Mortgage Tools

Adjustable-rate mortgage (ARM): A mortgage loan with an interest rate on the note that is periodically
adjusted based on an index. Most ARMs an initial fixed-rate period of 3, 5 or 7 years. ARMs may have
restrictions, or cap rates, on the amount of the first, periodic, and lifetime total changes in the interest
rate.
Amortization Term: The length of time required to pay off a mortgage loan expressed as a number of
months. For example: 360 months is the amortization term for a 30-year fixed rate mortgage.

Annual Percentage Rate (APR): The measurement of the full cost of a loan including interest and loan
fees expressed as a yearly percentage rate. Lenders apply the same rules in calculating the annual
percentage rate, so it is a good basis for comparing the total cost of different loans.
Appraisal: An estimate of the value of property made by a qualified professional called an "appraiser”.
The Home value is based on an appraiser's knowledge, experience and analysis of the property.
Assumability: An assumable mortgage can be transferred from a seller of a property to a new buyer.
Generally, this requires a credit review of the new borrower and lenders may charge a fee for the
assumption. If a mortgage contains a due on sale clause it may not be assumed by a new buyer.
Approved lender: Lenders that apply for and meet requirements established by the entity (i.e., the
Federal Housing Administration, U.S. Department of Housing and Urban Development, the U.S.
Department of Veterans Affairs, the U.S. Department of Agriculture, and the government-sponsored
enterprises) are granted permission to participate in the entity’s programs. Approved activities may
include origination, underwriting, purchasing, holding, servicing, or selling mortgages. Common
eligibility requirements include a net worth threshold, a checklist of financial statements, and a quality
control program.
Balloon Mortgage: A loan which is amortized for a longer period than the term of the loan. Usually this
refers to a thirty-year amortization and a five or seven year loan term. At the end of the term of the
loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon
payment.
Biweekly Payment Mortgage: A mortgage payment plan to where a borrower makes debt payments
every two weeks (instead of the standard monthly payment schedule). The 26 biweekly payments are
each equal to one half of the monthly payment required if the loan were a standard 30-year fixed rate
mortgage. The result for the borrower is a savings in interest charges.
Borrower (Mortgagor): One who applies for and receives a loan in the form of a mortgage with the
intention of repaying the loan back in full.
Bridge Loan: A second mortgage loan that is collateralized by a borrower's present home allowing the
proceeds to be used to close on a new house before the current home is sold.
Basis points: A basis point is one hundredth of 1 percent. That is, one basis point equals 0.01 percent or
there are 100 basis points in 1 percent. It is a common unit of measure for interest rates.
Certificate of Eligibility: The document given to qualified veterans which entitles them to VA guaranteed
loans for homes business and mobile homes. Certificates of eligibility may be obtained by sending form
DADA (Separation Paper) to the local VA office with VA form 1880 (Request for Certificate of Eligibility).
Closing costs: Fees incurred by the borrower and/or seller for costs associated with the closing of a
mortgage loan. Common fees include appraisal fees, tax service provider fees, title insurance,
government taxes, and prepaid expenses such as property taxes and homeowner’s insurance. Fees are
generally paid up front at closing or the lender may roll them into the mortgage, resulting in higher
monthly mortgage payments.
Construction Loan: A short term interim loan to pay for the construction of building a home. These
loans are usually designed to provide periodic disbursements to the builder as the home is built and
must be paid in full when the property is fully constructed.
Conventional loan: A mortgage that is not insured or guaranteed by a Federal government agency, i.e.,
the Federal Housing Administration (FHA), U.S. Department of Housing and Urban Development, the
U.S. Department of Veterans Affairs (VA), the U.S. Department of Agriculture, and the Bureau of Indian
Affairs. Conventional loans include both loans that conform to government sponsored enterprise (GSE)
guidelines and those that do not conform. Conventional mortgages delivered to the GSEs are also known
as conforming mortgages.
Correspondent lender: A lending institution that originates and funds loans in its own name and then
sells them to another lender or investor. The underwriting function in a correspondence relationship can
be carried out by the correspondent or the investor. As a correspondent lender, the originating lender is
acting as an extension of the investor. For example, correspondent lenders work with approved
seller/servicers to originate government-sponsored enterprise loan products.
Debt-to-Income Ratio: A ratio expressed as a percentage which results when a borrower's monthly
payment obligations (debts) are divided by his or her gross monthly income.
Deed of Trust: In many states this document is used in place of a mortgage to secure repayment of a
note.
Department of Veterans Affairs (VA): An independent agency of the federal government which
guarantees long term low-or-no-down payment mortgages to eligible veterans.
Down payment: A payment made in cash at the onset of the purchase of a home. Homebuyers typically
make down payments that equal 5-25 percent of the total value of a home. Some federal and GSE
programs allow lower down payments.
Earnest Money: Money given by a buyer to a seller as part of a purchase contract to bind a transaction
or assure payment.
Equity: The difference between the fair market value of a home and the current loan obligations
secured against the property. Also referred to as the owner's interest. The monetary value an owner
has in real estate over and above the obligation against the property.
Escrow: An account held by the lender into which the home buyer pays money for tax or insurance
payments. The lender will make these payments on behalf of the borrower.
Federal Housing Administration (FHA): A division of the Department of Housing and Urban
Development. Its main activity is the insuring of residential mortgage loans made by private lenders.
FHA also sets standards for underwriting mortgages.
FHA Loan: A loan insured by the Federal Housing Administration open to all qualified home purchasers.
While there are limits to the size of FHA loans, they are generous enough to handle moderately priced
homes almost anywhere in the country.
FICO score: A type of credit score that lenders use to assess a borrower’s credit risk. FICO stands for Fair
Isaac Corporation, the company that created the FICO score. Scores are calculated using borrower credit
reports and range from 300 to 850. A lower score indicates the borrower has poorer credit, and a higher
score indicates the borrower has stronger credit.
First mortgage: A mortgage in the first-lien position that has priority over all other liens or claims to a
property in the event of default.
Fixed-rate mortgage: The interest rate is determined at the onset of the loan obligation and will not
change over the loan term.
FNMA: The Federal National Mortgage Association is a secondary mortgage institution. FNMA buys VA
FHA and conventional mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure: A legal process by which the lender or the seller forces a sale of a mortgaged property
because the borrower has not met the terms of the mortgage. Also known as a repossession of
property.
Ginnie Mae: Short for the Government National Mortgage Association. Ginnie Mae guarantees timely
payments on mortgage-backed securities (MBS) backed by federally-insured loans including those
insured by the U.S. Department of Veterans Affairs, Federal Housing Administration, U.S. Department of
Agriculture Rural Development, and the U.S. Department of Housing and Urban Development Office of
Public and Indian Housing. Ginnie Mae securities are the only MBS guaranteed by the Federal
government.
Hazard Insurance: A form of insurance in which the insurance company protects the insured from
specified losses such as fire, windstorm and the like. Typically, Hazard Insurance does not cover a flood
event.
Initial Interest Rate: This refers to the original interest rate of the mortgage at the time of closing. This
rate will change for an adjustable rate mortgage (ARM).
Interest: The fee charged by a lender to borrow money.
Jumbo Loan: A loan which is larger than the limits set by the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two
agencies, they may carry a higher interest rate. Currently loans greater than $510,400 is considered a
Jumbo loan.
Loan limit: The maximum allowable mortgage amount under a particular program established by the
federal agency or government-sponsored enterprise (GSE), generally according to statutory parameters.
For example, the Federal Housing Finance Agency (FHFA) sets “conforming loan limits” for the GSEs, the
Federal Housing Administration sets “statutory loan limits” for approved lenders, the U.S. Department
of Agriculture has “area loan limits,” and the U.S. Department of Veterans Affairs (VA) follows FHFA
guidelines. Currently the loan limit is $510,400.
Loan Estimate: A disclosure provided by the lender to help borrowers understand the key loan terms
and estimated costs of getting a mortgage. After a consumer submits 6 key elements: name, income,
social security number, property address, estimated property value and desired loan amount, the lender
is required to provide this form. All lenders are required to use the same standard loan estimate form to
make it easier for consumers to compare and shop for a mortgage.
Liabilities: A person's financial obligations. Liabilities include long-term and short-term debt. Examples
include Auto Loans, Credit Cards, Revolving Lines of Credit, Student Loans and Unsecured Installment
loans.
Loan-to-value (LTV) ratio: A ratio that compares the amount of the first mortgage with the appraised
value of the property. It is calculated by dividing the loan amount by the value of the property. The
higher the down payment, the lower the LTV.
Mortgage Insurance: An insurance policy paid for by the borrower with the lender as beneficiary. The
insurance policy protects the lender in the event of foreclosure. In the event of foreclosure, the insurer
would pay a set amount to the lender to cover some or all of the outstanding loan balance.
Negative Amortization: When monthly payments are not large enough to pay all the interest due on a
loan. This unpaid interest is added to the current balance of the loan. The home buyer ends up owing
more than the original amount of the loan.
Origination Fee: The fee charged by a lender to prepare loan documents, do credit checks, process a
loan file, and underwrite a loan. Usually a fixed dollar amount or a percentage of the total loan amount.
PITI: This is a borrower’s total monthly loan payment including principle, interest, taxes and insurance.
Also called the monthly housing expense.
Points (Loan Discount Points): Prepaid interest assessed at closing by the lender. Each point is equal to
1 percent of the loan amount (e.g. one point on a $100,000 mortgage would cost $1000).
Prepayment Penalty: Money charged for an early repayment of debt. Prepayment penalties are allowed
in some form (but not necessarily imposed) in many states.
Pre-Qualification Letter: A letter provided by a lender to a borrower to aid in the process of buying a
home. The lender reviews the borrower’s loan application and based on the information submitted, will
determine the loan amount a borrower may qualify to borrow. A pre-qualification letter is not a
commitment to lend.
Pre-Approval Letter: A letter issued by a lender to a borrower providing a conditional commitment to
lend. Prior to issuance of a Pre-Approval letter, a lender may underwrite a borrower’s income, assets,
and credit.
Private mortgage insurance (PMI): An insurance policy that protects lenders against loss if a borrower
defaults on a conventional loan. PMI is required for government-sponsored enterprise loans with loanto-
value ratios over 80 percent. Purchasing PMI allows the borrower to make a smaller down payment.
Rate Lock: A commitment issued by a lender to a borrower guaranteeing a specified interest rate and
lender costs for a specified period of time.
Rescission: The borrower’s ability to cancel a mortgage contract after signing loan documents but prior
to funding of the loan. A waiting period called Rescission gives a homeowner three days to cancel a
contract in some cases once loan documents are signed if the transaction uses equity in the borrower’s
primary residence a collateral.
Recording Fees: Money paid to the lender for recording a home sale with the local authorities thereby
making it part of the public records.
Refinance: Obtaining a new mortgage loan on a property. The new mortgage loan often replaces an
existing loan or loans on the property.
Second Mortgage: A mortgage made subsequent to another mortgage and subordinate to the first one.
Seller Carry Back: An agreement in which the owner of a property provides subordinate financing to the
buyer in combination with a new first mortgage to purchase the property.
Title: A document that gives evidence of an individual's ownership in a property.
Underwriting: The decision whether to make a loan to a potential borrower based on credit,
employment, assets, amount of down payment, and other factors.
Verification of Deposit (VOD): A document signed by the borrower's financial institution verifying the
status and balance of his/her financial accounts.
Verification of Employment (VOE): A document signed by the borrower's employer verifying his/her
position and salary.