Sharon Rhodes
The 'Perfect Agent' to handle your next real estate transaction.
Mortgage Terms

A Glossery of Mortgage Terms

"A Paper" - Refers to mortgage loans with interest rates that have not been adjusted for marginal credit or excessive ratios. Generally, to be eligible for "A Paper" a middle credit score of 620 or better is needed; however, with 20% down a lower credit score may be acceptable. Major delinquencies such as bankruptcies or foreclosures can make a client ineligible for "A Paper", especially if they are looking for a high LTV loan (95% or higher). All first mortgage "A Paper" is graded by an automated underwriting system.

Acceleration Clause - A clause in the mortgage note that allows the lender to speed up the rate at which the loans comes due, as well as call the note due and payable immediately upon default.

Adjustable Rate Mortgage (ARM) - Refers to a mortgage with has a note rate that fluctuates during the life of the loan based on an index and specified parameters, such as margins, caps, etc.

Adjustment Interval - The specified time between interest rate (or payment) changes on an adjustable rate mortgage.

Administrative Fee - A fee charged by some lenders/investors to cover the costs associated with processing, underwriting, and document preparation, in lieu of charging separate fees.

Amortization - The reduction of debt through regularly scheduled monthly payments of principal and interest, which are large enough to pay the loan in full by maturity.

Annual Percentage Rate (APR) - The annual cost of borrowing money expressed as a percentage of the loan amount, which includes loan related charges and fees. Reflects the real cost of borrowing money and can be used to compare similar loans by various lenders.

Appraisal - A written estimate of the current market value of a property. It entails a comparison of recent comparable sales (comps), as well as an analysis of the cost to rebuild the property in its current condition.

Appraisal Fee - The fee charged by a qualified appraiser to estimate the current market value of a property.

Appraisal Review Fee - Also called Field Review. The fee charged by an investor (or their appraiser) to review the appraiser's work to insure that the appraised value is realistic based on current market.

Assumable Mortgage - A mortgage that can be taken over with no change in terms for the remaining life of the loan. Most assumable loans now require qualification and release of liability. Most conventional loans are not assumable.

Assumption - An agreement between the seller and buyer, whereby the buyer takes over payments on the existing mortgage. 
 
Automated Underwriting - A term used to refer to an instant underwriting decision regarding an application for a mortgage loan. There are several systems in use today, including Loan Prospector and Desktop Underwriting.

Balloon Payment Mortgage - A mortgage that has amortized payments for a period of years and then the remaining principal balance comes due at the end of the specified period. The most common types are the 7/23, 5/25, and 30/15.

Bridge Loan - A short-term loan that is used to borrow equity against a property that you are selling to use as down payment on the property you are purchasing.

Buydown or Temporary Buydown - Use of a subsidy to obtain lower payments during the first one to three years of the mortgage, usually paid for by either the lender or homebuilder. The most common temporary buydown is the 2/1, which lowers the payments by 2% interest in the first year and 1% in the second year. This term is often used to refer to paying points to lower the interest rate over the entire life of the loan.

Caps - Refers to the limits set on interest rate changes (and payment changes, if applicable) during the life of an adjustable rate mortgage, which dictate how much the interest rate can increase or decrease per change, as well as over the life of the loan.

Cash-Out Refinance - A refinance in which the new loan amount exceeds the total amount needed to payoff the existing mortgage and pay the costs of the refinance. Often used to borrow against the equity of a home while lowering the interest rate on the existing mortgage, rather than taking a second mortgage.

Closing (or Settlement) - The finalization of a real estate purchase, where all final paperwork has been executed by the buyer, seller, lender, and title company and the mortgage loan has funded and documents sent to record the transfer of title and release existing liens.

Closing Cost - A term used to refer to any lender or title company fees associated with the purchase of a property and the associated mortgage loan, such as loan origination, title company fees, appraisal fees, etc.

Closing Fee - Also referred to as Settlement Fee or Escrow Fee. The fee charged by a title company or other neutral third party for handling the paperwork and funds to complete the transfer of real estate. Includes the cost of doing title searches and searching the county records for tax liens and judgments that could take priority over a new mortgage.

Conforming Loan - Refers to mortgages that are eligible for purchase by Fannie Mae or Freddie Mac, the largest purchasers of non-government mortgages.

Construction Loan (or Interim Financing) - Refers to short-term interim financing to construct a property or building. The lender advances funds to the builder/developer as construction progresses.
 
Conventional Loan - Refers to mortgage loans that are not insured or guaranteed by the government. There are many sub-types, including conforming, jumbo, sub-prime, etc.

Conversion Option - An option in an adjustable rate mortgage that allows you to convert to a fixed rate mortgage for the remaining term of the mortgage.

Courier Fees - Fees collected to cover the cost of hiring a courier service to expedite the transfer of documents between the lender and the title company.

Credit Report Fee - A fee charged by a lender to obtain a complete credit history on an individual. Most lenders pull a tn-merged (three bureau) report. In some cases an RMCR (Residential Mortgage Credit Report) may be required if information on the credit report needs correcting or updating for underwriting.

Credit Scores - Refers to the credit bureau rating system, usually denoted as FICO scores in the lending industry. The three credit bureaus grade current and prior credit history by evaluating payment history, type of credit established, total available credit, amount of credit in use, lack of credit, recent inquiries, and other major delinquencies such as bankruptcies, foreclosures, repossessions, collections, charge-offs, judgments, and tax liens. The evaluation of these factors results in a score that creditors use to determine whether or not they will extend credit to an applicant. Scores range from the 400s to the 800s and a higher score indicates less risk of default.

Debt Ratio - A ratio used in underwriting that determines what percentage of gross monthly income is going to pay current monthly recurring debt plus the proposed housing expense for the new mortgage.

Discount Points - Charged to buy the interest rate below current market over the life of the loan. They are charged as a percent of the loan amount - 1 point equals 1%. Generally, 1 point will buy the interest rate down 0.25%. However, because of rounding and required investor yield this is only a "rule of thumb". Discount points are tax-deductible because they are prepaid interest; they make up the difference needed to get the desired yield over the life of the loan.

Document Preparation Fee - A fee charged by the lender for the preparation of all the final closing paperwork including loan documents and deeds of trust to complete the purchase of a property with a mortgage.

Down Payment - The difference between the loan amount and sales price that must be pald by the buyer. Does not include any closing costs or prepaid expenses.

Endorsements - Riders to the ALTA (American Land Title Association) policy that extends the coverage for specific items, such as PUDs, Condos, environmental liens, etc.

Escrow - Refers to the account held by the lender used to collect property taxes, hazard insurance, and mortgage insurance through the scheduled monthly mortgage payment. Also used to refer to the service provided by the title company who handles the title search and closing on a real estate purchase.
  
Fannie Mae (FNMA) - The name used to identify the Federal National Mortgage Association, which is a tax-paying corporation (created by Congress) who is one of the largest purchasers of conventional residential mortgages, as well as FHA insured and VA guaranteed mortgages. They set standards that conventional conforming mortgages must be underwritten by to be eligible for purchase by them in the secondary market. Their automated underwriting system is call Desktop Underwriting, or DU for short.

Farmers Home Administration (FmHA) - The entity that provides financing to farmers and other qualified buyers who are unable to obtain loans elsewhere.

FHA Loan - Refers to a mortgage that is insured by the Federal Housing Administration. All qualified purchasers of owner-occupied homes are eligible; however, there are maximum loan limits set by County that restrict what can be borrowed on an FHA loan.

Final Inspection Fee - A fee charged by an appraiser to inspect and certify completion of construction (new homes, pools, etc.) or repairs.

Finance Charge - Refers to the total dollar amount that borrowing money (credit) will cost you.

Financing Concessions - Refers to funds from an interested party to the transaction used to reduce the interest rate, pay closing costs and prepaids, subsidize the borrower's interest rate, or pay other costs related to the purchase, such as association dues.

Fixed Rate - Refers to a mortgage with fixed or "set" interest rate for the term of the mortgage.

Flood Certification Fee - A fee charged by a third party company to determine whether or not the subject property is in a flood zone requiring flood insurance.

Freddie Mac (FHLMC) - The name used to identify the Federal Home Loan Mortgage Corporation, which is a quasi-governmental agency that purchases conventional mortgages from approved mortgage bankers and insured depository institutions. Their automated underwriting system is call Loan Prospector, or LP for short.

Funding Fee - The one-time upfront fee charged a Veteran (or active military) borrower on a VA mortgage loan. Can be paid in cash at closing or financed by adding it to the base loan amount.

Ginnie Mae (GNMA) - Used to identify the Government National Mortgage Association, which provides sources of funds for residential mortgages that are insured or guaranteed by FHA or
VA.

Graduated Payment Mortgage - A flexible-payment type mortgage where the payments increase for a specified number of years and then level off for the remaining term of the loan. This type of mortgage allows for negative amortization during the early years of the loan.

Gross Monthly Income - The total monthly earnings before deduction of taxes or other expenses.
 
Hazard Insurance - A form of property insurance that protects the insured from specified losses, such as fire, windstorm, theft, and the like. The first year annual premium must be paid in full at closing to put the hazard (homeowners) insurance coverage in force when a property is purchased with a mortgage. If escrows are "waived" the customer must still provide evidence of insurance. The same applies to flood insurance if the property is in a flood zone.

Home Equity Line of Credit (HELOC) - Refers to a secondary form of financing that consists of a revolving line of credit secured again a property that is subordinated to the existing first mortgage. They usually have a variable interest rate.

Home Equity Loan - A mortgage loan that is used to borrow equity from your home, which is secured against the property in the form of a second mortgage or line of credit (HELOC).

Housing Ratio - A ratio used in underwriting that determines what percentage of gross monthly income is going to the proposed housing expense for the new mortgage.

HUD - Abbreviation used to identify the U.S. Department of Housing and Urban Development. The Office of Housing/Federal Housing Administration within HUD insures FHA home loans made by lenders and they also set minimum standards for such home loans.

Impound - The portion of the monthly mortgage payment held by the lender or servicer to pay for property taxes, hazard insurance, mortgage insurance, and other items as they come due. Also referred to as reserves.

Index - Refers the specific fund or security yield that your adjustable rate mortgage is tied to. Also refers to the published interest rate for a specified investment used in an adjustable rate mortgage, such as a one-year treasury bill.

In-File Credit Report - A report issued by one credit bureau (repository) containing information about an individual's credit history.

Initial Interest Rate - The interest rate you pay when you first take out the mortgage loan. On some types of mortgages this rate may only be for the first month, but on a fixed rate mortgage it stays the same for the life of the loan.

Interest - Is the charge paid for borrowing money, usually expressed as a percentage of the amount borrowed or interest rate.

Interest Rate - The annual rate of interest charged on a loan, expressed as a percentage of 100.

Interest Rate Adjustment Period - See Adjustment Interval.

Interest Rate Caps - See Caps.

Investor - Is the money source for a mortgage lender.
  
Jumbo Loan - Refers to a mortgage that exceeds the maximum conforming loan limits set down by Fannie Mae and Freddie Mac (currently $275,000 for a single-family home). Because these mortgages are not eligible for purchase by these agencies they usually carry a higher rate of interest.

Lender - The company that performs the functions necessary to complete a mortgage loan transaction, including mortgage bankers, mortgage brokers, and third party originators (TPOs).

Liquid Assets - Refers to cash or other assets that can be readily converted to cash. Examples include checking and savings accounts, money markets, CDs, mutual funds and stocks, retirement plans (not pensions), cash-value life insurance policie,s and annuities.

Loan Amount - Refers to the amount being borrowed not including any interest.

Loan-to-Value Ratio (LTV) - A percentage that determines what amount the mortgage loan is of the appraised value or purchase price, whichever is lower.

Lock Period - Refers to the amount of time during which the interest rate lock is guaranteed for. Lock periods range from 10 to over 90 days, but the longer the lock period the higher the interest rate or points you will be charged.

Margin - The specified amount that is added to the index on an adjustable rate mortgage to determine the adjusted interest rate.

Merged Credit Report - Also referred to as a Merged In-File or Three Bureau credit report. A report provided by a credit company that consolidates information from all three credit bureaus (repositories). The report may be individual or joint for a married couple.

Minimum Down Payment - The amount that is required to be put down at closing for a specified mortgage, which does not include any closing costs or prepaid items.

Monthly Payment - The minimum amount that must be paid each month on a loan. On a mortgage this usually includes both principal and interest, and may include other items such as property taxes, hazard insurance, and mortgage insurance.

Mortgage - A lien against real property given to a lender as security for the money borrowed. MIP (Mortgage Insurance Premium) - The monthly mortgage insurance required on FHA loans.

Mortgage Banker - A mortgage banker is a company that originates, processes, underwrites, and funds loans in their name. Depending on the size of the company, they may service the loan or sell it to a larger company after the loan is closed.

Mortgage Broker - Mortgage brokers are entities or persons who specialize in matching borrowers and lenders for specific program needs. They collect a commission for placing the loan, typically referred to as a mortgage broker fee.
  
Mortgage Broker Fee - A fee charged by a mortgage broker for placing the loan with an investor or mortgage banker.

Mortgage Insurance - Is a form of insurance that protects the lender or investor against loss from default on a mortgage. It is usually collected as an addition to the monthly mortgage payment, although some loans require an upfront or first year premium to be paid as a lump sum. See PMI and MIP.

Mortgage Note - A written agreement that specifies the terms of a mortgage loan and serves as proof of the indebtedness and specifies the manner in which it will be repaid.

Mortgagee - The mortgage lender or party granting the loan.

Mortgagor -- The borrower on a mortgage loan or the party requesting the loan.

Negative Amortization - The unpaid interest that is added to the remaining principal balance of a mortgage when the monthly payment is not large enough to pay all the accrued interest currently due.

No Doc Loan - A mortgage product that does not require any documentation or disclosure of employment, income, or assets. This type of mortgage is offered at a higher interest rate because of the risk to the lender or investor.

No Income/No Asset Loan - A mortgage product that does not require any income or asset documentation. This type of mortgage is offered at a higher interest rate because of the risk to the lender or investor.

No Ratio Loan - A mortgage product that does not consider ratios in the qualification. This type of mortgage is offered at a higher interest rate because of the risk to the lender or investor.

Non-Conforming Loan - A conventional mortgage that does not meet Fannie Mae or Freddie Mac's criteria for loan amount, credit, ratios or other underwriting criteria, such as employment history. Non-conforming products include Jumbo loans, Stated Income loans, No Doc loans, No Ratio loans, or credit-graded Sub-Prime loans.

Origination Fee - Also referred to as Loan Origination Fee. A fee charged by a lender that covers the cost of originating a mortgage loan. The fee is usually computed as a percentage of the total loan amount.

Piggyback - Refers to combining a first mortgage with a purchase money second or seller carryback to avoid paying mortgage insurance.

PMI (Private Mortgage Insurance) - The monthly mortgage insurance required on most Conventional type loans with LTV's greater than 80.0%.

Prepaid Interest - The per diem interest charged from the day of loan funding to the last day of the month. Because interest on a mortgage is collected in arrears, interest that will accrue in the month of closing must be prepaid.
  
Processing Fee - A fee charged by the lender to cover the cost of processing the paperwork needed to underwrite and close a mortgage loan.

Purchase Money Second - Is an amortized mortgage that takes second lien position behind the first mortgage to avoid paying mortgage insurance on a high LTV first mortgage. Sometimes called a Second Trust Deed or Loan. See Piggyback.

Recording Fees - Money paid to the lender for having the deed recorded with the county recorders office to make it part of the public records.

Release - The fee charged by the title company to record the release of the seller's lien when ownership is transferred to a new person/entity.

Reserves - The lender's requirement for initial deposits into the escrow (impound) account for property taxes, hazard and flood insurance, and mortgage insurance (MIP or PMI). Lenders require reserves because mortgage payments are delayed 3 0-60. This insures there will be enough funds to pay the insurance and taxes when they are billed (in advance of the due date).

Sales Concession - Refers to any incentive given by a seller to the buyer to purchase a property, such as money for closing costs, interest rate buydowns, and personal property such as appliances, furniture, etc.

Second Home - A one-unit property owned by an individual who occupies it for some portion of the year, but does not use it as a primary residence. The property cannot be located in the same metropolitan area and cannot be subject to any timesharing.

Security - Property pledged to the creditor in case of a default on the loan. Also referred to as collateral.

Security Interest - The creditor's right to take property back that was offered as security or collateral.

Self-Employed Borrower - An applicant who owns a 25% or more interest in a business.

Seller Contribution - The maximum amount a buyer can receive from a seller towards the payment of closing costs, prepaid items, and discount points. The maximum contribution varies by the loan type and sometimes loan-to-value (LTV) and is considered a sales concession.

Servicing - Refers to the collection of monthly mortgage payments and distribution of payments for property taxes, homeowner's insurance, etc. done by a lender.

Settlement - See Closing.

Settlement Costs - Refers to charges associated with the purchase and financing of a piece of real estate. See Closing Costs and Prepaids.
 
Stated Income Loan - A mortgage product that certain lenders offer that does not require any income documentation, but does require a stable 2-year employment history. This type of mortgage is offered at a higher interest rate because of the risk to the lender or investor.

Sub-Prime Loan - Refers to mortgages that do not meet normal credit criteria or scores because of current and/or prior credit history. This type of mortgage is offered at a higher interest rate because of the risk to the lender or investor.

Tax Service Fee - A fee charged by the lender to hire and retain a third-party who tracks the property taxes owed and paid on mortgaged properties.

Temporary Buydown - See Buydown.

Term - The period of time between the beginning loan date as specified on the legal documents and the date the entire balance of the loan is due in full. The term of a mortgage can be shorter than the amortization period, such as a 30 due in 15 (30/15) loan.

Termite Inspection - Most lenders require a clear termite inspection on resale home purchases. The fee is typically paid direct to the termite inspection company.

Title - The document that gives evidence of an individual's ownership of a property.

Title Insurance - A policy that insures the homebuyer and/or lender against errors in the title search. There are two types of policies typically used on a purchase transaction, the owner's title policy that insures the buyer and the ALTA (lender's) policy that insures the lender.

Title Search - A through examination of municipal records to determine legal ownership of a property, as well as determine what liens are currently recorded against the property.

Treasury Index - An index based on Treasury Bill yields that is used for Adjustable Rate Mortgages

Truth-in-Lending - A federal law that requires lenders to disclose the Annual Percentage Rate (APR) to homebuyers within 3 business days of applying for a mortgage.

UFMIP (Upfront Mortgage Insurance Premium) - Refers to the upfront mortgage insurance required on all FHA loans, which can be financed by adding it to the base loan amount.

Underwriting - The analysis of risk to determine whether or not a lender will make a mortgage loan, which involves the evaluation of credit, income, assets, employment history, ratios, and the property appraisal.

Underwriting Fee - A fee charged by the lender to cover the cost of underwriting loans. Some lenders have underwriters on staff, while others contract underwriting out to PMI companies or the underlying investor.

VA Funding Fee - The premium, up to 3% of the loan amount, that is paid on a mortgage backed by the Veterans Administration.
 
VA Loan - Mortgages insured by the Veteran's Administration that are only available to retired or active duty military people (and veteran's surviving spouse) who have served the required time to have eligibility. VA sets the maximum loan amount (including funding fee) that they will guarantee against default, as well as the underwriting standards. This program allows an eligible borrower to purchase with no down payment.

Verification of Deposit - A document used by the mortgage company to verify balance and status of an applicant's bank accounts and other liquid assets.

Verification of Employment - A document used by the mortgage company to verify an applicant's employment, including type of pay, date of employment, position, etc.

Verification of Rent or Mortgage - A document used by the mortgage company to obtain a rent or mortgage payment history on an applicant.

Waiver of Escrow Fee - The fee charged by an investor/lender to "waive escrows" because of the increased risk to the investor when they cannot control the payment of property taxes and hazard insurance. Normal charge is .25, which equates to 0.25% of the loan amount paid as discounts/ points or adds 0.125% to the interest rate.

Wholesaler - Is a lender that provides loans to borrowers through correspondents or mortgage brokers, where the correspondent or broker processes the actual loan.

Wraparound - Combining an existing assumable loan with a new loan, resulting in an interest rate somewhere between the old interest rate and current market rate. Payments are usually serviced by a Title Company, who then forwards payments to the first mortgage lender and disburses the difference as agreed in the "wrap" after their service fee.