Glossary of Terms

Good Terms to Know    
If you’re planning on getting a mortgage, it can be helpful to familiarize yourself with some of the common terms involved in real estate transactions. If you have questions about any of these terms, your Norcom mortgage expert will be happy to explain them to you in more detail.

Adjustable Rate Mortgage
A mortgage in which the interest rate is adjusted periodically based on an index (also called a variable rate mortgage)

Amortization
Repayment of a mortgage debt in periodic payments over the length of the loan term (payments usually include principal and interest)

Amortization Schedule
A table that shows the amounts of principal and interest due at regular intervals, as well as the unpaid mortgage balance after each payment is made

Application
The steps, including the completion of documents, a lender requires from those seeking a loan

Appraisal
An opinion or estimate of a property’s value (usually based on a comparison of a property to similar properties recently sold in the same market)

Appreciation
An increase in value for any reason (except inflation)

Asset
Any property or right owned (tangible or intangible) that has monetary value and is capable of providing future benefits to its owner

Breach
A violation of any legal obligation
 
Buy-Down Mortgage
A temporary buy-down is a mortgage on which an initial lump sum payment is made to reduce the borrower’s monthly payments during the first few years of the mortgage. A permanent buy-down reduces the interest rate over the entire life of the mortgage.

Cash-Out Refinancing
When the principal amount of a new mortgage involved in a refinance is greater than the outstanding principal of the existing mortgage and all or a portion of the equity is being converted to cash

Caps (Interest)
Safeguards on an adjustable-rate mortgage which limit the amount the interest rate may change

Caps (Payment)
Safeguards on an adjustable-rate mortgage which limit the amount monthly payments may change

Closing
Repayment of a mortgage debt in periodic payments over the length of the loan term (usually include principal and interest)

Closing Costs
Fees paid to affect the closing of a mortgage (i.e. origination fee, discount points, title insurance fees, survey fees, attorney’s fees, etc.)

Collateral
Property pledged as security for a debt

Commitment
An agreement (usually in writing) between a lender and borrower to loan money at a future date (subject to compliance with stated conditions)

Condominium
Property ownership whereby the purchaser receives title to a “unit” and a proportionate interest in common areas

Conventional Mortgage
A mortgage that is not insured or guaranteed by a government agency (i.e. HUD/FHA, CHFA, VA)

Credit Report
A report to a prospective lender on the credit standing of a prospective borrower

Covenant
A legally enforceable promise or restriction in a mortgage (e.g. the borrower may “covenant” to keep the property in good repair and adequately insured against fire and other casualties; a breach of covenant usually creates a default and can be the basis for foreclosure)

Deed
A signed, written document that conveys the title to a property from one owner to another

Default
A breach or nonperformance of the terms of a note or the covenants of a mortgage

Delinquency
The failure of a borrower to make timely payments under the terms of a loan agreement

Depreciation
The decline in value of a building or other real estate, resulting from age, physical wear, and economic or functional obsolescence

Down Payment
A portion of the sale price paid to a seller by a buyer, with the understanding that the balance will be paid later (also the difference between the sale price and the mortgage amount)

ECOA
The Equal Credit Opportunity Act is 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 form public assistance programs. Also called “Regulation B.”

Equity
A homeowner’s financial interest in a property, or the difference between the property’s fair market value and the amount still owed on its mortgage (e.g. if the fair market value is $125,000 and the mortgage balance is $119,000, then the equity is $6,000)

Escrow
An item of value, money or documents, deposited with a third party, that is to be delivered upon the fulfillment of a condition (e.g. the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate)

Escrow Payment
The portion of a mortgagor’s monthly payment that is held by the lender to pay taxes, hazard insurance, mortgage insurance, lease payments and other items, as they become due

Fannie Mae
A nickname for the Federal National Mortgage Association (FNMA), the nation’s largest mortgage investor and a quasi-governmental secondary-market organization that offers various mortgage purchase and securitization programs

Fair Market Value
The price at which a property will sell from a willing buyer to a willing seller, each of whom has a reasonable knowledge of all the pertinent facts and neither being under and obligation to buy or sell

Federal Home Loan Mortgage Corporation (FHLMC) – see Freddie Mac

Federal Housing Authority (FAH)
An agency of the U.S. Department of Housing and Urban Development (HUD) that mainly insures residential mortgages and loans made by private lenders; also sets standards for construction and underwriting, but does not lend money, or plan, or construct housing

Federal National Mortgage Association (FNMA) – see Fannie Mae

FHA Insurance
Insurance issued by FHA to insure the lender against loss arising from a potential default by the borrower

FICO score
A numerical score based on a system, developed by Fair, Isaac and Company, that uses the borrower’s credit history and other factors to predict his or her creditworthiness

Fixed-Rate Mortgage
A mortgage in which the interest rate and payments remain the same for the life of the loan

Foreclosure
A legal procedure in which a mortgaged property is sold to pay off the outstanding debt in case of default

Freddie Mac
Another name for the Federal Home Loan Mortgage Corporation (FHLMC), a quasi-governmental secondary market organization that offers various mortgage purchase and securitization programs

Gift
A monetary gift that given with no expectation of repayment (can be used to pay closing costs, or make or supplement a down payment; there are acceptable and unacceptable donors)

Gift Letter
A letter certifying to the underwriter that the funds in an applicant’s account are truly a gift and need not be repaid

Good Faith Estimate (GFE)
A written estimate (provided by the mortgage lender) that outlines the closing costs a borrower can expect to pay at or before settlement (must be mailed or delivered to all loan applicants within three business days after a loan application is received)

HUD
The Department of Housing and Urban Development is a governmental entity responsible for the implementation and administration of housing and urban development.

HUD-1 Income
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing. The bank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the “closing statement,” or “settlement sheet.”

Interest
Consideration in the form of money paid for the use of money, usually expressed as an annual percentage

Jumbo Loan
A mortgage loan that exceeds the legislated purchase limits of Fannie Mae and Freddie Mac (also called a non-conforming loan)

Lien
A creditor’s legal hold or claim on the property of another as security for a debt (liens are always against property, usually real property)

Loan Origination
The process by which a mortgage banker or direct lender brings into being a mortgage secured by real property

Loan-to-Value Ratio
The ratio of mortgage amount to appraised value, or sales price of real property (used by lenders to determine maximum loan amounts as set by law)

Lock-in
A lender’s promise to hold a certain interest rate and a certain number of points (usually for a specified period of time) while a loan application is processed (also called a rate-lock or rate commitment)

Mortgage Clause
A clause that may be attached to an insurance policy stipulating that the lender will receive a portion of insurance proceeds sufficient to satisfy the unpaid amount of a loan in the event of a loss

Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to FHA or a private mortgage insurance company

Mortgage Broker
A firm, or individual who matches borrowers with lenders (in return for a commission)

Mortgagor
One who borrows money, giving as a security a mortgage, or deed of trust on real property

Origination
The process of creating residential mortgage loans

Origination Fee
The lender’s fee charged to a borrower to prepare documents, make credit checks, inspect and sometimes appraise a property

PITI
An acronym for the items included in a monthly payment (i.e. principal, interest, taxes and insurance)

Pre-Approval
A process whereby a potential borrower’s credit worthiness is evaluated to determine whether they qualify for a mortgage; includes a thorough look at the borrower’s income, current debt level, credit report, rental or previous mortgage history, etc.; pre-approval does not constitute a guarantee of a mortgage; the pre-approved mortgage amount is still subject to review (once a property has been chosen), and the amount may be lowered, or revoked, depending on a number of factors related to the specific property   

Pre-Qualification
A less “formal” evaluation of a borrower’s creditworthiness (compared to Pre-Approval); provides an estimate of the loan amount a borrower is likely to receive; the borrower’s information (credit, income, employment, etc.) is not verified during a Pre-Qualification; there is no guarantee that a Pre-Qualified buyer will receive a mortgage

Private Mortgage Insurance (PMI)
Insurance that is issued to protect the lender against potential financial loss, which may occur if a borrower defaults on the mortgage

Point
1% of the principal amount of the mortgage
 
Principal
The amount of money borrowed in a mortgage, excluding interest; also, the remaining balance of a loan, excluding interest

Refinancing
The repayment of a mortgage using the proceeds of a new loan, with the same property as security

Term
The period of time between the commencement date and termination date of a mortgage

Underwriting
The analysis of the risk involved in making a mortgage; involves the evaluation of the property (as outlined in the appraisal) and the borrower’s ability to repay the loan

Unsecured Loan
Money received with the expectation of repayment; not an acceptable source of funds for a down payment, closing costs, or financial reserves

VA Mortgage
A mortgage guaranteed by the Department of Veterans Affairs (VA)

Variable Rate Mortgage
A mortgage agreement (also known as an Adjustable Rate Mortgage, or ARM) that allows for an adjustment in the interest rate, according to changes in the market and the terms of the loan

Wholesaler
A lender who purchases mortgages a broker (or correspondent) has completely or partially originated (versus working directly with consumers)