Glossary of Common Lending Terms

Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically according to a pre-selected index. Payments may go up or down accordingly.

Alternative Credit Offer: An offer to extend credit on terms different from those the applicant originally requested.

Amortization: The systematic and continuous payment of an obligation through installments until the debt has been paid in full.

Annual Percentage Rate (APR): The cost of credit expressed as an annual rate. It usually includes a combination of the interest rate, points and certain other fees paid to a lender to acquire a mortgage. The APR is the most meaningful measure for comparing the cost of mortgage loans offered by different lenders.

Application: The printed form used by a mortgage lender to record necessary information concerning a prospective mortgage.

Appraisal: A report made by a qualified person offering an expert opinion or estimate of property value. The term also refers to the process by which this estimate is obtained.

Approval Letter: A lender's written offer to grant a mortgage loan outlining the terms, the amount of the loan, the interest rate and any other conditions. It can also serve as a communication of the lender's decision to the borrower's application.

Assessed Valuation: The value that a taxing authority places on real property for the purpose of taxation.

Buy Down: A payment to the lender from the seller, buyer, or third party, causing the lender to reduce the interest rate.

Cash to Close: Liquid assets readily available to pay the down payment, closing costs, and prepaid items of a mortgage transaction.

Certificate of Occupancy (C.O.): A certificate issued by a local building department to a builder or renovator, stating that the building is in proper condition to be occupied and stating the legally permissible use of the building.

Closing: The meeting during which the title to the property actually changes hands, documents are executed and the sale of the property and/or the loan is completed. Keys are generally transferred to the new owner at this time.

Closing Costs: Money paid by the borrower in connection with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey, and pre-paid items such as tax and insurance escrow payments.

Closing Statement/HUD/Settlement Statement: A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

Co-Borrower: Additional borrower(s) whose income contributes to qualifying for a loan and whose name(s) appear on documents with equal legal obligations.

Commitment Fee (Loan): Any fee paid by a potential borrower to a lender for the lender's promise to lend money at a specified rate and within a given time period.

Covenant: Generally, almost any promise set forth in a written agreement. Most commonly, assurances set forth in a deed by the grantor or implied by law.

Credit Report: A report detailing an individual's credit history.

Credit Score: A credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It is designed to predict risk; specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.

Deed: A legal document conveying ownership (title) to real property from one individual to another.

Deed of Trust: An instrument used in many states in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

Delinquency: A loan payment that is overdue but within the period allowed before actual default is declared.

Department of Housing and Urban Development (HUD): Organization responsible for the implementation and administration of government housing and urban development programs.

Discount Point(s): An amount payable to the lending institution by the borrower or seller to increase the lender's effective yield. One point is equal to one percent of the loan amount.

Down Payment: The money the homebuyer pays at the time of closing for the purchase of the home. The down payment reduces the amount financed.

Earnest Money: A portion of the down payment delivered to the seller or an escrow agency by the purchaser of real estate with a purchase offer as evidence of good faith.

Equal Credit Opportunity Act (ECOA): A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs, or past exercising of rights under the Consumer Credit Protection Act.

Equity: The market value of the property minus any outstanding mortgage or cooperative loan balance or other encumbrance.

Escrow: Funds held by the lender, set aside for payment of taxes and possible property and mortgage insurance and other recurring charges against real property. (Monthly mortgage payments usually include principal, interest, and escrow amounts.) Also, a procedure whereby a disinterested third party handles legal documents and funds on behalf of a seller and buyer.

Fair Credit Reporting Act (FCRA): A Federal law that requires a lender who is declining a loan request because of adverse credit information to inform the borrower of the source of such information.

Federal Home Loan Mortgage Corporation - FHLMC (FREDDIE MAC): A corporation authorized by Congress which purchases residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages. It sells participation certificates whose principal and interest are guaranteed by FHLMC.

Federal National Mortgage Association - FNMA (FANNIE MAE): A corporation authorized by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

Finance Charge: The total dollar amount your loan will cost you. It includes all interest payments during the term of the loan, any interim interest paid at closing, your origination fee, and any other charges paid to the lender or to a third party as a condition of the extension of credit. Certain charges like the appraisal, credit report, and the title search charges are not included in the finance charge calculation.

First Mortgage: A real estate loan that has priority over any subsequently recorded mortgages.

Fixed Interest Rate: An interest rate that does not change during the term of the loan.

Flood Insurance: Insurance protecting against loss by flood damage, required by lenders in areas designated (federally) as potential flood areas.

Foreclosure: A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower's debt.

Gift Letter: A written explanation signed by the individual giving the gift, stating "This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time."

Good Faith Estimate (G.F.E.): An estimate of the charges that a borrower is likely to incur in connection with a settlement.

Gross Monthly Income: Total monthly income earned before tax and other deductions.

Guaranteed Loans: A loan guaranteed by Veteran's Administration or Rural Development. The guarantee protects the lender against loss incurred by a mortgage default.

Hazard Insurance: Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.

Homeowners' Association Dues: The fees imposed by a condominium or homeowners' association for maintenance of common areas.

Index: A published interest rate not controlled by the lender to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. The index and the interest rate linked to it may increase or decrease.

Insured Loans: A loan insured by the Federal Housing Authority (FHA) or a private mortgage insurance company.

Interest: A share or right in some property. Also, money charged for the use of money (principal).

Interest Rate Cap: A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

Investment Property: Real estate owned with the intent of earning income and not intended for owner occupancy.

Joint Tenancy: Joint ownership by two or more persons with the right of survivorship; all joint tenants own equal interest and have equal rights in the property.

Lien: An encumbrance against property for money due, either voluntary or involuntary.

Loan-To-Value Ratio (L.T.V.): The ratio of the amount of your mortgage loan and the lower sales price or appraised value.

Margin: The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.

Maturity: Termination or due date on which final payment on a loan must be paid in full.

Monthly Payment: Usually, the amount of PITI (principal, interest, taxes, and insurance) paid each month on a mortgage loan.

Mortgage: The conveyance of an interest in real property given as security for the payment of a loan.

Mortgage Insurance: Insurance protecting the mortgage lender against loss incurred by a mortgage default.

Mortgage Note: A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.

Mortgagee: The lender in a mortgage transaction.

Mortgagor: The borrower in a mortgage transaction, who pledges property as security for a debt.

Negative Amortization: Occurs when the monthly payments cover only part of the interest then due. The interest cost that is not covered is added to the unpaid principal balance. This additional amount is additional principal.

Non-Conforming Loan: Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a higher rate and origination fee.

Note: A written agreement containing a promise of the signer to pay to a named person, or bearer, a definite sum of money at a specified date or on demand.

Occupancy: The use of a property as a full-time residence, either by the title holder (owner-occupancy) or by another party through a formal agreement (rental).

Origination Fee: The amount charged for services performed by the company handling the initial application and processing of the loan. Usually a percentage of the loan amount.

PITI (Principal, Interest, Taxes, and Insurance): The most common components of a monthly mortgage payment.

Point: One percent of the amount of the loan.

Preliminary Title Report: The results of a title search by a title company prior to issuing a title binder or commitment to insure clear title.

Prepaid Items: Those expenses of property which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, insurance, rent, etc.

Prepayment Penalty: A fee charged for paying off a loan prior to a specified time period.

Primary Residence: A residence that the borrower intends to occupy as a principal residence.

Principal: Amount of debt, not including interest. The face value of a note or mortgage.

Processing: The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

PUD (Planned Unit Development): A planned combination of diverse land uses, such as housing, recreation, and shopping in one contained development or subdivision. A major feature of a PUD includes areas of common land for use by the housing unit owners. The association of unit owners generally owns, pays fees, and maintains the common areas.

Purchase Contract: An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.

Qualifying Ratios: The ratio of fixed monthly expenses to gross monthly income. Used to determine how much the homebuyer can afford to borrow.

Rate Lock: An agreement guaranteeing the homebuyer a specified interest rate, provided the loan is closed within a set period of time.

Real Estate Settlement Procedures Act (RESPA): A Federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances and servicing disclosure.

Real Property: Land and that which is affixed to it.

Refinancing: The repayment of a debt from the proceeds of a new loan using the same property as security.

Residential Mortgage Credit Report: A report requested by your lender that utilizes information from at least two of the three national credit bureaus and information provided on your loan application.

Secondary Mortgage Market: A market where existing mortgages are bought and sold. It contrasts with the primary mortgage market where mortgages are originated.

Security: In lending, the collateral given, deposited, or pledged to secure the payment of a debt.

Survey: A print showing the measurements of the boundaries of a parcel of land, together with the location of all improvements on the land and sometimes its area and topography.

Title Insurance: Insurance against loss resulting from defects of title to a specifically described parcel of real property.

Title Search: An examination of public records to disclose the past and current facts regarding the ownership and lien priority of a given piece of real estate.

Total Debt Ratio: Monthly debt and housing payments divided by gross monthly income.

Truth-in-Lending Act: A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

Underwriting: Analysis of credit risk on a specific rate and term for a mortgage on a given property for given borrowers.