Essential Mortgage Glossary:
Your Comprehensive Guide to Lending Terms
A
Acceleration Clause
A provision in a mortgage contract that allows the lender to demand the full loan balance upon the borrower's default or failure to meet specific conditions.
Accrued Interest
The amount of interest that has accumulated on a loan since the last interest payment was made.
Additional Principal Payment
A payment made by the borrower in addition to their regular mortgage payment, specifically designated to reduce the outstanding principal balance.
Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically, typically in relation to an index, such as the prime rate or Treasury bills. The interest rate may adjust at specified intervals, such as annually or monthly.
Adjusted Basis
The original cost of a property, plus the value of any improvements, minus any depreciation taken for tax purposes.
Adjustment Date
The date on which the interest rate of an adjustable-rate mortgage changes, typically following the end of the initial fixed-rate period.
Adjustment Period
The length of time between interest rate adjustments for an adjustable-rate mortgage.
Affordability Analysis
An evaluation of a borrower's ability to afford a mortgage, taking into account their income, debts, and other financial obligations.
Amortization
The process of paying off a mortgage loan through regular principal and interest payments, gradually reducing the loan balance over a set period.
Amortization Term
The length of time it takes to fully amortize a mortgage, typically expressed in months or years.
Annual Percent Rate (APR)
The yearly cost of a mortgage, expressed as a percentage, including the interest rate and other fees, such as points and origination fees. The APR allows borrowers to compare the true cost of different mortgage options.
Application Fee
A fee charged by a lender to cover the cost of processing a mortgage application.
Appraisal
A professional assessment of a property's market value, typically conducted by a licensed appraiser, to determine if the property is worth the purchase price or loan amount.
Appraised Value
The estimated market value of a property, as determined by a professional appraiser.
Asset
An item of value owned by an individual or company, such as real estate, stocks, or cash.
Assignment
The transfer of a mortgage from one party to another, such as when a lender sells a mortgage to an investor.
Assumability
The ability of a mortgage to be transferred from the current homeowner to a new buyer, allowing the buyer to take over the existing mortgage terms, including interest rates and repayment schedule.
Assumption Fee
A fee charged by a lender when a buyer assumes an existing mortgage from the seller.
Automated Underwriting System (AUS)
A computerized system used by mortgage lenders to evaluate loan applications, assess borrower risk, and provide recommendations for loan approval or denial based on predefined criteria.
B
Balance
The outstanding principal amount owed on a mortgage or other loan.
Balance Sheet
A financial statement that lists an individual or company's assets, liabilities, and net worth at a specific point in time.
Balloon Mortgage
A mortgage with a large final payment, or "balloon payment," due at the end of the loan term. The borrower typically makes smaller, interest-only payments throughout the loan term and then pays off the remaining principal balance in one lump sum.
Balloon Payment
The large, final payment due at the end of a balloon mortgage term, which pays off the remaining principal balance.
Before-tax Income
A borrower's total income before taxes and other deductions are taken out.
Biweekly Payment Mortgage
A mortgage with payments made every two weeks instead of monthly, resulting in the equivalent of one extra monthly payment each year and a faster payoff of the loan.
Bridge Loan
A short-term loan used to finance the purchase of a new property before selling the borrower's existing property. The bridge loan is typically secured by the existing property and repaid once it is sold.
Broker
A licensed professional who serves as an intermediary between borrowers and lenders, helping to facilitate mortgage transactions. Brokers work with multiple lenders to find the best mortgage options for their clients.
Buydown
A financial arrangement in which the borrower or another party, such as the seller or builder, pays an upfront fee to reduce the interest rate on a mortgage for a specific period.
Buydown Account
An account established by a borrower, seller, or third party to temporarily subsidize a mortgage's interest rate, resulting in lower monthly payments for a specified period.
C
Cap
A limit on how much the interest rate on an adjustable-rate mortgage can change during a specified adjustment period or over the life of the loan.
Cash-out Refinance
A refinancing transaction in which the new loan amount is greater than the outstanding balance of the existing mortgage, allowing the borrower to receive the difference in cash to use for other purposes, such as debt consolidation or home improvements.
Certificate of Eligibility
A document issued by the Department of Veterans Affairs (VA) that verifies a borrower's eligibility for a VA loan based on their military service.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum loan amount for a VA mortgage, based on the appraised value of the property.
Change Frequency
The frequency at which the interest rate on an adjustable-rate mortgage can change, such as annually or monthly.
Closing
The final step in a real estate transaction, during which ownership of the property is transferred from the seller to the buyer and the mortgage documents are signed.
Closing Agent
A neutral third party, such as an attorney or escrow company, responsible for coordinating the final steps of a mortgage transaction, including the preparation and execution of closing documents, the disbursement of funds, and the recording of the deed and mortgage.
Closing Costs
Fees and expenses associated with finalizing a mortgage transaction, such as loan origination fees, title insurance, appraisal fees, and recording fees. Closing costs are typically paid by the borrower and/or seller at closing.
Closing Disclosure (CD)
A standardized form provided by a lender to a borrower at least three business days before closing on a mortgage loan, detailing the final terms and costs of the loan, including the interest rate, monthly payment, and actual closing costs. The Closing Disclosure is designed to help borrowers understand their loan terms and ensure that they match the terms outlined in the Loan Estimate.
Collateral
Property pledged as security for a loan, such as the home in a mortgage transaction. If the borrower defaults on the loan, the lender can seize and sell the collateral to recover their losses.
Compound Interest
Interest calculated on both the initial principal and any accumulated interest, causing the total amount of interest to grow at an increasing rate over time.
Construction-to-Permanent Loan
A mortgage loan that combines financing for the construction of a new home and the permanent mortgage into a single loan, with one closing and one set of closing costs.
Consumer Reporting Agency (or Bureau)
An organization that collects and maintains credit information on individuals, such as their payment history, outstanding debts, and credit inquiries. Lenders use this information to evaluate a borrower's creditworthiness.
Conversion Clause
A provision in some adjustable-rate mortgages that allows the borrower to convert the loan to a fixed-rate mortgage at specified times during the loan term, usually for a fee.
Co-signer
An individual who agrees to be responsible for a borrower's debt in the event the borrower defaults on the loan. The co-signer's credit history is considered in the loan application process, potentially improving the borrower's chances of approval.
Credit
The ability of an individual or company to borrow money, based on their history of repaying debts and other financial obligations.
Credit Report
A record of an individual's credit history, including their payment history, outstanding debts, and credit inquiries, maintained by a consumer reporting agency.
Credit Risk Score
A numerical rating, also known as a credit score, used by lenders to evaluate a borrower's creditworthiness. The most widely used credit risk score is the FICO score, which ranges from 300 to 850.
D
Debt-to-Income (DTI) Ratio
A calculation that compares a borrower's total monthly debt payments, including their mortgage payment, to their gross monthly income. Lenders use the DTI ratio to determine a borrower's ability to afford a mortgage.
Deed of Trust
A legal document used in some states that serves as evidence of a mortgage, transferring the legal title of a property from the borrower to a trustee until the loan is repaid.
Default
The failure of a borrower to meet their loan obligations, such as not making required mortgage payments or violating the terms of the mortgage agreement.
Delinquency
The status of a loan when a borrower has not made a required payment by the due date or within an agreed-upon grace period.
Deposit
An upfront payment made by the buyer to the seller to secure the purchase of a property, also known as earnest money. The deposit is typically held in an escrow account and applied toward the down payment at closing.
Discount
A reduction in the interest rate or principal balance of a loan, often offered as an incentive for early repayment or as part of a loan modification agreement.
Discount Point/Fee
Fees paid to the lender to secure a lower interest rate on a mortgage, usually calculated as a percentage of the loan amount.
Down Payment
The portion of a property's purchase price that the buyer pays upfront, not financed by the mortgage. A larger down payment can result in a lower mortgage interest rate and smaller monthly payments.
Discount Points
Prepaid interest paid at closing to reduce the interest rate on a mortgage. One discount point is equal to 1% of the loan amount.
Due-on-Sale Clause
A provision in a mortgage agreement that requires the borrower to pay off the loan in full upon the sale or transfer of the property, preventing the new owner from assuming the existing mortgage.
E
Effective Gross Income
A borrower's total income before taxes, plus any tax-exempt income, such as Social Security benefits or child support payments.
Equity
The difference between the market value of a property and the outstanding mortgage balance. As the borrower makes mortgage payments and the property's value increases, their equity in the property grows.
Escrow
A neutral third-party account used to hold and disburse funds during a real estate transaction, such as the buyer's deposit or the lender's portion of the mortgage payment.
Escrow Disbursements
Payments made from an escrow account to cover expenses related to a mortgage, such as property taxes and homeowners insurance.
Escrow Payment
A portion of a borrower's monthly mortgage payment that is held in an escrow account to cover property taxes, homeowners insurance, and other expenses.
F
Fannie Mae
A government-sponsored enterprise (GSE) that buys and guarantees mortgages from lenders, providing liquidity to the mortgage market and making it easier for borrowers to obtain loans. Fannie Mae stands for the Federal National Mortgage Association (FNMA).
FHA
The Federal Housing Administration, a government agency that insures mortgages made by approved lenders to eligible borrowers, reducing the risk to lenders and making it easier for borrowers to obtain loans.
FHA Mortgage
A mortgage insured by the Federal Housing Administration, which often features lower down payment requirements and more lenient credit standards compared to conventional mortgages.
FICO
A credit scoring model developed by the Fair Isaac Corporation, used by lenders to evaluate a borrower's creditworthiness. FICO scores range from 300 to 850, with higher scores indicating lower credit risk.
FICO Score
A numerical rating, also known as a credit score, used by lenders to evaluate a borrower's creditworthiness. The FICO score is the most widely used credit scoring model, with scores ranging from 300 to 850.
First Mortgage
The primary mortgage loan on a property, which has priority over any subsequent mortgages or liens in the event of foreclosure or sale.
Fixed Installment
A set monthly payment amount that remains constant throughout the life of a loan, typically for fixed-rate mortgages.
Fixed Rate Mortgage
A mortgage with an interest rate that remains constant for the entire loan term, resulting in predictable monthly payments.
Freddie Mac
A government-sponsored enterprise (GSE) that buys and guarantees mortgages from lenders, providing liquidity to the mortgage market and making it easier for borrowers to obtain loans. Freddie Mac stands for the Federal Home Loan Mortgage Corporation (FHLMC).
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a payment schedule that ensures the loan will be fully paid off by the end of the term, even if the interest rate increases.
G
Ginnie Mae (GNMA)
The Government National Mortgage Association, a government agency that guarantees mortgage-backed securities composed of loans insured by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and other government programs.
Good Faith Estimate (GFE)
A document provided by a lender to a mortgage applicant, outlining the estimated costs associated with the loan, including interest rates, closing costs, and other fees. The GFE is designed to help borrowers compare different loan offers.
Growing-Equity Mortgage (GEM)
A mortgage with gradually increasing monthly payments, allowing the borrower to build equity more quickly and pay off the loan faster. The additional payments are applied directly to the principal balance.
Guarantee Mortgage
A mortgage that is guaranteed by a third party, such as the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA), reducing the risk to the lender and making it easier for borrowers to obtain loans.
H
Home Equity
The difference between the market value of a property and the outstanding mortgage balance. Home equity can be used as collateral for a home equity loan or line of credit.
Housing Expense Ratio
The percentage of a borrower's gross monthly income that is spent on housing-related expenses, including mortgage payments, property taxes, and homeowners insurance. Lenders use this ratio to determine a borrower's ability to afford a mortgage.
HUD
The U.S. Department of Housing and Urban Development, a federal agency responsible for implementing and enforcing housing policies and programs.
HUD-1 statement
A standardized document provided at closing, detailing the final settlement costs associated with a mortgage transaction, including loan fees, taxes, and other expenses.
Hybrid ARM
An adjustable-rate mortgage (ARM) that combines features of both fixed-rate and adjustable-rate mortgages. Hybrid ARMs typically have an initial fixed-rate period, followed by an adjustable-rate period with periodic interest rate adjustments.
I
Index
A benchmark interest rate, such as the prime rate or Treasury bills, used as a reference to determine the interest rate on an adjustable-rate mortgage.
Initial Interest Rate
The starting interest rate on an adjustable-rate mortgage (ARM), which typically remains fixed for a specified period before adjusting periodically based on a reference index.
Installment
A regular payment made by a borrower to repay a loan, such as a mortgage or auto loan. Installments typically include both principal and interest.
Insured Mortgage
A mortgage that is insured by a third party, such as the Federal Housing Administration (FHA) or a private mortgage insurer, protecting the lender against losses if the borrower defaults on the loan.
Interest
The cost of borrowing money, expressed as a percentage of the loan amount and paid by the borrower to the lender.
Interest Rate
The percentage of a loan amount that a borrower is charged for the use of the lender's money. The interest rate is typically expressed as an annual percentage and can be fixed or adjustable.
Interest Accrual Rate
The rate at which interest is calculated and added to the principal balance of a loan, usually expressed as a daily or monthly percentage.
Interest Rate Buydown Plan
A financial arrangement in which the borrower or another party, such as the seller or builder, pays an upfront fee to reduce the interest rate on a mortgage for a specific period.
Interest Rate Ceiling
The maximum interest rate that can be charged on an adjustable-rate mortgage (ARM) during the life of the loan, as specified in the mortgage agreement.
Interest Rate Floor
The minimum interest rate that can be charged on an adjustable-rate mortgage (ARM) during the life of the loan, as specified in the mortgage agreement.
Interest-Only Mortgage
A mortgage in which the borrower is only required to pay interest on the loan for a specified period, typically five to ten years. After the interest-only period, the borrower must begin making principal and interest payments or refinance the loan.
Investment Property
A property that is purchased with the intention of generating rental income or capital appreciation, rather than being used as a primary residence or second home. Mortgage loans for investment properties generally have higher interest rates and down payment requirements, as well as stricter underwriting guidelines, compared to loans for primary residences.
J
K
L
Late Charge
A fee assessed by a lender when a borrower fails to make a required payment by the due date or within an agreed-upon grace period.
Lease-Purchase Mortgage Loan
A mortgage that combines a lease agreement with an option to purchase the property at the end of the lease term, allowing the borrower to apply a portion of their rent payments toward the purchase price.
Liabilities
Debts and financial obligations owed by an individual or company, such as loans, credit card balances, and taxes.
Lien
A legal claim on a property by a creditor as security for a debt. If the debt is not repaid, the creditor can seize and sell the property to recover their losses.
Life-Cap
The maximum amount by which the interest rate on an adjustable-rate mortgage (ARM) can change over the life of the loan, as specified in the mortgage agreement.
Lifetime Payment Cap
The maximum amount by which the monthly payment on an adjustable-rate mortgage (ARM) can change over the life of the loan, as specified in the mortgage agreement.
Lifetime Rate Cap
The maximum amount by which the interest rate on an adjustable-rate mortgage (ARM) can change over the life of the loan, as specified in the mortgage agreement.
Line of Credit
A flexible borrowing arrangement in which a lender extends credit up to a specified limit, allowing the borrower to draw funds as needed and repay them with interest.
Liquid Asset
An asset that can be quickly and easily converted into cash, such as savings accounts, stocks, and bonds.
Loan
An agreement in which a lender provides funds to a borrower in exchange for the borrower's promise to repay the funds, usually with interest.
Loan Commitment
A written agreement from a lender to provide a mortgage loan to a borrower, specifying the terms and conditions of the loan, including the interest rate, loan amount, and repayment schedule. A loan commitment is typically issued after the completion of the underwriting process, and may be subject to certain conditions or contingencies.
Loan Estimate (LE)
A standardized form provided by a lender to a borrower within three business days of receiving a completed loan application, detailing the estimated interest rate, monthly payment, and total closing costs for the proposed loan.
Loan Modification
A permanent change to the terms of a mortgage loan, such as the interest rate, loan term, or monthly payment, designed to make the loan more affordable for the borrower and avoid foreclosure.
Loan Origination
The process of creating a new mortgage loan, from the initial application and credit evaluation through underwriting, approval, and closing. Loan origination may be performed by a mortgage lender, broker, or other financial institution, and may involve various fees and costs associated with processing the loan application.
Loan Servicing
The ongoing administration of a mortgage loan after closing, including the collection of payments, the maintenance of loan records, and the management of escrow accounts.
Loan to Value Ratio (LTV)
The percentage of a property's appraised value that is financed by a mortgage. A higher LTV ratio typically results in a higher interest rate and may require the borrower to purchase mortgage insurance.
Lock
An agreement between a borrower and a lender to secure a specific interest rate on a mortgage for a specified period, typically 30 to 60 days.
Lock-In Period
The length of time during which a lender guarantees a specific interest rate on a mortgage to a borrower, typically 30 to 60 days.
M
Margin
The percentage added to the reference index rate to determine the interest rate on an adjustable-rate mortgage (ARM).
Maturity
The date on which a loan becomes due and must be paid in full or refinanced.
Monthly Fixed Installment
A set monthly payment amount that remains constant throughout the life of a loan, typically for fixed-rate mortgages.
Mortgage
A loan used to purchase or refinance a property, with the property serving as collateral for the loan. The borrower agrees to repay the loan, plus interest, over a specified term.
Mortgage Banker
A financial institution or individual that originates and funds mortgage loans, using their own funds or funds borrowed from a warehouse lender.
Mortgage Broker
An intermediary who connects borrowers with lenders, helping them find and secure mortgage loans that best suit their needs. Mortgage brokers typically charge a fee or earn a commission for their services.
Mortgage Insurance
Insurance that protects the lender against losses if the borrower defaults on the loan. Mortgage insurance is usually required for loans with a loan-to-value ratio (LTV) above 80%.
Mortgage Insurance Premium (MIP)
The fee paid by a borrower for mortgage insurance, typically added to the monthly mortgage payment.
Mortgage Life Insurance
A type of life insurance policy that pays off the outstanding balance of a mortgage in the event of the borrower's death, ensuring that the borrower's family can remain in the home.
Mortgage Note
A legal document signed by the borrower at closing, which serves as a promise to repay the mortgage loan according to the specified terms, including the interest rate, repayment schedule, and any applicable penalties or fees. The mortgage note is secured by the property and may be transferred or assigned to other parties, such as investors in the secondary mortgage market.
Mortgage Servicing
The ongoing administration of a mortgage loan, including the collection of payments, management of escrow accounts, and communication with borrowers. Mortgage servicing may be performed by the original lender or a separate company that specializes in loan servicing.
Mortgagor
The borrower in a mortgage transaction, who pledges the property as collateral for the loan.
N
Negative Amortization
A situation in which the monthly payments on a loan are insufficient to cover the interest due, causing the principal balance to increase rather than decrease over time.
Net Worth
The total value of an individual's or company's assets minus their liabilities.
No-Income Verification Loan
A type of mortgage loan that does not require the borrower to provide proof of income, typically used for self-employed borrowers or those with irregular income sources. These loans often have higher interest rates and stricter underwriting requirements to compensate for the increased risk to the lender.
Non-Conforming Loan
A mortgage loan that does not meet the underwriting guidelines of Fannie Mae or Freddie Mac, typically due to factors such as loan amount, credit history, or property type.
Non-Liquid Asset
An asset that cannot be quickly and easily converted into cash, such as real estate, artwork, or collectibles.
O
Origination Fee
A fee charged by a lender for processing a loan application and preparing the necessary documents, usually expressed as a percentage of the loan amount.
Owner Financing
A financing arrangement in which the seller of a property provides a loan to the buyer to cover part or all of the purchase price, allowing the buyer to make payments directly to the seller instead of obtaining a mortgage from a traditional lender.
P
Payment Change Date
The date on which the monthly payment on an adjustable-rate mortgage (ARM) changes, typically following a change in the interest rate.
Payment Period
The interval between required loan payments, such as monthly, quarterly, or annually.
Payoff Amount
The total amount required to fully repay a loan, including the remaining principal balance, accrued interest, and any fees or penalties.
Periodic Payment Cap
The maximum amount by which the monthly payment on an adjustable-rate mortgage (ARM) can change during a single adjustment period, as specified in the mortgage agreement.
Periodic Rate Cap
The maximum amount by which the interest rate on an adjustable-rate mortgage (ARM) can change during a single adjustment period, as specified in the mortgage agreement.
Piggyback Loan
A secondary loan used in conjunction with a primary mortgage to help a borrower avoid the need for private mortgage insurance (PMI) or make a larger down payment. Common structures include 80-10-10 or 80-15-5, where the first number represents the primary mortgage, the second number represents the secondary loan, and the third number represents the borrower's down payment.
PITI Reserves
A cash reserve required by a lender, equal to a specified number of months' worth of principal, interest, taxes, and insurance (PITI) payments, to ensure the borrower can continue making payments in the event of financial hardship.
Points
Fees paid to a lender at closing to reduce the interest rate on a mortgage. One point is equal to 1% of the loan amount.
Portfolio Loan
A mortgage loan that is held and serviced by the originating lender, rather than being sold to investors on the secondary mortgage market. Portfolio loans often have more flexible underwriting guidelines, as the lender can set its own criteria and assume the full risk of the loan.
Prepayment
The act of paying off a mortgage loan, or a portion thereof, before the scheduled due date. Prepayment can reduce the total interest paid over the life of the loan but may be subject to penalties or fees, depending on the loan terms.
Prepayment Penalty
A fee charged by a lender if a borrower pays off a loan before the end of the agreed-upon term, to compensate the lender for the lost interest payments.
Pre-Approval
A preliminary evaluation by a lender of a potential borrower's creditworthiness and ability to repay a loan, often resulting in a conditional commitment to provide a mortgage up to a specified amount.
Pre-payment Penalty
A fee charged by a lender if a borrower pays off a loan before the end of the agreed-upon term, to compensate the lender for the lost interest payments.
Pre-Qualification
An informal assessment by a lender of a potential borrower's ability to qualify for a mortgage, based on the borrower's self-reported income, assets, and debts. Pre-qualification does not guarantee loan approval.
Prime Rate
The interest rate charged by banks to their most creditworthy customers, often used as a benchmark for other lending rates, such as adjustable-rate mortgages and lines of credit.
Principal
The original amount of money borrowed in a loan, excluding interest and fees.
Principal Balance
The outstanding amount of a loan, not including interest and fees, that remains to be repaid.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment, which include the loan principal, interest, property taxes, and homeowners insurance.
Private Mortgage Insurance (PMI)
Insurance provided by a private company that protects the lender against losses if the borrower defaults on the loan. PMI is typically required for loans with a loan-to-value ratio (LTV) above 80%.
Property Inspection
A professional examination of a property's condition, typically conducted before a sale, to identify any potential issues, such as structural damage, plumbing or electrical problems, or pest infestations. Property inspections can provide valuable information for both buyers and sellers, and may be a requirement for certain loan programs.
Q
Qualifying Ratios
Lending guidelines used by lenders to evaluate a borrower's ability to afford a mortgage, based on the borrower's debt-to-income (DTI) ratio and housing expense ratio.
R
Rate-and-Term Refinance
A refinancing transaction in which the borrower replaces their existing mortgage with a new loan that has a different interest rate or term, without taking cash out of the transaction.
Rate Lock
An agreement between a borrower and a lender to secure a specific interest rate on a mortgage for a specified period, typically 30 to 60 days.
Recast
The process of adjusting a mortgage loan's monthly payment amount based on a new principal balance, typically following a significant principal prepayment or a change in the loan's interest rate.
Real Estate Agent
A licensed professional who represents buyers and sellers in real estate transactions, helping them find, negotiate, and complete the sale or purchase of a property.
Real Estate Settlement Procedures Act (RESPA)
A federal law that requires lenders and other parties involved in a mortgage transaction to provide borrowers with clear and timely disclosures about the terms and costs of the loan.
Recording
The act of filing documents related to a real estate transaction, such as a deed or mortgage, with the appropriate public office, usually the county recorder's office or registrar of deeds.
Refinance
The process of replacing an existing mortgage with a new loan, often to obtain a lower interest rate, change the loan term, or access equity in the property.
Reverse Mortgage
A type of mortgage loan available to homeowners aged 62 and older, which allows them to convert a portion of their home equity into cash while retaining ownership of the property. The loan becomes due and payable when the homeowner sells the property, moves out, or passes away.
Revolving Liability
A type of credit arrangement, such as a credit card or line of credit, that allows the borrower to borrow, repay, and re-borrow funds up to a specified limit.
Right of Rescission
A provision in the Truth in Lending Act that gives borrowers the right to cancel certain types of mortgage transactions within three business days of closing, without penalty. The right of rescission applies to refinances, home equity loans, and lines of credit, but not to purchase transactions.
S
Second Home
A property that is not the borrower's primary residence but is used for personal enjoyment, such as a vacation home. Mortgage loans for second homes typically have more stringent underwriting guidelines and higher interest rates than loans for primary residences, due to the increased risk of default.
Secondary Mortgage Market
The market in which mortgage loans and mortgage-backed securities are bought and sold by investors, providing liquidity to the primary mortgage market.
Security
Collateral provided by a borrower to secure a loan, such as a property in the case of a mortgage.
Seller Carry-back
A financing arrangement in which the seller of a property provides a loan to the buyer to cover part or all of the purchase price, allowing the buyer to make payments directly to the seller instead of obtaining a mortgage from a traditional lender.
Seller Concessions
Contributions made by a property seller to help the buyer with the purchase, such as covering closing costs, discount points, or other fees. Seller concessions can make a transaction more attractive to the buyer but may be limited by the loan program guidelines.
Seller Financing
A financing arrangement in which the property seller provides a loan to the buyer, rather than the buyer obtaining a mortgage from a traditional lender. Seller financing can be advantageous for buyers who may have difficulty qualifying for a mortgage, or for sellers who want to expedite the sale of a property.
Servicer
A company or individual responsible for managing a loan on behalf of the lender, including collecting payments, maintaining records, and handling any issues that arise during the life of the loan.
Settlement Costs
Fees and expenses associated with the completion of a mortgage transaction, such as loan origination fees, appraisal fees, and title insurance premiums.
Simple Interest
A method of calculating interest on a loan or investment, based on the principal balance and the interest rate, without compounding the interest over time.
Standard Payment Calculation
A method of calculating the monthly payment on a loan, which includes principal, interest, taxes, and insurance (PITI), to ensure the loan is repaid in full by the end of the term.
Stated Income Loan
A type of mortgage loan that allows borrowers to declare their income without providing extensive documentation, such as tax returns or pay stubs. Stated income loans have become less common due to stricter underwriting guidelines and regulations.
Step-Rate Mortgage
A mortgage with an interest rate that changes at pre-determined intervals during the life of the loan, usually starting at a lower rate and gradually increasing. The rate changes are specified in the mortgage agreement.
Streamline Refinance
A simplified refinancing process that requires minimal documentation and underwriting, typically available for borrowers with government-backed loans, such as FHA, VA, or USDA loans. Streamline refinances are designed to lower the borrower's interest rate or monthly payment, without taking cash out of the transaction.
Subordinate Financing
Any mortgage or lien that has a lower priority than the primary mortgage, such as a second mortgage, home equity loan, or home equity line of credit (HELOC). In the event of default, the primary mortgage must be paid off before any proceeds from the sale of the property can be applied to the subordinate financing.
Subprime Mortgage
A type of mortgage loan designed for borrowers with less-than-perfect credit, who may not qualify for a conventional mortgage due to their credit history, income, or other factors. Subprime mortgages typically have higher interest rates and fees to compensate for the increased risk to the lender.
T
Temporary Buydown
A mortgage feature that allows the borrower to temporarily reduce their interest rate and monthly payment for a specified period, usually one to three years, by paying upfront fees or "buydown points" at closing. After the temporary buydown period ends, the interest rate and payment revert to their original levels.
Term
The length of time over which a loan is to be repaid, typically expressed in months or years.
Third-party Origination
The process in which a lender outsources part or all of the loan origination process, such as underwriting or document preparation, to a third party, often a mortgage broker or correspondent lender.
Title Insurance
A type of insurance policy that protects the lender and/or the homeowner against financial losses due to defects in the property's title, such as liens, encumbrances, or ownership disputes. Lender's title insurance is typically required for a mortgage, while owner's title insurance is optional but recommended.
Title Search
A thorough examination of property records, such as deeds, liens, and encumbrances, to confirm the property's legal ownership and identify any potential issues that could affect the transfer of the title.
Total Expense Ratio
A financial metric used by lenders to evaluate a borrower's ability to afford a mortgage, calculated as the borrower's total monthly debt payments (including the proposed mortgage payment) divided by their gross monthly income.
Transaction Fee
A fee charged by a lender or other party involved in a mortgage transaction for processing a specific service or activity, such as a credit report, appraisal, or title search.
Treasury Index
An interest rate benchmark based on the yields of U.S. Treasury securities, often used as the reference index for adjustable-rate mortgages (ARMs).
Truth-in-Lending
A federal law that requires lenders to disclose the terms and costs of a loan, including the annual percentage rate (APR) and finance charges, in a clear and consistent manner.
Two-step Mortgage
A mortgage with an interest rate that adjusts only once during the life of the loan, typically after an initial fixed-rate period. The new rate remains in effect for the remainder of the loan term.
U
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender, including assessing the borrower's creditworthiness, financial stability, and ability to repay the loan.
Underwriting Fee
A fee charged by a lender for the underwriting process, which includes evaluating a borrower's creditworthiness, financial stability, and ability to repay the loan.
USDA Loan
A mortgage loan guaranteed by the United States Department of Agriculture (USDA) and designed to promote homeownership in rural areas. USDA loans often feature low-interest rates, zero down payment requirements, and flexible credit guidelines.
V
VA Funding Fee
A one-time fee charged by the Department of Veterans Affairs (VA) on VA-guaranteed loans, used to help fund the VA loan program. The funding fee varies based on the borrower's military status, the loan type, and the down payment amount, and may be rolled into the loan or paid separately at closing.
VA Loan
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA), designed to help eligible veterans, active-duty military personnel, and their families purchase or refinance a home with favorable loan terms, such as low or no down payment requirements and competitive interest rates.
Variable Rate
An interest rate that changes over time, typically in response to changes in a reference index, such as the prime rate or the London Interbank Offered Rate (LIBOR).
Verification of Deposit (VOD)
A document used by lenders to verify the amount and status of a borrower's financial accounts, such as checking, savings, or investment accounts, as part of the loan underwriting process.
Verification of Employment (VOE)
A document used by lenders to verify a borrower's employment status, job title, and income, as part of the loan underwriting process.
Verification of Rent (VOR)
A document used by lenders to verify a borrower's rental payment history, usually obtained from the borrower's current landlord or property management company, as part of the loan underwriting process.
W
Workout Agreement
A negotiated arrangement between a borrower and a lender to modify the terms of a mortgage loan, such as the interest rate, loan term, or monthly payment, to help the borrower avoid default or foreclosure.
X
Y
Yield Spread Premium (YSP)
A fee paid by a mortgage lender to a broker or loan officer as compensation for originating a loan with a higher interest rate than the borrower might otherwise qualify for. The YSP allows the borrower to pay lower upfront costs in exchange for a higher interest rate, which may result in higher long-term costs.
Z
Zero Down Payment Mortgage
A mortgage loan that requires no down payment from the borrower, allowing them to finance 100% of the home's purchase price. Examples of zero down payment mortgages include VA loans for eligible military members and USDA loans for eligible rural properties.
Zero Point/Zero Fee Loan
A mortgage loan with no points or fees charged by the lender at closing, often resulting in a higher interest rate to compensate the lender for the absence of upfront costs.
Zombie Title
A situation in which a homeowner vacates a property in anticipation of a foreclosure, but the foreclosure process is never completed, leaving the homeowner still legally responsible for the property, taxes, and any associated liabilities.
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1031 Exchange
A tax-deferred exchange of investment or business property, allowing property owners to defer capital gains taxes by reinvesting the proceeds from the sale of a property into a "like-kind" property within a specified time frame, as outlined in Section 1031 of the Internal Revenue Code.
203(k) Loan
A type of FHA-insured loan that allows borrowers to finance both the purchase of a home and the cost of its rehabilitation, or to refinance an existing mortgage and include the cost of repairs or improvements in the new loan.
3/1 ARM
An adjustable-rate mortgage (ARM) with an initial fixed-rate period of three years, after which the interest rate adjusts annually based on a specified index and margin.
5/1 ARM
An adjustable-rate mortgage (ARM) with an initial fixed-rate period of five years, after which the interest rate adjusts annually based on a specified index and margin.
7/1 ARM
An adjustable-rate mortgage (ARM) with an initial fixed-rate period of seven years, after which the interest rate adjusts annually based on a specified index and margin.
80-10-10 Mortgage
A mortgage structure in which a borrower takes out a primary mortgage for 80% of the home's value, a second mortgage or home equity loan for 10%, and makes a down payment of 10%, thereby avoiding the need for private mortgage insurance (PMI).
10/1 ARM
An adjustable-rate mortgage (ARM) with an initial fixed-rate period of ten years, after which the interest rate adjusts annually based on a specified index and margin.