Mortgage Glossary: Common Terms, Defined

Mortgages come with a language all their own, and nobody should need a translator to buy a home. This A-to-Z glossary collects the terms you are most likely to hear during the loan process, defined in plain English. And if a term still is not clear, our Austin-based team is always happy to walk you through it.

0–9

1003

The Uniform Residential Loan Application, the standard form used to apply for a mortgage.

A

A & D Loan

Acquisition and development loan. A loan for the purchase of raw land for the purpose of development.

Abstract of Title

A written history of the ownership of a parcel of land.

Acceleration Clause

Allows the lender to speed up the rate at which your loan comes due, or even to demand immediate payment of the entire outstanding balance of the loan, should you default on your loan.

Acknowledgment

A declaration by a notary, certifying, by way of personal knowledge or written identification, the identity of the signer.

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a renegotiable rate mortgage or a variable rate mortgage.

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three, or five years, depending on the index.

Affidavit

A sworn statement in writing.

American Land Title Association (ALTA)

An organization of title companies specializing in real property law which has standardized forms and coverage on a national basis.

Amortization

Amortization refers to the principal portion of the loan payment, and is the repayment of a loan by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. A fully amortized loan will be completely paid off at the end of the loan term.

Annual Percentage Rate (APR)

An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost of each loan.

Appraisal

An estimate of the value of real property, made by a qualified professional called an appraiser. An appraisal will be needed to determine the value of your property.

Assumption

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. This must be approved by the lender and be allowed by the note, which was originally signed by the seller.

B

Back End

The debt-to-income ratio calculated using principal, interest, taxes, insurance, and consumer credit obligations divided by gross monthly income. It is expressed as a percentage.

Balloon

Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Beneficiary

The entity funding the loan. This is the entity to which the loan is owed.

BK / Bankruptcy

A reorganization or discharge of debts. May also be referred to as Chapter 7, 11, or 13.

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.

Buy Down

When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

C

Cap

The highest rate that an adjustable rate mortgage may reach. It can be expressed as the actual rate or as the amount of change allowed above the start rate. For example, a loan with a six percentage point rate-change cap can never rise more than six points above its starting rate.

Cash Out

Any funds disbursed directly to the borrower.

Certificate of Occupancy

A certificate issued by local city government to a builder, stating that the building is in proper condition to be occupied.

Certified Copy

A true copy, attested to be true by the officer holding the original. It should have a stamp and signature stating that it is a true copy.

Clear-to-Close

The loan is ready to be closed with no additional conditions.

Closing

The meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands. Also called settlement.

Closing Costs

Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge, and other costs assessed at settlement. Closing costs usually run about 3 percent to 6 percent of the total mortgage amount.

Commitment

An agreement, often in writing, between a lender and a borrower to loan money at a future date, subject to the completion of paperwork or compliance with stated conditions.

Community Property

Property owned in common by spouses which was not acquired as separate property. A classification of property peculiar to certain states, including Texas. In community property states, assets may be owned in part by a spouse even if their name does not appear on the title.

Comparable (Comp)

A property with the same basic characteristics as the property you are attempting to find the value of, usually for a real estate appraisal. It should have been sold recently and be as similar as possible.

Condominium

A property owned as a group, with rights to occupy specific units of the structure. An overseeing board, often referred to as a homeowners association, governs the property.

Construction Loan

A short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

Consumer Credit

Credit owed by the individual, not secured by real estate.

Conventional Loan

A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration.

Conversion Clause

A provision in some adjustable rate mortgages that allows you to change the ARM to a fixed-rate loan at some point during the loan term.

Credit Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans).

Credit Report

A history of the buyer's past credit performance.

Credit Score

The score given to an individual to determine creditworthiness. These scores come from the three major credit bureaus: Equifax, Experian, and TransUnion.

D

Debt Ratio (D.R.)

The customer's monthly obligations divided by their monthly gross income. See also Back End.

Deed

The legal document which conveys the title to a property.

Deed of Trust

A document which pledges real property to secure a debt. In some cases a deed of trust can replace a mortgage; it is the standard security instrument in Texas.

Default

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest

See Negative Amortization.

Delinquency

Failure to make payments on time. This can lead to foreclosure.

Department of Veterans Affairs (VA)

An independent agency of the federal government which guarantees long-term, low- or no-down-payment mortgages to eligible veterans.

Derog

Short for derogatory; refers to negative credit items.

Derog Letter

A letter written by the borrower giving an explanation for any derogatory credit.

Discharge

Following a completed bankruptcy proceeding, discharged debts are no longer owed or collectable. Lenders will require copies of the discharge papers on any prior bankruptcy filings.

Discount Points

Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (for example, two points on a 100,000-dollar mortgage would cost 2,000 dollars).

Dismissal

If a bankruptcy is dropped without being completed, a bankruptcy dismissal document will be needed to proceed with the loan. Either the court or the debtor can prompt the dismissal.

Down Payment

Money paid to make up the difference between the purchase price and the mortgage amount. Down payments on conventional loans are often 10 percent to 20 percent of the sales price, though lower down payment options exist. FHA loans allow low down payments, and VA loans can require no down payment at all for eligible borrowers.

Due-on-Sale Clause

A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

E

Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Easement

An interest in property owned by another that entitles the holder to a specific limited use or privilege, such as the right to cross or to build adjoining structures on the property.

Encroachment

A fixture of a piece of property which intrudes on another's property.

Equal Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity

The difference between the fair market value and current indebtedness, also referred to as the owner's interest.

Escrow

Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement, or closing. Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.

Escrow Instructions

Instructions to the escrow agent giving the parameters and contingencies involved in the transaction and agreed upon by both parties.

Escrow Waiver

A request for a borrower to pay their own taxes and insurance. Escrow waivers are rarely granted with less than a 25 percent equity position.

F

Farmers Home Administration (FMHA)

Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Federal Home Loan Mortgage Corporation (FHLMC)

Also called Freddie Mac, a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA)

A division of the Department of Housing and Urban Development. Its main activity is insuring residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)

Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution makes mortgage money more available and more affordable.

Fee Simple

The most common form of ownership, where the vestee owns both the land and the structures.

FHA Loan

A loan insured by the Federal Housing Administration, open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

FHA Mortgage Insurance

Insurance that protects the lender on an FHA loan, paid for by the borrower. It includes an upfront premium, paid at closing or financed into the loan, plus an annual premium collected as part of each monthly payment. The premium rates are set by FHA and adjust over time.

Fixed-Rate Mortgage

A mortgage on which the interest rate is set for the term of the loan.

Flood Insurance

A mandatory insurance for some homeowners whose property is built in a designated flood zone.

Foreclosure

A legal procedure in which property securing a debt is sold by the lender to pay a defaulting borrower's debt.

Free and Clear

The property is completely paid for and has no liens attached.

Functional Obsolescence

A detraction from the property value due to the design or material being less functional than the norm.

G

Good Faith Estimate (GFE)

A good faith estimate of the buyer's loan charges. For most mortgages today, the GFE has been replaced by the Loan Estimate disclosure, which serves the same purpose.

Government National Mortgage Association (GNMA)

Also known as Ginnie Mae. Provides sources of funds for residential mortgages insured or guaranteed by FHA or VA.

Graduated Payment Mortgage (GPM)

A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Grant Deed

The most common form of title transfer deed. A grant deed contains warranties against prior conveyances or encumbrances.

Gross Monthly Income

The total amount the borrower earns per month, before any expenses are deducted.

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 according to a contract.

H

Hazard Insurance

A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm, and the like. It would not cover earthquake, riot, or flood damage.

Homestead

The dwelling (house and contiguous land) of the head of the family. Some states, including Texas, grant statutory exemptions protecting homestead property (usually to a set maximum amount) against the rights of creditors. Property tax exemptions are also available in some states.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans).

I

Impound

That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

Index

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments, which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest Bearing

A form of interest calculation where the loan is charged at a daily or monthly rate (1/365 or 1/12 of the annual interest rate) on the current outstanding balance.

Investor

A money source for a lender.

J

Joint Tenants

A form of holding title where the owners have 100 percent rights of survivorship unless redirected by a will.

Jumbo Loan

A loan which is larger than the conforming loan 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 often carry different rates and requirements. The conforming limit is adjusted periodically, so ask your loan officer for the current figure.

L

Land Contract

An agreement between the seller and the buyer where the title is withheld until a time when the required payments have been completed.

Leasehold Estate

A kind of real estate ownership where the lessor does not hold title to the property but has use of the property subject to the terms of the lease.

Legal Description

A method of geographically locating a piece or parcel of land which is acceptable in a court of law.

LIBOR

The London InterBank Offered Rate, once the base interest rate paid on deposits between banks in the Eurodollar market and a common index for adjustable rate mortgages. LIBOR has since been phased out and replaced by newer indexes such as SOFR.

Lien

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

Loan Committee

Generally, the underwriting process.

Loan Risk

The rate category assigned to the loan, which estimates the probable risk of delinquency and loss in the future.

Loan-to-Value Ratio (LTV)

The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.

M

Margin

The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Market Value

The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Mortgage Escrow Account

The account set up by the lender to pay taxes and insurance on behalf of the borrower.

Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance and FHA Mortgage Insurance.

Mortgagee

The lender.

Mortgagor

The borrower or homeowner.

N

Negative Amortization

Amortization means that monthly payments are large enough to pay the interest and reduce the principal on a mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that is not covered is added to the unpaid principal balance. This means that even after making many payments, a borrower may owe more than was owed at the beginning of the loan.

Net Effective Income

The borrower's gross income minus federal income tax.

Non-Assumption Clause

Statements in the mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

Non-Owner Occupied

A property not used as a residence by the owner of the property.

Notary Public

A person, designated by the state, who can certify the identity of a person when signing various documents.

Note

Short for promissory note. This document gives the parameters of the loan and legally obligates the borrower to pay back the debt.

O

Obligations

Any debt or recurring payment the borrower is obligated to pay, including mortgage payments.

Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks, and inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

Owner Occupied

Designation given to property used as the owner's residence.

Owner's Policy

A policy of title insurance which protects the buyer against problems with the title.

P

P&I

Principal and interest. Refers to the principal and interest portions of the monthly mortgage payment.

P&L (Profit and Loss)

A statement of a business's gross income, cost of goods, operating costs, and net profit or loss.

Piggyback Loan

Financing obtained subordinate to the first mortgage to facilitate closing the first mortgage. Also known as secondary financing.

PITI

Principal, interest, taxes, and insurance. The complete monthly cost associated with financing a property.

Planned Unit Development (PUD)

Property owned as a group, where individuals own the specific piece of land and structure they occupy but also have a divided interest in a common area. A board, often referred to as a homeowners association, governs the development.

Points

A point is equal to one percent of the principal amount of a mortgage. See also Discount Points.

Power of Attorney

An authority by which one person enables another to act on his or her behalf. Power of attorney can be limited to specific areas or be general in some cases.

Pre-Approval

The buyer has actually begun the application process and an underwriter has approved their income, funds, and credit. Be aware of any conditions attached to the approval.

Preliminary Title Report

The title report generated at the beginning of the application process. It tells the mortgage company what liens are on the property and gives advice as to what will need to be done to gain clear title prior to recording the trust deed.

Prepaid Interest

The portion of interest, collected at loan closing, which covers the time period between funding and the beginning of the first 30-day period covered by the first payment. For example, if the loan closed on February 15, the first payment due on April 1 would pay interest from March 1 to April 1, and the prepaid interest would cover the period from February 15 to February 28.

Prepaids

Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance, and special assessments.

Prepayment

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty

Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Pre-Qualification

The buyer has discussed their financial situation with a loan expert, but no attempt has been made to verify the validity of any of the borrower's information. Pre-qualification is only an indication of what the buyer should qualify for.

Principal

The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)

If you do not have a 20 percent down payment, lenders will often allow a smaller down payment, but borrowers are usually required to carry private mortgage insurance in exchange. PMI may be paid as an upfront premium, as a monthly fee, or a combination of the two, depending on the loan's structure.

Purchase Agreement

The agreement made between the buyer and seller of a property, containing the purchase price and contingencies of the sale.

Q

Quitclaim Deed

A deed operating as a release, intended to pass any title, interest, or claim which the grantor may have in the property, but not containing any warranty of a valid interest or title in the grantor.

R

Rate Float

Assuming market risk on an interest rate in the hopes that it will go lower prior to closing.

Rate Lock

Choosing to have no change to a rate for a specific length of time.

Ratios

How a buyer's housing expense and debt picture relates to their income.

Real Estate Settlement Procedures Act (RESPA)

A federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement.

Realtor

A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Reconveyance (Recon)

A release of lien filed with the county recorder by the trustee.

Recording Fees

Money paid for recording a home sale with the local authorities, thereby making it part of the public records.

Refi

Short for refinance: a new mortgage on a property that does not change ownership.

Request for Reconveyance

Verification given by the beneficiary to the trustee that the conditions of the lien have been fulfilled, with a request that the lien be canceled.

Rescission

The cancellation of a contract. For many refinances and home equity transactions secured by a primary residence, federal law gives the homeowner three business days after closing to cancel the transaction without penalty. Purchase loans generally do not carry this right.

Reverse Annuity Mortgage (RAM)

A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.

S

Second Mortgage

A mortgage which is entered into after the primary loan. Called a second due to it being in second lien position to the first mortgage. See also Secondary Financing.

Secondary Financing

Financing obtained subordinate to the first mortgage to facilitate closing the first mortgage. Also known as a piggyback loan.

Servicing

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, and the like.

Settlement

See Closing.

Settlement Costs

See Closing Costs.

Shared Appreciation Mortgage (SAM)

A mortgage in which a borrower receives a below-market interest rate, in return for which a lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.

Statement of Information (S.I.)

The form the customer fills out for the title company giving further identification of the customer. This allows the title company to eliminate debts and liens owed by people with similar names.

Submission

A complete loan application package submitted for approval to the underwriting department.

Subordination Agreement

The agreement detailing the contingencies of subordination, filed with the county recorder, used when a lien holder agrees to accept a lien position after that of a later recorded lien.

Substitution of Trustee

A document, filed by the beneficiary, which changes the trustee on a particular trust deed.

Surety Bond

A bond which insures against harm to a party (usually the lender or owner) by a lien still attached to the property. This is usually used when the original deed was lost or the beneficiary cannot be located.

Survey

A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

Suspended

The underwriter cannot yet approve or deny the loan; more information is required.

T

Tenants in Common

A percentage interest in a property held by two or more individuals without rights of survivorship.

Term Mortgage

See Balloon.

Title

A document that gives evidence of an individual's ownership of property.

Title Insurance

The insurance policy insuring the lender and/or the buyer that the liens are as stated in the title report. Any claim arising from a lien other than those disclosed is payable by the title insurance company.

Title Search

An examination of municipal records to determine the legal ownership of property. Usually performed by a title company.

Trust Deed

The trust deed attaches the note as a lien on the property. This is the document which conveys the ability to collect from the proceeds of the property.

Truth-in-Lending (TIL)

A federal law requiring disclosure of the annual percentage rate to homebuyers shortly after they apply for the loan.

Two-Step Mortgage

A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or ten), and then receives a new interest rate adjusted, within certain limits, to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or ten years.

U

Underwriting

The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors, and the matching of this risk to an appropriate rate, term, or loan amount.

V

VA

See Department of Veterans Affairs.

VA Loan

A long-term, low- or no-down-payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA Funding Fee

A one-time fee, calculated as a percentage of the loan amount, paid on a VA-backed loan. The percentage varies with the size of the down payment and the borrower's service history, and the fee can be paid at closing or added to the amount financed. Some veterans are exempt.

Variable Rate Mortgage (VRM)

See Adjustable Rate Mortgage.

Verification of Deposit (VOD)

A document signed by the borrower's financial institution verifying the status and balance of his or her financial accounts.

Verification of Employment (VOE)

A document signed by the borrower's employer verifying his or her position and salary.

W

Wraparound

Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

Z

Zoning

The division of a city or county into areas (zones), specifying the uses allowable for the real property in these areas.