Mortgage terms, defined

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A B C D E F G H I J L M N O P Q R S T U V W Z

1003 The Uniform Residential Loan Application, named after its old Fannie Mae form number. It’s the standard mortgage application used across the industry.

A & D Loan Acquisition and development loan. It pays for buying raw land and putting in the roads, drainage and utilities that make it buildable.

Abstract of Title A written summary of everything recorded against a parcel of land. It shows who has owned it and what claims have attached to it over time.

Acceleration Clause The part of your mortgage that lets the lender demand the whole remaining balance at once if you default. The lender doesn’t have to wait for each payment to come due.

Acknowledgment A notary’s certification that the person signing a document is who they say they are and signed it willingly.

Adjustable Rate Mortgage (ARM) A loan whose interest rate resets from time to time based on a published index, usually after a fixed period at the start. Your payment moves with it.

Adjustment Interval On an ARM, how often the rate can reset once the fixed period ends. Every six or twelve months is common.

Affidavit A written statement sworn to be true before someone authorized to administer an oath.

American Land Title Association (ALTA) The trade group for title insurers. Most title insurance in the country is written on its standard policy forms.

Amortization Paying a debt down to zero with regular, equal payments. Each one covers the interest due and pays down some of the balance. A fully amortizing loan is paid off exactly at the end of its term.

Annual Percentage Rate (APR) The yearly cost of a loan, including the interest and most of the lender fees. It’s usually higher than the note rate, and it’s meant to help you compare offers. It doesn’t change your monthly payment.

Appraisal An independent written opinion of a property’s market value, prepared by a licensed appraiser.

Assumption Taking over someone else’s mortgage on its current terms. FHA and VA loans are generally assumable. Most conventional loans aren’t.

Back-End Ratio Your total monthly debt payments, housing included, as a percentage of your gross monthly income.

Balloon Payment A single large payment due at the end of some loans. The regular payments don’t pay the loan off, so this one clears whatever balance is left.

Beneficiary On a deed of trust, the party the debt is owed to. That’s usually the lender.

Bankruptcy A court process that reorganizes or wipes out debts you can’t pay. Chapter 7 discharges them. Chapter 13 reorganizes them into a repayment plan.

Broker A go-between who arranges a mortgage between a borrower and a lender. A broker can shop a panel of lenders instead of offering one lender’s products. Barrett is a broker.

Buydown Paying money up front to lower the interest rate, either for the whole term or for the first year or two. Builders and sellers sometimes pay for one as an incentive.

Cap The limit on how far an ARM’s rate can move. There’s usually one for the first adjustment, one for each adjustment after that, and one for the life of the loan.

Cash Out Money you get from a refinance, drawn from your home’s equity. It’s the part that isn’t used to pay off the existing loan and its costs.

Certificate of Occupancy Confirmation from the local government that a newly built or substantially altered building is fit to live in.

Certified Copy A copy of a document confirmed as a true reproduction of the original by whoever holds the original.

Clear to Close The point where underwriting has signed off on every condition and your signing can be scheduled.

Closing The meeting or process where the sale is finished. Documents get signed, money changes hands, and the property transfers. Some states call it settlement.

Closing Costs Everything you pay to finish the purchase and the loan, beyond the down payment. That includes lender charges, title and settlement work, recording, taxes, and prepaid items.

Closing Disclosure The five-page form showing the final terms and costs of your loan. You must get it at least three business days before you sign, and it’s laid out so you can compare it with your Loan Estimate.

Commitment A lender’s written promise to lend on stated terms, usually once certain conditions are met.

Community Property In a handful of states, property that spouses acquire during a marriage belongs to both of them equally, no matter whose name is on it.

Comparable (Comp) A recently sold property close enough to the one being appraised to show its value, after adjusting for the differences.

Condominium Ownership of an individual unit inside a larger building or development, with a shared interest in the common areas.

Construction Loan A short-term loan that pays for building work in stages. Once the home is finished, a permanent mortgage replaces it.

Consumer Credit Borrowing for personal use that isn’t secured by real estate, like credit cards, car loans and personal loans.

Conventional Loan A mortgage that isn’t insured or guaranteed by FHA, VA or USDA. Most follow Fannie Mae and Freddie Mac standards.

Conversion Clause A feature in some ARMs that lets you switch the loan to a fixed rate, usually within a set window and for a fee.

Credit Report The record a consumer reporting agency keeps of your borrowing and how you’ve repaid it. Mortgage lenders pull all three bureaus at once.

Credit Score A number that sums up the risk in your credit file. FICO scores, which mortgage lenders use, run from 300 to 850.

Debt Ratio Monthly debt obligations divided by gross monthly income. See back-end ratio.

Deed The document that transfers ownership of real property from one party to another.

Deed of Trust Used instead of a mortgage in many states. A trustee holds title as security for the loan, which lets the lender foreclose without going to court.

Default Not meeting an obligation in your loan agreement. That usually means missed payments, but it can also mean not insuring the property or not paying the taxes.

Deferred Interest Interest that builds up but isn’t collected, so it’s added to your balance instead. See negative amortization.

Delinquency Being behind on payments. It’s generally reported to the credit bureaus once you’re 30 days late.

Department of Veterans Affairs (VA) The federal department that guarantees home loans for eligible service members, veterans and surviving spouses.

Derogatory Item Anything negative on a credit report, like a late payment, a collection, a charge-off or a judgment.

Derogatory Letter A letter from you explaining what caused a negative item and what has changed since. Lenders ask for these all the time, and it’s not a bad sign.

Discharge The court order at the end of a bankruptcy releasing you from the debts it covered.

Discount Points Prepaid interest you pay at closing to lower your rate for the rest of the term. One point is one percent of the loan.

Dismissal A bankruptcy case ended by the court without a discharge, leaving the debts in place.

Down Payment The part of the purchase price you pay with your own money instead of borrowing.

Due-on-Sale Clause The clause that makes the whole balance due when the property is sold. It’s why most conventional loans can’t be assumed.

Earnest Money A deposit you put down with your offer to show you’re serious. It’s credited to you at closing. You could lose it if you back out for a reason your contract doesn’t protect.

Easement A right for someone else to use part of your land for a defined purpose, such as access or utilities.

Encroachment A structure that extends over a boundary onto land belonging to someone else.

Equal Credit Opportunity Act (ECOA) The federal law prohibiting discrimination in lending on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

Equity What the property is worth less what you owe against it.

Escrow A neutral third party that holds money or documents until the terms of a deal are met. It’s also the account your servicer uses to collect and pay your property taxes and insurance.

Escrow Instructions The written directions telling the escrow holder what has to happen before funds and documents are released.

Escrow Waiver An arrangement, allowed on some loans, where you pay your property taxes and insurance yourself instead of through your servicer.

Fannie Mae (FNMA) The Federal National Mortgage Association. A government-sponsored enterprise that buys conventional mortgages from lenders, so they have money to lend again. Its guidelines set the standard for conforming loans.

Farmers Home Administration (FmHA) A former federal agency, abolished in 1994. Its rural housing loan programs are now run by USDA Rural Development.

Federal Housing Administration (FHA) Part of HUD. It doesn’t lend money itself. It insures mortgages against loss, and that’s what lets lenders accept smaller down payments.

Fee Simple The most complete form of ownership. You own the land and everything on it with no end date, subject only to public rights and any recorded restrictions.

FHA Loan A mortgage insured by the Federal Housing Administration. It allows a smaller down payment and a thinner credit history than conventional financing.

FHA Mortgage Insurance Premium (MIP) The insurance FHA charges on the loans it insures. There’s an upfront premium, a percentage of the loan that’s normally rolled into it, plus an annual premium collected monthly.

Fixed-Rate Mortgage A loan whose interest rate is set for the whole term, so the principal and interest payment never changes.

Flood Insurance Insurance against flood damage. Federal law requires it on a federally related mortgage when the property is in a designated special flood hazard area.

Foreclosure The legal process a lender uses to take and sell a property to recover a debt that’s in default.

Freddie Mac (FHLMC) The Federal Home Loan Mortgage Corporation. It’s the other government-sponsored enterprise that buys conventional mortgages, along with Fannie Mae.

Free and Clear Owned outright, with no mortgage or other lien against it.

Functional Obsolescence A loss in value because something about the property itself is outdated or poorly laid out. It has nothing to do with what’s happening around the property.

Ginnie Mae (GNMA) The Government National Mortgage Association. It guarantees securities backed by FHA, VA and USDA loans. That’s how those programs reach the bond market.

Good Faith Estimate (GFE) The cost estimate lenders had to give you before October 2015. The Loan Estimate replaced it for almost all consumer mortgages.

Graduated Payment Mortgage (GPM) A loan whose payments start low and rise on a set schedule for several years before leveling off.

Grant Deed A deed that transfers ownership with a limited promise that the seller hasn’t already sold the property or put a claim on it.

Gross Monthly Income What you earn each month before taxes and deductions. Every qualifying ratio is measured against it.

Guarantee A promise to cover someone else’s debt if they don’t pay. A VA guaranty works like this, with the VA covering part of the lender’s loss.

Hazard Insurance The part of a homeowners policy that covers physical damage to the building from fire, storms and similar causes. Lenders require it.

Homestead Your principal residence. Several states give it specific protection from creditors, and some give it a property tax exemption.

Housing Expense Ratio Your total monthly housing payment as a percentage of your gross monthly income. Also called the front-end ratio.

Impound Account Another name for an escrow account. Your servicer collects money with each payment and holds it to pay your taxes and insurance when they’re due.

Index The published rate an ARM is tied to. The rate you pay is the index plus the lender’s margin.

Interest Bearing Describes an account or a debt on which interest accrues.

Investor The company that ultimately owns your loan and receives your payments. Very often it isn’t the company you send them to.

Joint Tenancy Ownership by two or more people in equal shares, with a right of survivorship. When one owner dies, their share passes automatically to the others.

Jumbo Loan A mortgage above the conforming loan limit, which is set annually by the Federal Housing Finance Agency and varies by county.

Land Contract A seller-financed sale. The buyer pays in installments, and the seller keeps legal title until the price is paid.

Leasehold Estate The right to occupy and use land for a fixed period under a lease, without owning the land itself.

Legal Description The formal description of a parcel of land, precise enough to record it. It uses lot and plat, metes and bounds, or a survey reference.

Lien A recorded claim against a property that secures a debt. A mortgage is a lien. So are unpaid tax claims and contractor claims.

Loan Estimate The three-page form a lender must give you within three business days of your application. It shows the rate, the payment, the cash to close and every fee. Every lender uses the same layout, so you can compare two side by side.

Loan Officer The licensed person who takes your application, advises you on programs and guides your file through to closing. Each one has their own NMLS identification number.

Loan-to-Value Ratio (LTV) The loan as a percentage of the property’s value. It affects your pricing, your mortgage insurance and which programs you can use.

London Interbank Offered Rate (LIBOR) A former benchmark interest rate that’s no longer used for new loans. Older ARMs tied to it have been moved to replacement indexes.

Margin The fixed percentage a lender adds to the index to arrive at an ARM’s interest rate at each adjustment.

Market Value What a property would sell for between a willing buyer and a willing seller, both informed and neither under pressure.

Mortgage Insurance Insurance that protects the lender against loss when the down payment is small. It’s called private mortgage insurance on conventional loans and MIP on FHA loans.

Mortgagee The lender.

Mortgagor The borrower.

Negative Amortization When your payment doesn’t cover the interest that’s building up, so the shortfall is added to the balance and the debt grows.

NMLS Number The unique ID every licensed mortgage company and loan originator has in the Nationwide Multistate Licensing System. You can look anyone up by it for free, and you should.

Non-Assumption Clause A clause that bars a buyer from taking over the loan.

Non-Owner Occupied A property the owner doesn’t live in. Financing it costs more and takes a larger down payment.

Notary Public A person authorized by the state to witness signatures and administer oaths.

Note The document where you promise to repay the loan. It sets out the amount, the rate and the terms. The mortgage or deed of trust secures it against the property.

Obligations The recurring debts counted against your income when you qualify, like loans, credit cards and support payments.

Origination Fee What the lender charges for taking and processing the loan, usually quoted as a percentage of the amount borrowed.

Owner Occupied A property the borrower lives in as their principal residence. Lenders price it better than a second home or a rental, because they see it as the least likely to go into default.

Owner’s Title Policy Title insurance that protects your ownership. The lender’s policy is separate and only protects the lender.

P & I Principal and interest. The part of your monthly payment that goes to the loan itself.

P & L Profit and loss statement. A summary of a business’s income and expenses. Self-employed borrowers need one for the year to date.

PITI Principal, interest, taxes and insurance. It’s the full monthly cost of owning the home, and qualifying ratios are built on it.

Planned Unit Development (PUD) A development where you own your lot and home outright and share ownership of common areas through an association.

Piggyback Loan A second mortgage taken out at the same time as the first, usually to keep the first at 80% and avoid mortgage insurance.

Points One point is one percent of the loan amount. Discount points buy the rate down. Origination points pay the lender for making the loan.

Power of Attorney Written permission for someone to sign for you. It’s useful if you’ll be away at closing, but the lender and the title company have to approve it in advance.

Pre-Approval A lender’s conditional commitment after checking your income, credit and assets. It’s much stronger than a pre-qualification, and it’s what sellers want to see.

Pre-Qualification An early estimate of what you could borrow, based on numbers you give that haven’t been verified yet. It’s useful for setting a budget, but it isn’t a commitment to lend.

Preliminary Title Report The title company’s first report on what’s recorded against the property and what has to be cleared before it can insure the title.

Prepaid Interest Interest for the days between closing and the start of your first full month. Closing later in the month means less of it.

Prepaids Money collected at closing for costs that are yours, not the lender’s. That includes the first year of insurance and the reserves that start your escrow account.

Prepayment Paying more than is due, or paying the loan off early.

Prepayment Penalty A charge for paying a loan off early. Regulation Z now bans them on the great majority of consumer mortgages, and where one is allowed, it’s tightly limited.

Principal The amount you borrowed, or what’s left of it, not counting interest.

Private Mortgage Insurance (PMI) Insurance a conventional lender requires when the down payment is under 20%. It protects the lender, you pay for it, and it cancels once you have enough equity.

Purchase Agreement The signed contract between buyer and seller setting out the price, the timetable and the conditions of the sale.

Quitclaim Deed A deed that transfers whatever interest the signer has, with no warranty that they have any. It’s common between family members and in divorces. It moves title but doesn’t touch the mortgage.

Rate Float Choosing not to lock your rate yet, and taking whatever it is when you do.

Rate Lock A lender’s promise to hold a quoted rate for a set period, commonly 30 to 60 days, as long as the loan closes in that time.

Ratios The two percentages you qualify on: your housing payment compared with your income, and your total debt compared with your income.

Real Estate Settlement Procedures Act (RESPA) The federal law that governs the settlement process. It requires specific disclosures, limits escrow balances, and bans kickbacks and referral fees between settlement service providers.

Realtor A real estate agent who is a member of the National Association of Realtors and bound by its code of ethics. Not every agent is one.

Reconsideration of Value A formal request asking the appraiser to review a value because of factual errors or better comparable sales. Every lender is now expected to have a process for it.

Reconveyance The release of a deed of trust once the loan is paid off. It’s recorded to clear the lien from the title.

Recording Fees What the county charges to enter the deed and the mortgage in the public record.

Refinance Replacing your mortgage with a new one to change the rate, the term or the loan type, or to take cash out of your equity.

Request for Reconveyance The instruction a lender sends the trustee once the debt is paid, telling them to release the deed of trust.

Rescission Canceling a transaction. On a refinance or home equity loan against your principal residence, federal law gives you three business days after signing to rescind for any reason.

Reverse Mortgage A loan for older homeowners that turns equity into cash with no monthly mortgage payment. It’s repaid when the last borrower sells, moves out permanently or dies. You’re still responsible for taxes, insurance, upkeep and living in the home.

Second Mortgage A loan secured by a property that already has a first mortgage. In a foreclosure, it gets paid after the first one.

Secondary Financing Any borrowing taken alongside the first mortgage to help pay for the purchase.

Servicing Managing the loan after closing. That means collecting payments, running the escrow account, and working with borrowers who are having trouble. It’s often sold to a different company from the one that made the loan.

Settlement Another word for closing, used in much of the eastern United States.

Settlement Costs The costs of completing the transaction. See closing costs.

Shared Appreciation Mortgage (SAM) An arrangement where the lender accepts a lower rate in exchange for a share of any increase in the property’s value. These are uncommon.

Statement of Information A confidential form the title company asks each party to fill out. It helps them tell apart judgments and liens against people with similar names.

Submission Sending a completed file to underwriting for a decision.

Subordination Agreement A recorded agreement that changes the order of priority between liens. It’s most often used to keep a second mortgage behind a new first mortgage when you refinance.

Substitution of Trustee A recorded document replacing the trustee named in a deed of trust.

Surety Bond A bond guaranteeing that an obligation will be carried out, with a third party on the hook if it isn’t.

Survey A measured map of a parcel showing its boundaries, where the buildings sit, and any easements or encroachments.

Suspended An underwriting decision that’s neither an approval nor a denial. The file needs more information before a decision can be made.

Tenancy in Common Ownership by two or more people in shares that don’t have to be equal, with no right of survivorship. Each owner’s share passes under their will.

Term Mortgage A loan where you pay only interest during the term, and the whole principal comes due at the end.

Title Legal ownership of property, and the proof of it.

Title Insurance Insurance against loss from a title defect that existed before you bought. The lender’s policy protects the lender. An owner’s policy protects you.

Title Search A search of the public record to confirm who owns a property and what’s recorded against it.

Trust Deed See deed of trust.

Truth in Lending Act (TILA) The federal law that requires the cost of credit to be disclosed in a standard way. It’s behind the APR, the Loan Estimate, the Closing Disclosure and the right of rescission on a refinance.

Two-Step Mortgage A loan with one interest rate for an initial period, then a second rate, set once, for the rest of the term.

Underwriting The lending decision. An underwriter reviews the income, credit, assets and property, then decides whether the loan can be made and on what conditions.

Uniform Residential Loan Application (URLA) The standard mortgage application form, redesigned in 2021. People still call it the 1003.

VA Funding Fee A one-time fee most VA borrowers pay to the Department of Veterans Affairs, usually rolled into the loan. Veterans receiving compensation for a service-connected disability, and qualifying surviving spouses, don’t pay it.

VA Loan A mortgage guaranteed by the Department of Veterans Affairs, available to eligible service members, veterans and surviving spouses with no down payment and no monthly mortgage insurance.

Variable Rate Mortgage Another name for an adjustable rate mortgage.

Verification of Deposit (VOD) Confirmation from your bank of your account balances and history.

Verification of Employment (VOE) Confirmation from your employer of your position, your earnings and how long you’ve worked there. It’s usually repeated shortly before closing.

Wraparound Mortgage A new loan written around an existing one. The seller keeps paying the original mortgage out of what the buyer pays them. These are rare, and the due-on-sale clause usually blocks them.

Zoning Local rules controlling how land may be used and what may be built on it.