Common Terms of the Mortgage Loan Process

Acceleration Clause

A provision found within a loan that gives the lender the right to demand payment of the balance remaining if, for example, a monthly payment is missed or if the property is sold or otherwise transferred without the lenders consent.

Additional Principal Payment

A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.

Adjustable Rate Loan/Mortgage (ARM)

A loan that permits the lender to adjust the interest rate periodically on the basis of changes in an index.

Adjusted Basis

The original cost of a property, plus the value of any capital expenditures for improvements to the property, minus any depreciation taken.

Adjustment Periods

Adjustment periods are terms set out in the loan document that call for possible changes in the interest rate and payments during a particular time frame of an ARM loan, which could be from one month to several years.

Amortization Schedule

The amortization schedule of a loan is the timetable for loan re payment that shows how much of each payment is applied to interest and how much to principal, as well as the remaining balance after each payment.

Annual Percentage Rate (APR)

The APR is the actual cost of credit, expressed as an annual rate.

Appraisal

An appraisal is a written analysis of the estimated value of real estate, usually conducted to determine the loan amount. Appraisals on behalf of lenders are prepared by licensed appraisers.

Appreciation

An increase in value due to greater demand, improved economic conditions, increase in reproduction cost, or other factors.

Asset

An asset is anything a person owns that has monetary value.

Balloon Loan

A balloon loan is one that calls for a large sum to be paid at the end of the loan term.

Balloon Payment

A balloon payment is the final payment, usually a large sum, made at the maturity of a balloon loan.

Bankruptcy

A federal court process that relieves a person, firm, or corporation from the payment of debts.

Basis Point

One one-hundredth of one percent. Used primarily to describe changes in yield or price on debt instruments, including mortgages and mortgage-backed securities. Commonly used to describe differences in mortgage interest rates.

Before Tax Income

Earnings calculated before income taxes are deducted.

Best Practices

Best practices is the term used to describe lenders' policies related to loan processing, products and terms, customer interaction, or customer and broker education. While there is no set best practices standard for the lending industry, each lender follows its own a set of best practices, and many overlap throughout the industry.

Buy-Down Loan (temporary or permanent)

A temporary buy-down is a loan on which a borrower makes a one-time payment to reduce the interest rate during the first year or years of a loan.

A permanent buy-down reduces the interest rate over the course of the entire loan term.

Cap/Floor

A cap is a provision of an adjustable-rate loan (ARM) that limits the amount an interest rate or loan payment may increase or decrease (floor).

Cash Flow

The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income-producing property (mortgage payment, maintenance, utilities, etc.).

Cash Out Refinance

A cash out refinance is a loan in which the amount borrowed exceeds the total amount needed to repay the original loan and loan expenses, in essence putting cash into the borrower's pocket.

Closing Cost(s)

Closing costs are fees that a borrower pays at the time of the loan closing. These costs are part of the loan service and are not included in the price of the loan.

Closing

The "closing" is the period that marks that a loan transaction is final.

Co-Mortgagor/Co-Borrower

One who signs a mortgage loan contract with another party and is thereby jointly obligated to repay the loan. Generally, a co-mortgagor or co-borrower provides some assistance in meeting the requirements of the loan, and generally shares the ownership in the encumbered property.

Collateral

Property used to secure repayment of a loan.

Collection

A loan goes into collection when payment on a loan is delinquent and efforts are made to collect the amount due. This is also the stage at which the lender files the papers necessary to prepare to proceed with foreclosure.

Combined Loan to Value (CLTV )

The sum of all liens on the property divided by the value (or purchase price, if applicable) of the property.

Commitment

An agreement, often in writing, between a lender and a borrower to loan money at a future date on specified terms subject to the completion of paperwork or compliance with stated conditions. The commitment may guarantee an interest rate or other terms until a future date.

Conforming Loan

A mortgage loan, which meets all requirements (size, type, and age) to be eligible for purchase or securitization by federal agencies or federally chartered enterprises. See government sponsored enterprises; securitization.

Correspondent Lending

Mortgage loans purchased from lenders, either qualified financial services companies or mortgage bankers, who have the ability to fund their loans in their own company's name, either individually or in a pool of loans.

Consumer Reporting Agency (See Credit Bureau)

A consumer reporting agency is a third party agency that provides brokers and lenders with information regarding potential borrowers' credit histories.

Conventional Loan (or "A" Loan)

Consumers need to demonstrate excellent credit in order to obtain an "A" or conventional loan, generally a credit score of 670-680 or higher.

Convertibility Clause

A convertibility clause, found in some adjustable rate mortgages (ARMs), offers the borrower the option of changing the adjustable rate to a fixed rate at a specific time for the duration of the loan.

Credit Bureau (See Consumer Reporting Agency)

An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. Major US credit bureaus include Equifax, Experian and TransUnion.

Credit History

History of an individual's debt payment. Lenders use this information to gauge a potential borrower's ability to repay a loan.

Credit Report

A detailed report showing an individual's credit history, prepared by a credit bureau or consumer reporting agency. Brokers or lenders may purchase these reports to help determine a loan applicant's eligibility. Consumers/borrowers have access to their own credit reports by contacting a credit bureau and requesting one.

Credit

The ability of a person to borrow money, or obtain goods with payments over time, as a consequence of the favorable opinion held by a lender as to the person's financial situation and reliability.

Debt Consolidation

Refinancing one or more existing debts into a new loan. In the mortgage-lending context, relatively short-term, unsecured debt is often rolled into a long-term mortgage loan.

Debt to Income Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly obligations are divided by his/her gross monthly income.

Default

Default on a loan is when a borrower fails to comply with any of the terms of an agreed-upon loan, including timely repayment.

Depreciation

Loss of value in real property brought about by age, physical deterioration, or functional/economical obsolescence. Generally, the loss of value due to any cause.

Discount Points

Prepaid interest paid by the borrower to the lender to reduce the interest rate on the loan. Each point is one percent of the loan amount.

Equal Credit Opportunity Act (ECOA)

The Equal Credit Opportunity Act (ECOA) is a federal law that prohibits lenders from discrimination on the basis of race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs or the exercise of certain consumer rights.

Equity Stripping

The practice of making a series of loans with little or no benefit to the borrower, designed specifically to take away a borrower's equity in his or her house, and eventually to foreclose.

Equity

Equity is the difference between the value of a piece of property and the amount owed on that property.

Escrow (also referred to as "in escrow")

Escrow is a separate account where money and/or documents are held by a third party until previously specified conditions are met. Often times, escrow is referred to as the time period between an offer to purchase a home being accepted by the sellers(s) and the financial details being settled.

Fair Credit Reporting Act

The Fair Credit Reporting Act is a federal consumer protection law that regulates the disclosure of consumer credit reports and establishes procedures for correcting any errors that may appear on a credit report.

Fannie Mae

Federal National Mortgage Association (FNMA), a federally chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors. By purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.

Federal Housing Administration (FHA)

The FHA is an agency of the federal government that insures first mortgage lenders against loss when a loan is made following FHA regulations. The FHA does not lend money, it only insures the loan.

FICO Score

A credit score developed by Fair Isaac & Co. that determines the likelihood that credit users will pay their bills. Scoring is widely accepted by lenders as a reliable means of credit evaluation.

Fixed Installment

Fixed installment is an industry term for the monthly payment due on a mortgage loan.

Fixed-rate loan

A fixed-rate loan is one in which the interest rate or scheduled payment amount does not change during the course of the loan.

Flipping

Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced. See also equity stripping and predatory lending.

Foreclosure

Foreclosure is a court or other procedure utilized when a lender is unable to collect the money owed on a particular piece of property from the borrower. When a property goes into foreclosure, it is sold at a public auction and the proceeds of the sale are applied to the remaining loan amount.

Freddie Mac

Federal Home Loan Mortgage Corporation (FHLMC), a federally chartered corporation that purchases residential mortgages from specified entities, securitizes them and sells them to investors; this provides lenders with funds for new homebuyers.

Good-Faith Estimate (GFE)

An itemization of the estimated loan closing costs. Lenders or brokers must provide this list to the loan applicant for a mortgage loan within three business days after receipt of the application. The GFE is intended to assure that consumers have adequate information about closing costs early in the process.

Government National Mortgage Association (Ginnie Mae)

Ginnie Mae is a special assistance loan program sponsored by the U.S. Department of Housing and Urban Development (HUD).

Government-Sponsored Enterprises (GSEs)

Entities established by Congress to perform specified public-interest tasks. The two GSEs applicable to multifamily real estate financing are Fannie Mae and Freddie Mac. Both are private shareholder-owned companies operating under congressional charters that direct them to increase the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.

Guarantee

A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform as promised.

Home Equity Line of Credit

A real estate loan that allows a borrower to withdraw equity from time to time up to a specified amount called a preapproved credit limit.

Home Equity Loan

A loan that uses the equity in the home as collateral, meaning that you are using your home as a guarantee that you will repay the loan.

Home Ownership and Equity Protection Act (HOEPA)

Passed by Congress in 1994, the Home Ownership and Equity Protection Act regulates some lending practices for closed-end loans made at higher rates or costs and fees.

Homestead Exemptions

A statutory right that gives a homeowner protection from certain creditors. In some states, this term is also used to refer to a reduction of the tax-assessed value of a primary residence.

Housing Expense-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

HUD

Established in 1965, U.S. Department of Housing and Urban Development (HUD) works to create decent home and suitable living conditions developing American communities, and enforcing fair housing laws.

Impounds

A trust account established by lenders for the accumulation of borrower funds to meet certain expenses such as taxes and hazard insurance.

Increased Interest After Default

Practice of charging a higher interest rate if a borrower defaults on the mortgage loan.

Index

A published interest rate against which lenders measure the loan rate. The lender then uses it to adjust the interest rate on an adjustable mortgage up or down. The rate must generally be one that is outside the influence of the lender. (See Margin)

Initial Interest Rate (also known as "start rate")

The initial interest rate is the rate that is used at the start of an adjustable rate loan (ARM).

Jumbo Loan

Generally, a loan that is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Lien

A legal claim upon a piece of property generally for the payment of a debt or obligation.

Loan-to-Value Ratio (LTV)

The ratio that results when the amount of the loan is divided by the value of the subject property.

Mandatory Arbitration

When lenders require predispute, binding arbitration as a condition of getting a loan.

Margin

The amount a lender adds to an index on an adjustable rate mortgage to establish the interest rate on the loan.

Mortgage (Deed of Trust, Security Deed)

A pledge of collateral as security. In some states, the term mortgage also describes the document signed to show that the lender is granted a lien on the home. It may also show the amount of money borrowed.

Mortgage Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Mortgage Insurance

An insurance policy purchased by the borrower to protect a lender's equity. See private loan insurance.

Mortgage Lender

The person or entity providing credit or a loan to a borrower on specific terms and conditions. May be used interchangeably with term "creditor" or with "mortgage banker."

Negative Amortization

Negative amortization occurs when a borrower's monthly payment amount does not cover the interest due and therefore the loan is increased, with the amount of the shortfall being added to the balance of the loan.

Non-Prime (See also Sub-Prime)

Nonprime, also known as subprime, is the designation given to borrowers with less than perfect credit ratings. Such ratings may be the result of limited credit histories, past credit difficulties, high debt-to-income ratio or other factors.

Open-Ended Loan

Describes a loan that allows for future increases in the principal, such as an equity line of credit.

Origination Fee

Borrowers sometimes pay an origination fee to a lender or broker for making or securing their real estate loan. This fee is typically stated as a percentage of the loan amount or as points (one point = one percent).

PITI

The total monthly housing loan expenses Ð Principal + Interest + Taxes + Insurance.

Points

Finance charges paid by a borrower at the beginning of a loan. One point is equal to one percent of the loan amount. Generally paid to lower an interest rate.

Predatory Loan/Lending

An unsuitable loan designed to exploit vulnerable and unsophisticated borrowers.

Preemption

A principle of asserting the supremacy of federal over state legislation on the same subject, or, state over local supremacy.

Prepayment Penalty

A lender may impose a prepayment penalty if a loan is paid off before it is due. This is usually because the lender incurs costs when making a loan and will build these costs into the borrower's payments over the life of the loan. When a borrower pays the loan off early, the lender tries to recoup some of its costs through a prepayment penalty.

Primary Mortgage Market

Lenders that make mortgage loans directly to borrowers, such as savings and loan associations, commercial banks, and mortgage companies. These lenders usually sell their mortgages into the secondary mortgage markets, such as to FNMA, FHLMC, etc. Loans sold to government-sponsored agencies such as Fannie Mae, and Freddie Mac.

Prime Rate

Prime rate is the interest rate that a bank charges its best, or prime customers. Most nonprime borrowers receive an interest rate that is slightly higher than prime rate, depending on their credit histories.

Principal

The amount of a loan as distinguished from interest.

Private Loan Insurance (MI)

Private loan insurance against default that is sometimes purchased by a borrower whose loan is considered especially risky - usually a loan amount that is more than 80 percent of the value of the property.

Rating Agency

Company that provides an opinion on the ability of an entity to repay financial commitments in a timely manner and in accordance with the terms thereof.

Real Estate Settlement Procedures Act (RESPA)

Federal law that regulates the settlement or closing practices within the real estate industry. This law requires the provision of Good Faith Estimates of Closing Costs, prohibits kickbacks for referrals of related services and standardizes the closing process.

Refinance

Refinance is the term used when a borrower pays off one loan with a new loan on the same real estate. The new loan usually has some kind of benefit to the borrower, either lower interest rates or lower monthly payments. (See Cash Out Refinance)

Reverse Annuity Mortgage (RAM)

A mortgage that uses present equity in the property to fund monthly payments from the lender to the borrower in lieu of the borrower receiving the proceeds of the loan in a lump sum; usually not requiring repayment until the property is sold or the borrower no longer lives in it.

Revolving Debt

Credit account that establishes a maximum dollar amount that can be borrowed, requiring monthly payments of less than the full amount due. The balance carried forward is subject to a finance charge. Also, an arrangement whereby credit is extended up to a specified limit and for a specified period with a fee charged for the commitment. Also called open-end credit or revolving line of credit.

Seasoned Loan

A loan on which several payments have been collected. In most cases, a 12-month payment history is a fully seasoned loan.

Second Mortgage

Second priority lien against the equity in a home, usually following a purchase money mortgage.

Secondary Mortgage Market

The market in which lenders and investors buy and sell existing mortgages or mortgage-backed securities, thereby providing greater availability of funds for additional mortgage lending. The secondary market includes "wholesale" lenders who buy loans from small lenders and the securitization market, where mortgage loans are pooled and sold to investors. When a loan is sold on the "secondary loan market" the purchasing investor typically engages a "servicer" to collect mortgage payments. Borrowers are then required to remit payment to this new entity.

Secured Loan

A secured loan is one in which the borrower offers up something of value as collateral for the loan.

Securitization

The process of pooling loans into securities backed by mortgage loans. This is one process used to provide capital for the creation of mortgage loans.

Servicer

A servicer is a company that handles all payment-related transactions with borrowers. A servicer is often used to collect payments of loans that have been purchased by an investor in the secondary loan market.

Steering

The practice of routing certain borrowers to lenders that charge higher fees or interest rates than the borrowers' credit history warrants.

Sub-Prime (See Non-Prime)

Subprime, also known as nonprime, is the designation given to consumers with less than perfect credit ratings. Such ratings may be the result of limited credit histories, past credit difficulties, high debt-to-income ratio or other factors.

Title

The evidence one has of the right to ownership of real property.

Trusts

A fiduciary relationship under which one holds property for the benefit of another. The party creating the trust is the settlor or trustor, the party holding the property is the trustee, and the party for whose benefit the property is held is the beneficiary.

Truth in Lending Act

The Truth in Lending Act is a Federal law that requires creditors to fully disclose the terms and conditions of consumer loans, in writing. Disclosure must include the loan's annual percentage rate and any additional fees and charges to be paid by the borrower.

Underwriting

Underwriting is the process lenders use to determine the risk involved in any given loan.

Warehouse Lending

The financing of mortgage loans for lenders, either qualified financial services companies or mortgage bankers, for a given period of time prior to sale to an investor, so that the lenders may fund the loans in their own company's name.