Home Loans Glossary
Adjustable-Rate Mortgage (ARM)
The interest rate on an Adjustable Rate Mortgage (ARM) loan can change at certain times during the loan, based on an index that reflects the lender's costs. Some ARM loans limit how much your payments can increase, which can sometimes lead to your loan balance growing instead of shrinking (this is called negative amortization). There can also be limits on how much the interest rate itself can go up.
Amortization
A loan is paid back in equal payments over its term, or the time you have to repay it. At the beginning, most of your payment goes toward paying interest. Later on, more of your payment goes toward paying off the amount you borrowed (the principal).
Annual Escrow Statement
Each year, the loan company will send borrowers a detailed statement. It’ll show the payments made over the past year, and how they were used for principal, interest, taxes, and insurance. The statement will also show when the tax and insurance payments were made.
Annual Percentage Rate (APR)
A loan’s APR represents the total cost you’ll pay to borrow money, expressed as a yearly percentage of the total mortgage amount. It’s a more complete measure of a loan’s cost than the interest rate alone, because it includes fees and other charges you may need to cover the loan.
Appraisal
Appraisals estimate how much a home is worth by comparing it to similar homes. Unlike a home inspection, an appraisal does not give a detailed check of the home's systems or structure.
Appreciation
The value of a property can go up, or appreciate, over time. Two things that affect a home's value are the area's economic health and how well the property is taken care of.
Automated Underwriting
A computer-based method for reviewing loan applications helps lenders process them faster, more efficiently, and more fairly. It also uses better ways to measure risk.
Biweekly
For most loans, you make payments once a month. With biweekly mortgages, you make payments every two weeks. By making 26 biweekly payments each year (which is like making 13 monthly payments), you can pay off the loan faster.
Closing
At the end of the sale, the ownership of the property legally moves from the person selling it to the person buying it.
Closing Costs
At the end of the sale, both the buyer and the seller have to pay certain expenses. These expenses are listed on a form called the Closing Disclosure. The total amount of these expenses, called closing costs, can be between 3% and 10% of the price of the home.
Closing Disclosure (CD)
Lenders have to give borrowers a document called the Closing Disclosure (CD) at least three business days before the planned closing date. The CD gives a summary of the borrower's loan details. Borrowers can review it during those three days before closing to make sure everything is correct and fix any mistakes if needed.
Community Property
Property acquired by spouses during marriage, giving each partner an interest in it regardless of whether their name appears on the title.
Condominium
A type of property where one person owns their own living space and also shares ownership of common areas, like a pool or a lobby.
Contingency
A rule in the sales agreement that needs to be fulfilled for the agreement to be legally valid. Common rules include getting a loan approved or having the property's value assessed.
Conventional Mortgage
If a home loan is not insured or guaranteed by the federal government, it’s called a conventional loan.
Co-op
Co-ops, short for cooperatives, are a way of owning property where each owner holds a part of the company that owns the whole building.
Credit Score
A way to statistically estimate how good someone is at handling their money and paying back what they owe. It helps guess how likely they are to pay off a mortgage or other debts. Many mortgage lenders use a system called the FICO® score to do this.
Deed-In-Lieu of Foreclosure
The servicer, who manages the loan, agrees to take the ownership of a property if the borrower can't pay back the loan. This is usually a last resort option after trying everything else.
Depreciation
The price of a property might go down over time, which is called depreciation. Two things that can affect how much a home is worth are how well the area's economy is doing and how well the property is maintained.
Discount Points
One discount point equals 1% of the loan amount. These points are like paying interest upfront to the lender, instead of paying it gradually over time with your loan payments. Usually, if the interest rate is higher, you'll pay fewer discount points. And if the interest rate is lower, you might pay more discount points.
Discretionary Expense
Non-essential expenses are things like going out for fun or buying fancy stuff that you can usually choose whether to spend money on or not. They're different from essential costs, like paying for your car or your utilities, which you usually can't avoid.
Down Payment
The down payment is the money you pay upfront when you buy a home. For first-time homebuyers, this payment usually falls between 3% and 5% of the total price.
Earnest Money
When you agree to buy a house, you might put some of the down payment money into a special account held by the real estate agent. This money is called the earnest money deposit, and it shows that you're serious about buying the house. If the seller agrees to the deal, this money goes towards your down payment and the costs of closing the sale.
Equity
Equity is the extra value you have in your house after you subtract how much you owe on your mortgage. It grows over time when you pay off more of your mortgage and when your house gets more valuable.
Escrow Accounts
Each month, lenders collect a portion of the yearly payments for property taxes, hazard insurance, and mortgage insurance. They put this money into a special account called an escrow account. Then, when the taxes and insurance premiums are due each year, the lender uses the money from this account to pay them.
Fixed-Rate Loan
With a fixed-rate mortgage, the interest rate stays the same for the entire time you're paying back the loan.
Forbearance
When there's a written agreement between the borrower and the servicer, the borrower's mortgage payments can be temporarily lowered or stopped for a set time. After that time is up, the borrower has to start paying the regular monthly amount again, plus extra to cover the payments they missed during the break.
Foreclosure
Foreclosure is when a lender sells a property because the borrower hasn't paid back the loan as agreed. In traditional underwriting, the lender looks at four things - Collateral (like the property), Capacity (the ability to repay), Credit history, and Capital (the borrower's financial resources) - to decide whether to give the loan.
Government Mortgages
These are home loans that the federal government protects with insurance or a guarantee.
Gross Monthly Income
This is the money someone makes from their job before any taxes or other deductions are taken out.
HVAC
These are the systems in a house that control the temperature, air quality, and airflow: heating, ventilation, and air-conditioning (HVAC) systems.
Home Energy Audit
A home energy audit is like a checkup for how much energy a house uses. It looks at things like insulation, appliances, and heating and cooling systems to find ways to make the home use less energy and be more efficient.
Home Energy Rating System (HERS)
This is a checkup on how well the heating, cooling, and hot-water systems in a home are using energy compared to what's considered “normal.” The findings help figure out ways to save energy in the house.
Home Equity Loan
These are loans that use your home as collateral and can be used for different things like combining other loans, paying for college, or going on a trip. The interest you pay on these loans might be tax deductible, but it's best to check with a tax expert. If you can't pay back this type of loan, you could lose your home.
Home Inspection
This is a thorough check of a home's systems and structure done by a certified inspector. They create a report listing the condition of everything they inspected and suggest fixes for any problems. While lenders usually don't demand this inspection, it's highly recommended for buyers.
Home Warranty
Home warranties usually pay for fixing certain parts of a home, like big appliances or important systems such as plumbing, electrical, heating, and air conditioning.
Housing Expense Ratio
In traditional mortgage rules, the housing expense ratio helps figure out how much someone can afford to pay each month for housing, based on their total monthly income. For instance, if the housing expense ratio is 33%, it means the monthly housing expenses, like mortgage payments, shouldn't be more than 33% of their total monthly income.
Joint Tenancy
This is a type of ownership where all owners have equal rights to the property, and they can sell their share to anyone they want. If one owner passes away, the surviving owner(s) automatically inherit that person's share of the property.
Loan Estimate (LC)
Lenders have to give borrowers a Loan Estimate (LE) within three days of receiving a loan application. This document gives a summary of important details about the loan, including the estimated interest rate, monthly payments, and total closing costs. It also includes estimates for taxes and insurance. The LE should also mention if there are any penalties for paying off the loan early, or features that could increase what you owe over time. The purpose of the LE is to make it easier for borrowers to understand the loan terms and compare offers from different lenders.
Loan Modification
A loan modification is when the servicer adjusts one or more terms of the loan to assist the borrower in catching up on missed payments. This option is usually offered to borrowers facing ongoing financial difficulties.
Loan Officer
Unlike a mortgage broker who partners with many lenders, a loan officer is employed by just one lender. The loan officer's role is to help applicants find the best loan option from their lender's offerings based on the applicant's financial status.
Loan-To-Value (LTV)
The Loan-to-Value (LTV) ratio is found by dividing the amount of the loan still owed by the current value of the property.
Manufactured (Chassis-Built) Home
This is a home that's built in a factory and then transported to a permanent location where it's placed on a foundation. It's usually constructed on a frame that can be moved if needed.
Mortgage or Deed of Trust
The mortgage or Deed of Trust is a formal document of the promise to pay back the loan. If the borrower doesn’t repay the loan as agreed, the lender can take over the property.
Mortgage or Deed of Trust
The mortgage or Deed of Trust is a formal document of the promise to pay back the loan. If the borrower doesn’t repay the loan as agreed, the lender can take over the property.
Mortgage Broker
A mortgage broker works between a borrower and a lender, helping to arrange a loan. They have to be clear from the start about how they're getting paid for their work.
Mortgage Insurance
Mortgage insurance is like a safety net for the lender or investor in case they lose money during a foreclosure. The borrower pays a monthly premium for this insurance.
Multiple Listing Service
This is a list of properties that are up for sale, managed by local members of the National Association of Realtors®.
Multiple Listing Service
This is a list of properties that are up for sale, managed by local members of the National Association of Realtors®.
Negative Amortization
Negative amortization can happen with adjustable-rate mortgage loans that have payment caps. When the cap is reached, the amount the borrower should be paying gets added to the loan balance, causing it to grow instead of shrink, which is negative amortization.
Non-Traditional Credit
This is someone who doesn't have much or any history with credit cards, car loans, or student debt. However, they might have a good track record of paying bills like rent, utilities, or cell phone bills. And they can show that as proof of their ability to manage money responsibly.
Note
This is a paper signed by the borrower during the final steps of buying a home, making a formal commitment to repay the mortgage loan.
Origination Point
Lenders might ask for origination points to help cover the costs of getting your loan ready. Each point is 1% of the total loan amount.
Panelized Home
Walls, floors, and roof parts are built in panels in a factory. Then they're brought to the site and assembled on a foundation.
PITI
A term that covers the four elements of a mortgage payment — Principal, Interest, Taxes and Insurance.
Pre-Cut Home
For a pre-cut home, workers cut wood into certain lengths at a factory. Then they use those pieces to assemble the home at its permanent location.
Predatory Lenders
Predatory lending doesn't have a single definition, but it generally describes a situation when a lender prioritizes its own interests over the borrower's. For instance, the lender might approve a loan even if it knows the borrower can't really afford it.
Pre-foreclosure Sale
This is also known as a "short sale." In this agreement, the servicer agrees to take the money from selling a home, even if it's less than what the borrower owes.
Pre-payment Penalty
Some loans let the lender charge a fee if the borrower pays back the loan faster than planned.
Pre-pays
The lender might ask for certain payments upfront during the closing, even if they're not due yet. For example, they might collect a whole year's worth of insurance premiums to start up the escrow accounts.
Rate Lock-In
This is a written agreement where the lender promises to set a specific interest rate and points for a certain period after the borrower applies for the loan.
Refinance
Refinancing means using money from a new mortgage on the same property to pay off one or more existing mortgage loans. People usually do this to lower their interest rate, monthly payment, or to get cash from the home's equity.
Reverse Mortgage
This is a type of mortgage designed for homeowners aged 62 or older. They borrow money against the equity in their home, and receive periodic payments according to a schedule they choose. Usually, the loan is paid back when the home is sold or passed on to an estate. The borrower or the estate won't owe more than the home's value. The borrower still needs to cover property taxes, home insurance, and other expenses besides the mortgage.
Second Mortgage
This is a kind of mortgage loan that comes after the first mortgage. If there's a foreclosure, the lender of the second mortgage has to wait behind the first mortgage lender to get paid.
Servicing
This is the process of collecting loan payments and managing other tasks related to mortgages, like communicating with borrowers. It can be done by the lender themselves or by a company authorized to handle these tasks, known as a servicing company.
Servicing
This is the process of collecting loan payments and managing other tasks related to mortgages, like communicating with borrowers. It can be done by the lender themselves or by a company authorized to handle these tasks, known as a servicing company.
Sole Ownership
Only one person's name is listed as the owner of the property.
Survey
This is a detailed map or drawing showing exactly where the boundaries of the property are located, as well as any easements, rights of way, or other physical features.
Tenancy by Entirety
In this type of title ownership for married couples, if one spouse passes away, the surviving spouse automatically becomes the owner of the property.
Tenancy in Common
If the property title is held this way and one owner dies, their share of ownership can pass to their heirs instead of going to the surviving owner(s).
Term
This is the planned length of time for paying off a mortgage. Usually, it's set at 30 or 15 years.
Title
This is a paper that proves who legally owns a property.
Title Insurance
This is insurance that guards against losses from disagreements about who owns a property. The borrower usually needs to get a policy for the lender, and it's also a good idea to get one to protect their own interests.
Total Debt Ratio
In traditional mortgage underwriting, this calculation determines how much of a person's monthly income should go towards paying for housing expenses and other debts like student loans, car loans, and credit card debt. For example, if the total debt ratio is 38%, the amount spent on housing and other debts shouldn't be more than 38% of the person's gross monthly income.
Townhouse
In this type of condominium, you own your own living space and share ownership of common areas with others.
Transfer of Servicing
At times, the lender or the company handling mortgage payments might decide to transfer this responsibility to another company. The main terms of the mortgage stay the same, and borrowers usually have a 60-day period to adjust if their payments are sent to the wrong place.