Knowing the terms can help with the mortgage and loan process

  • Acceleration clause

    A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

  • Adjustable rate mortgage (ARM)

    An adjustable rate mortgage (ARM) has an interest rate that initially remains fixed for a certain period, after which it is adjusted at periodic intervals according to a pre-selected index. Adjustable rate mortgages which offer low initial fixed rates, allow borrowers to easily qualify for such loans. This aspect of an ARM may be beneficial to those who plan to occupy their home only for a few years

  • Amortization

    The gradual repayment of a mortgage by installments.

  • Amortization schedule

    A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.

  • Annual percentage rate (APR)

    The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).

  • Appraisal

    A professional opinion of the market value of a property.

  • Appreciation

    An increase in the value of a house due to changes in market conditions or other causes.

  • Assessed value

    The valuation placed upon property by a public tax assessor for purposes of taxation.

  • Assumable mortgage

    A mortgage that can be taken over (assumed) by the buyer when a home is sold.

  • Assumption

    The transfer of the seller’s existing mortgage to the buyer.

  • Binder

    A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

  • CAP

    A provision of an ARM limiting how much the interest rate or mortgage payments may increase.

  • Cash reserve

    A requirement of some lenders that buyers have cash remaining after closing. Traditionally lenders have required borrowers to have reserves equal to two mortgage payments.

  • Clear title

    A title that is free of liens and legal questions as to the ownership of the property.

  • Closing

    The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid (Also called settlement).

  • Closing costs

    Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called settlement costs.

  • Commitment letter

    A formal offer by a lender stating the terms under which it agrees to lend money to a homebuyer.

  • Community property

    Property acquired by husband and wife during a marriage when not acquired as separate property by either spouse. Each spouse has equal rights, including the rights of survivorship.

  • Condominium

    A form of property ownership in which the homeowner holds title to an individual dwelling unit plus an interest in common areas of a multi-unit project.

  • Contingency

    A condition that must be met before a contract is legally binding.

  • Conventional mortgage

    A conventional loan is a fixed rate loan product that provides financing for borrowers purchasing or refinancing properties. A conventional loan is not fully secured by the Veterans Administration or protected by the FHA (the Federal Housing Administration).

  • Convertible ARM

    An adjustable rate mortgage that can be converted into a fixed rate mortgage under specified conditions.

  • Cooperative

    A form of common property ownership in which the residents of an apartment building do not own their own units, but rather own shares in the corporation that owns the property.

  • Covenant

    A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

  • Credit report

    A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

  • Deed

    The legal document conveying title to a property.

  • Deed of trust

    The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

  • Default

    Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.

  • Delinquency

    A loan in which a payment is overdue.

  • Deposit

    Cash paid to the seller when a formal sales contract is signed.

  • Depreciation

    A decline in the value of property; the opposite of appreciation.

  • Discount points

    See Points.

  • Down payment

    The part of the purchase price which the buyer pays and does not finance with a mortgage.

  • Due-on-sale clause

    A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

  • Earnest money

    A deposit given to the seller to show that a prospective buyer is serious about buying the house.

  • Easement

    A right of way giving persons other than the owner access to or over a property.

  • Equal Credit Opportunity Act (ECOA)

    A federal law that prohibits lenders from denying mortgages on the basis of the borrower’s race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

  • Equity

    The difference between the market value of a property and the homeowner’s outstanding mortgage balance.

  • Equity loan

    A loan based on the borrower’s equity in his or her home.

  • Escrow

    The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.

  • Fair Credit Reporting Act

    A consumer protection law that sets up a procedure for correcting mistakes on one’s credit record.

  • FHA loan

    A mortgage that is insured by the Federal Housing Administration.

  • First mortgage

    The mortgage that has first claim in the event of default.

  • Fixed rate mortgage

    A mortgage in which the interest rate does not change during the entire term of the loan.

  • Flood insurance

    Insurance required for properties in federally designated flood areas.

  • Forbearance

    The lender’s postponement of foreclosure to give the borrower time to catch up on overdue payments.

  • Foreclosure

    The process by which a mortgaged property may be sold when a mortgage is in default.

  • Graduated payment mortgage

    A mortgage that starts with low monthly payments that increase at a predetermined rate.

  • Hazard insurance

    Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.

  • Homeowners insurance

    An insurance policy that combines liability coverage and hazard insurance.

  • Homeowners warranty

    A type of insurance that covers repairs to specified parts of a house for a specific period of time.

  • Impound account

    An account required if lender will pay the property taxes, mortgage insurance, and hazard insurance {Also called Tax and Insurance Reserve (TIR)}.

  • Interest

    The fee charged for borrowing money.

  • Interest rate cap

    A provision of an ARM limiting how much interest rates may increase per adjustment period (See also Lifetime cap).

  • Joint tenancy

    A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

  • Late charge

    The penalty a borrower must pay when a payment is made after the due date.

  • Lease-purchase mortgage loan

    An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy, and with each month’s rent payments consisting of PITI payments on the first mortgage, plus an extra amount that is earmarked for a savings account in which money for a down payment accumulates.

  • Lien

    A legal claim against a property that must be paid when the property is sold.

  • Lifetime cap

    A provision of an ARM that limits the total increase in interest rates over the life of the loan.

  • Loan commitment

    See Commitment letter.

  • Loan servicing

    The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

  • Loan-to-value ratio (LTV)

    The relationship between the amount of a mortgage and the total value of the property.

  • Lock-in

    A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

  • Margin

    The set percentage the lender adds to the index rate to determine the interest rate of an ARM.

  • Mortgage

    A legal document that pledges a property to the lender as security for payment of a debt.

  • Mortgage banker

    A company that originates mortgages exclusively for resale in the secondary market.

  • Mortgage broker

    A professional that for a fee matches borrowers with lenders.

  • Mortgage insurance

    See Private mortgage insurance.

  • Mortgage insurance premium (MIP)

    The fee paid by a borrower to the FHA or a private insurer for mortgage insurance.

  • Mortgage note

    A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.

  • Mortgagee

    The lender in a mortgage agreement.

  • Mortgagor

    The borrower in a mortgage agreement.

  • Negative amortization

    Payment terms under which the borrower’s monthly payments do not cover the interest due; as a result, the loan balance increases.

  • Notice of default

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

  • Origination fee

    A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.

  • Owner financing

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

  • Payment cap

    A provision of some ARMs limiting how much a borrower’s payments may increase regardless of how much the interest rate increases; may result in negative amortization.

  • PITI

    Stands for principal, interest, taxes, and insurance, the components of a monthly mortgage payment.

  • Points

    A one-time charge by the lender to increase the yield of the loan; a point is one percent of the amount of the mortgage.

  • Prepayment penalty

    A fee charged to a borrower who pays off a loan before it is due.

  • Prequalification

    The process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.

  • Principal

    The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

  • Private mortgage insurance (PMI)

    Insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults.

  • Purchase and sale agreement

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

  • Qualifying ratios

    Guidelines applied by lenders to determine how large a loan to grant a homebuyer.

  • Radon

    A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

  • Rate lock

    See Lock-in.

  • Real estate agent

    A person licensed to negotiate and transact the sale of real estate on behalf of the owner.

  • Real Estate Settlement Procedures Act

    A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

  • Refinancing

    The process of paying off one loan with the proceeds from a new loan secured by the same property.

  • Rent with option to buy

    See Lease-purchase mortgage loan.

  • Second mortgage

    A mortgage that has rights that are subordinate to the rights of the first mortgage holder.

  • Secondary mortgage market

    The buying and selling of existing mortgages.

  • Seller carryback

    An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

  • Settlement

    See Closing.

  • Settlement sheet

    The computation of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payments.

  • Subsidized second mortgage

    An alternative financing option for low- and moderate-income households that also includes a down payment and a first mortgage, with funds for the second mortgage provided by city, county, or state housing agencies, foundations, or nonprofit corporations. Payment on the second mortgage is often deferred, carries no or low interest rates, and part of the debt may be forgiven for each year the family remains in the home.

  • Survey

    A drawing showing the legal boundaries of a property.

  • Tax and Insurance Reserve (TIR)

    See Impound account.

  • Tenancy by entirety

    A type of joint ownership of property available only to a husband and wife.

  • Tenancy in common

    A type of joint ownership in a property without right of survivorship.

  • Three/two (3/2) option

    An alternative financing plan that enables households whose earnings are no more than 100 percent of the median income in their regional area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative or a 2 percent grant or unsecured loan from a nonprofit or state or local government program.

  • Title

    A legal document establishing the right of ownership.

  • Title company

    A company that specializes in insuring title to property.

  • Title insurance

    Insurance to protect the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.

  • Title search

    A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

  • Transfer tax

    State or local tax payable when title passes from one owner to another.

  • Truth-in-Lending Act

    A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

  • Underwriting

    The process of evaluating a loan application to determine the risk involved for the lender.

  • VA loan

    A loan that is guaranteed by the Veterans Administration.

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