to protect a lender against loss caused by a borrower’s default.

N

Negative Amortization
A situation where the loan balance increases over time, rather than decreases. Monthly mortgage payments may be less than required to pay both the interest and the principal and the unpaid interest is added to the loan balance.

Net Worth
The value of all assets less total liabilities.

Non-Conforming Loan
A conventional mortgage loan that does not comply with the underwriting criteria established by “Fannie Mae” or “Freddie Mac”.

Note (Promissory)
A written promise to pay a sum of money at a stated interest rate during a specified term; legal evidence of a debt; sometimes referred to as a “mortgage note”.

Note Endorsed with Recourse
A mortgage note assigned in the secondary market with the right of the note holder (assignee) to seek payment from the endorser (assignor); not limiting recovery solely from the property.

Note Endorsed with Non-Recourse
A mortgage note assigned in the secondary market without the right of the new note holder (assignee) to seek payment from the endorser (assignor) limiting recovery solely from the property.

O

Open-End Clause
Permits the mortgagor to re-borrow funds which had been previously repaid, up to the original face amount of the loan, upon agreement of both lender and borrower; a clause allowing future advances.

Origination Fee
The fee for the work involved in the evaluation, preparation, and submission of a proposed mortgage loan from individual borrowers.

P

Package Mortgage
A mortgage which includes personal property (chattel) together with the real property.

Par
The face amount of a mortgage or charge with no premium or discount.

Participation Loan
A mortgage originated with funds provided by multiple lenders, each being a participant in the total amount loaned.

Prepayment Penalty Clause
A provision in a mortgage that requires the borrower to pay a monetary penalty if the mortgage payments are made in advance of the normal due date or if the mortgage is paid in full ahead of schedule.

Prepayment Privilege Clause
The right given a borrower to pay all or part of a debt prior to maturity without penalty. A penalty is not permitted on any government-underwritten law.

Primary Mortgage Market
The market where loans are funded by institutions or investors directly to borrowers.

Principal
The amount of a debt, not including interest; the outstanding balance of a loan.

Private Mortgage Insurance (PMI)
Insurance provided by a private company protecting conventional mortgage lenders against loss resulting from a mortgagor’s default.

Purchase Money Mortgage (PMM)
A mortgage given (in lieu of cash) by the purchaser of real property to the seller as part of the consideration in the sales transaction; often considered “seller financing”.

R

Real Estate Sales Contract
A written agreement whereupon a seller commits to sell and a buyer commits to purchase certain real estate. Provisions include: price, terms, financing, down-payment, and responsibility for property settlement expenses. Most contracts provide for buyer or seller to cancel the contract and permit return of buyer’s deposit if diligent efforts to meet financing contingencies have been unsuccessful.

Real Estate Settlement Procedures Act (RESPA)
A federal law requiring that all closing costs be disclosed on a Good Faith Estimate within 3 business days, use of a HUD-1 Settlement Statement, requires lenders disclose the likelihood that the servicing rights may be transferred and limits the amount held in escrow to pay for taxes and insurance.

Retail Lender (Banks)
A lender who offers mortgage loans directly to the public.

Reverse Mortgage
A mortgage in which a lender may make scheduled monthly payments to the borrower using mortgage-free property as collateral.

Right of Rescission
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner 3 business days to cancel a contract in some cases, once it is signed, if the transaction uses equity in the home as security.

S

Secondary Mortgage Market
The market where existing mortgages are bought and sold. It contrasts with the primary mortgage market, where mortgages are originated.

Security Interest
An interest that a lender takes in the borrower’s property to assure repayment of a debt.

Servicing
The collection for an investor of periodic payments of principal, interest, and trust items (hazard insurance and taxes) in accordance with the terms of the note and mortgage.

Servicing Fee
The compensation a lender receives from an investor for servicing loans on its behalf.

Setback
Restrictions established in a deed or by zoning on the space required between lot lines and building lines.

Shared Appreciation Mortgage (SAM)
A mortgage in which a lender charges a below-market interest rate in exchange for a share of the property’s appreciation upon the sale or maturity of the loan.

Simultaneous Issue
The act of a title insurance company providing both an owner’s title policy and mortgagee’s title policy at the same time.

Stand-By Commitment
A commitment to purchase a loan whereby both parties understand that delivery is not likely unless circumstances warrant.

Stand-By Fee
The fee charged by an investor for a stand-by commitment. The fee is earned upon issuance and acceptance of the commitment.

Subject to the Mortgage
A purchaser acquires real property with an existing mortgage, upon which purchaser makes payments but does not take personal liability for the promissory note.

Subordination
Voluntary acceptance of a lower mortgage priority than one would otherwise be entitled to have in that property. A subordinated mortgage is inferior to a senior mortgage.

T

Taxable Value
The assessed value less allowable exemptions resulting in an amount to which the millage rate is applied to determine property taxes due.

Term Mortgage
A mortgage wherein only interest is periodically paid, with the entire principal amount due in one lump sum upon maturity.

Title
The evidence of the right to ownership of property.

Title Insurance Policy
A contract by which the insurer agrees to pay the insured a specific amount for any loss resulting from certain defects in the title to real estate.

Title Search
An analysis of the abstract of title on a specific piece of property in order to determine the present condition of title.

Truth-In-Lending Act (Regulation “Z”)
A federal regulation requiring disclosure of the APR, certain finance charges, the 3-day right of rescission when refinancing a primary residence, and certain additional disclosures when advertising financing terms.

U

Underwriting
The analysis of information relating to risk and making a decision whether or not to accept that risk. The underwriter evaluates the borrower’s ability and willingness to repay the obligation and establishes that the property represents adequate security for the debt.

Unencumbered Property
A property the title to which is free and clear of mortgage liens.

Utilization Ratio
The ratio between the credit limits on your accounts and the outstanding balances. This ratio shows lenders how much of your available credit you are using overall.

V

VA Loan
A loan partially guaranteed by the government made by a DVA approved lender to a qualified veteran.

W

Warranty Deed
A deed in which the grantor warrants or guarantees title against any and all claims.

WDO Inspection Report
A report from a certified pest control inspector determining the presence or absence of visible current termite infestation, or any visible evidence of structural damage from prior infestation or wood rot.

WDO Clearance Letter
Certification that no visible current termite infestation or any visible evidence of structural damage exists.

Wholesale Lender (Mortgage Broker)
A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower’s application, and processes the loan.

Wraparound Mortgage
A junior mortgage, which secures a debt that includes the balance due on an existing senior mortgage plus an additional amount due to the wraparound mortgagee. The wraparound mortgagee thereafter receives all payments and then remits the payments on the senior mortgage. In most cases, the purchase price minus the down payment will equal the wraparound mortgage amount.

Y

Yield
The annual return on an investment stated as a percentage of the equity invested.