Amortization

The gradual reduction in the principal amount owed on a debt. During the earlier years of the loan, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Annual percentage rate (APR)

The annual cost of a loan to a borrower. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees (such as mortgage insurance, most closing costs, discounts points and loan origination fees) to reflect the total cost of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing the costs of similar credit transactions.

Appraisal or appraised value

An informed estimate of the value of a property. When made in connection with an application for a loan secured by a home, a professional appraiser usually performs the appraisal.

Balloon loan

A loan that provides you with lower-than-usual monthly payments for a set period of time followed by a payment larger than usual at the end of your loan repayment period. While a balloon loan may lower your monthly payments it can also mean you make higher interest payments over the life of the loan.

Broker

A third party who arranges funding or negotiates a contract between parties, but does not lend the money.

Cash to close

The amount a homebuyer needs in cash at the closing of the loan. This typically, this includes down payment and closing costs.

Cash-out refinance

A refinance transaction in which the new loan amount exceeds the total of the principal balance of the existing first mortgage and any secondary mortgages or liens, together with closing costs and points for the new loan. This excess is usually given to the borrower in cash and can often be used for debt consolidation, home improvement or any other purpose.

Clear title

Titles that are marketable and are free of liens or disputed legal questions as to ownership of the property.

Closing

The time and place, at which all documents for your loan are signed, dated, and notarized. 

Closing costs

Closing costs, also known as settlement costs, are the costs incurred when obtaining your loan. For new purchases, these costs also include ownership transfer of any collateral property from the seller to you. Costs may include and are not limited to: attorney's fees, preparation and title search fees, discount points, appraisal fees, title insurance, and credit report charges. They are typically about 3% of your loan amount, and are often paid at closing or just before your loan closes.

Funds often needed to close a loan, such as homeowners insurance, property taxes, and escrow impound account funds, aren't included in closing costs and are considered separate. You should be prepared to pay these costs before your loan closes.

Co-borrower

An additional person who assumes equal responsibility for repayment of a loan and is fully obligated under the terms of the loan. This person also has equal rights to the proceeds of the loan.

Conforming loan

A mortgage loan that has the standard features as defined by (and is eligible for sale to) Fannie Mae and Freddie Mac.

Contingency

A specified condition in a sales contract that must be satisfied before the home sale can occur. When buying a home, the 2 most common contingencies are that the house must pass inspection and that the borrower must be approved for a loan.

Conventional loan

A home loan that is not insured or guaranteed by the federal government. A conventional loan can be for conforming or non-conforming loan amounts.

Credit score

A number that rates the quality of an individual’s credit. The number helps predict the relative likelihood that a person will repay a credit obligation, such as a mortgage loan. In general, the higher your credit score, the more likely you are to be approved for and to pay a lower interest rate on a loan.

Debt-to-income ratio

Your total monthly debt payments (for example: loans, credit cards and court-ordered payments) divided by your gross monthly income before taxes and expressed as a percentage. Federal Housing Administration (FHA) guidelines layer in early 2017 recommend that your monthly mortgage payment should be no greater than 31% of your monthly income before taxes and your total monthly debt should be no greater than 43% of your monthly income before taxes.

Deed (warranty or quit-claim)

A document that legally transfers ownership of real estate from a seller to a buyer and delivered to the buyer at closing. Before making a loan, a lender will usually require a title search or a title report to make sure the borrower legally owns the real estate tthat is being used to secure the loan.

Down payment

The amount of cash you pay toward the purchase of your home to make up the difference between the purchase price and your mortgage loan. Down payments often range between 5% and 20% of the sales price depending on many factors, including your loan, your lender and your credit history.

Earnest money

A deposit made toward a down payment as a sign of good faith. The deposit is typically made when a purchase agreement is signed.

Equity

The difference between the fair market value (appraised value) of your home and your outstanding mortgage balances and other liens.

Escrow account

An escrow account is created at no cost to you to hold money to pay your homeowners insurance and property taxes on your behalf. We obtain information to determine the yearly insurance and tax amounts due on the property and include those amounts in your contractual payments to eliminate a large one-time expense to you. Escrow funds received as part of contractual payments are placed into an escrow account. When an insurance or property tax bill is received, escrow funds collected over time in the escrow account are used to pay these bills.

Escrow accounts can also be referred to as Impound Accounts.

Fannie Mae

Federal National Mortgage Association, a government-sponsored enterprise that buys and securitizes mortgages for resale in the secondary market. Visit the Fannie Mae website

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Federal Housing Administration (FHA)

An agency of the Department of Housing and Urban Development. The FHA provides mortgage insurance for certain residential mortgages. It also sets standards for underwriting these mortgages and for construction of homes secured by these mortgages. Visit the FHA website

FHA home loan

A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government loan. FHA mortgage insurance protects the lender (not the borrower) if a borrower defaults on the FHA loan. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.

FICO®

An acronym for Fair Isaac Corporation, which develops the mathematical formulas used to produce credit scores for assessing credit risk. FICO scores fall between a low of 300 and a high of 850. The higher the FICO score, the lower credit risk a consumer presents.

Floating rate

A loan rate for which the lender has not "locked" or committed to lend at a particular interest rate. The floating interest rate and any discount points are not guaranteed. Your actual interest rate and discount points will be based on the market price available for your loan product at the time your interest rate is locked.

Flood insurance

Insurance that protects against loss due to floods. When available, this type of insurance is required by law when a property is located within a special flood hazard zone.

Freddie Mac

A government-sponsored enterprise that buys and securitizes mortgages for resale in the secondary market.

Good faith estimate (GFE)

An itemized, detailed list of certain estimated costs associated with a home loan that the lender is required to provide to the borrower within 3 business days of the application.

Home equity line of credit (HELOC)

A line of credit secured by the borrower's residence. The typical HELOC term is 30 years: a 10-year draw period followed by a 20-year repayment period. A HELOC is often used for home improvements, debt consolidation or other major expenses. In most cases, you can withdraw funds up to your available credit limit for the first 10 years (your draw period) using convenience checks, debit cards or money transfer via Online Banking.

Homeowners insurance

Insurance to protect your home against damage from fire, hurricanes and other catastrophes. Usually, homeowners insurance also covers you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property. A lender will likely require you to name it as a payee under the insurance if you need to make a claim. Also called hazard insurance.

Interest-only loan

A loan for which you pay only the interest due for a portion of the loan term. This lowers your periodic payment but does not decrease your principal balance on the loan. Making interest-only payments will result in larger payments being due at the end of the interest-only payment period.

Interest rate

The annual cost of a loan to a borrower, usually expressed as a percentage. The interest rate does not include fees charged for the loan.

Jumbo loan

Also known as a nonconforming loan. The amount of the loan exceeds standards that would make it eligible for sale to Fannie Mae and Freddie Mac. Certain geographical areas have temporary conforming loan limits higher than typical conforming limits. Lenders may charge additional fees and place certain restrictions due to the large loan amounts.

Lien

The legal claim of a creditor on a borrower’s property, to be used as security for a debt.

Lien holder

An individual or entity that has placed a lien on real property.

Loan-to-value ratio (LTV)

The ratio between the unpaid principal amount of your loan, or your credit limit in the case of a line of credit, and the appraised value of your collateral. Expressed as a percentage. For example, if you have an $80,000 first mortgage on a property with an appraised value of $100,000, the LTV is 80% ($80,000 / $100,000 = 80%).

Lock period

The amount of time prior to closing that you can secure an interest rate for your loan. Lock periods typically range from 30 days to more than 90 days. Generally, the longer the lock period, the more you pay in points or interest.

Manufactured housing

A structure that has been partially or entirely constructed at another location and moved onto the property (on a permanent foundation). A manufactured home may or may not be a mobile home.

Mobile home

A type of residence that’s built upon a wheeled chassis and can be transported from site to site.

Modular home

A factory-built home that’s erected on-site, with the appearance and characteristics of a site-built residence.

Mortgage

A legal document giving a lender a lien on real estate to secure repayment of a loan. Mortgage loans generally run from 10 to 30 years, after which the loan is required to be paid off. Also called deed of trust and/or security deed.

Mortgage insurance

For conventional loans, insurance that protects the lender if you default on your loan. If your down payment is less than 20%, most lenders will require you to pay mortgage insurance. Also called private mortgage insurance (PMI).

Mortgage type

Generally, there are three basic mortgage programs: Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and conventional mortgage loans. VA loans are only offered to qualifying veterans and surviving spouses, while FHA loans are available to all qualifying borrowers. Both VA and FHA loans are guaranteed/insured by the federal government. This insurance protects the lender (not the borrower) should the borrower default and the lender sustains a loss. Conventional loans are available to all qualifying borrowers and are not insured or guaranteed by the federal government.

Multi-family residence (2 to 4 units)

A residential property with 2 to 4 individual housing units (duplex, triplex or quadplex).

Negative amortization

The result when monthly payments don’t cover all the interest due on the loan. The unpaid interest is added to the unpaid balance, which means the homebuyer will owe increasingly more than the original amount of the loan.

No closing cost loan

A loan in which the borrower is not required to pay cash out-of-pocket at closing for the normal closing costs. The lender typically includes the closing costs in the principal balance or charges a higher interest rate than for a loan with closing costs to cover the advance of closing costs.

Note

A written agreement in which the signer promises to pay to a named person or company a specific sum of money at a specified date or on demand.

Note rate

The interest rate stated in a mortgage note.

Notice of default

A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Option ARM

A type of adjustable-rate mortgage (ARM) that offers the borrower a choice of 4 monthly payment options to help provide financial flexibility to manage payments in rising rate markets and take advantage of falling interest rates.

Origination fee

A fee imposed by a lender to cover certain processing expenses in connection with making a mortgage loan. Usually a percentage of the amount loaned (often 1%). The origination fee is stated in the form of points. See also: Points

Owner financing

A property purchase transaction in which the property seller provides all or part of the financing.

Owner-occupied

A property that the owner occupies as a principal residence.

Payoff

Payment of the outstanding balance of a loan in full. Also, the amount required to pay the outstanding balance in full.

Per diem interest

The amount of interest that accrues daily on a loan. This is calculated by multiplying the outstanding loan balance by the annual rate of interest, then dividing the result by 365.

PITI

An acronym for principal, interest, taxes and insurance. Also referred to as the monthly housing expense.

Points

An amount paid to the lender, typically at closing, to lower (or buy down) the interest rate. One discount point equals one percentage point of the loan amount. For example, 2 points on a $100,000 mortgage would cost $2,000. Negative points indicate the amount to be credited at closing to reduce closing costs. Also called discount points or mortgage points.

Preapproval

A lender’s conditional agreement to lend a specific amount of money to a homebuyer under a specified set of terms.

Prepaid expenses

The expenses that are usually paid in advance, such as escrows for taxes and insurance (which are paid at closing).

Prepaid interest

Interest collected at closing of a first mortgage, covering the period from the date of disbursement to the start of the next payment period.

Prepayment

An amount paid to reduce the principal balance of a loan before the principal is due.

Prepayment penalty

A penalty assessed by some lenders if a loan is paid off before the specified term. This is a lump-sum amount due and payable in addition to the loan balance, and is usually limited to the early years of a mortgage.

Principal & interest

The principal is the amount of money borrowed on a loan. The interest is the charge paid for borrowing money. Principal and interest account for the majority of your mortgage payment, which may also include escrow payments for property taxes, homeowners insurance, mortgage insurance and any other costs that are paid monthly, or fees that may come due.

Principal balance

The unpaid portion of the loan amount. The principal balance does not include interest or any other charges.

Principal payment

Portion of your monthly payment that reduces the principal balance of a home loan. This term also refers to prepayments you make to the principal balance.

Purchase agreement

A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Rate lock

A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specified period of time. Rate lock periods are for a fixed number of days, and rate lock expiration occurs when that period has passed, subjecting the interest rate on the loan to market fluctuations since the date of the initial rate lock. When a rate lock expires, you will need to contact your lending specialist to establish a new rate lock prior to closing your loan.

Rate lock expiration

A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specified period of time. Rate lock periods are for a fixed number of days, and rate lock expiration occurs when that period has passed, subjecting the interest rate on the loan to market fluctuations since the date of the initial rate lock. When a rate lock expires, you will need to contact your lending specialist to establish a new rate lock prior to closing your loan.

Recording

A charge for a public official (typically a Registrar of Deeds or County Clerk) noting in the public record the terms of a legal document affecting title to real property such as a deed, a security instrument, a satisfaction of mortgage or an extension of mortgage.

Recording fee

A charge for a public official (typically a Registrar of Deeds or County Clerk) noting in the public record the terms of a legal document affecting title to real property such as a deed, a security instrument, a satisfaction of mortgage or an extension of mortgage.

Refinance

Paying off your existing loan with the proceeds from a new loan, generally using the same property as collateral, in order to take advantage of lower monthly payments, lower interest rates or save on financing costs.

Rehabilitation loan

A first mortgage that enables borrowers to purchase or refinance and rehabilitate homes. With this mortgage product, borrowers can qualify for loan amounts based on the as-completed value of the property, up to the maximum loan limits.

Repayment period

The time you have to fully repay your outstanding balance, according to your payment terms. In a home equity line of credit, for example, the repayment period (typically 20 years) is the loan term that follows the draw period (typically 10 years).

Rescission

The cancellation of a contract. In certain real estate-secured transactions that involve the refinance of a primary residence, applicants have 3 business days to cancel the transaction.

Reserves

The amount of savings, separate from the down payment, that a homebuyer sets aside in case of unforeseen events or emergencies. During the loan approval process, many lenders require reserves (typically the equivalent of 2 monthly mortgage payments) to be verified.

Rural housing loan

A loan offered by the Rural Housing Service (RHS), an agency within the Department of Agriculture. The RHS provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury. 

Second home

A property occupied part-time by a person in addition to his or her primary residence.

Short sale

A commonly used alternative to a foreclosure. If a homeowner can no longer afford to make mortgage payments and their home is worth less than they owe, a short sale allows them to sell the home to pay off the mortgage. In a short sale, the lender agrees to accept an amount less than is actually owed on the loan, based on a showing of financial hardship.

Single-family residence

A detached individual housing unit. The property shares no common ground with neighboring properties and shares no wall or roof, but can be part of a planned unit development (PUD).

Third-party fees

Fees charged for services rendered by parties other than the borrower or the lender. Such fees may include appraisal, credit report, title and flood certifications.

Title

Written evidence of ownership in property.

Title company

The agency that will investigate a property’s title (or deed) for discrepancies or undiscovered liens and that will issue title insurance to the lender after the title is deemed clear.

Title insurance

Insurance that protects an interested party, either the owner or the lender, against issues that would affect legal ownership of the property.

Title search

An examination of records used to determine the legal ownership of property and all liens and encumbrances on it. Usually performed by a title company or attorney.

Underwriter

The person who approves or denies a home loan, based on the lender’s underwriting and approval criteria.

Underwriting

The lender’s process of deciding whether to make a loan to a potential borrower based on credit, employment, assets and other factors, and the matching of this risk to an appropriate rate, term and loan amount.

Uniform Residential Loan Application (1003)

The standard loan application form published by the Federal National Mortgage Association (Fannie Mae) and used by most lenders.

VA loan

A mortgage that is guaranteed by the Department of Veterans Affairs (VA) for qualified veterans of U.S. military forces. See also: Government loan

Vacation home

A vacation home is a single-family property that the borrower occupies in addition to his or her primary residence. The property cannot be considered income-producing and must not be part of a mandatory rental pool, but occasionally may be rented to friends and relatives. When property is classified as a second home, rental income may not be used to qualify the applicant. A 2- to 4-unit property is not eligible for second home status. Also known as second home.

Variable rate

An interest rate that may fluctuate or change periodically, often in relation to an index such as the prime rate or other criteria. Payments may increase or decrease accordingly.

W-2

A wage and tax statement provided by your employer annually. The W-2 form details your income and the various local and federal taxes withheld from your income. It is provided to the IRS along with your tax return.

Walk-through

A final inspection shortly before settlement to make sure the property is in the same condition that it was at the time the offer contract was written.

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