LOAN TERMS

Browse our glossary of mortgage and real estate terms that are helpful in the borrowing process. For additional help, contact one of our knowledgeable loan professionals.

Additional Principal Payment - A payment by a borrower of more than the scheduled principal amount due in an effort to reduce the remaining balance on the loan.

Adjustable Rate Mortgage (ARM) - A mortgage whose interest rate changes periodically based on the changes in a specified index.

Amortization Calendar - Detailed table showing the principal and interest portions of a payment, along with remaining principal balance and ending balance.

Amount Financed - Amount of money financed for a loan. Equal to the sales price minus the down payment and prepaid fees.

Annual Real Estate Appreciation - The increase in value of a property over time due to inflation, supply and demand, capital improvements and other factors.

Application Fee - A sum charged by a lender for accepting an application in which a prospective borrower details his or her financial situation in an effort to qualify for a loan.

Appraisal - A written analysis of the estimated value of real estate prepared by a licensed appraiser.

Appraised Value - An opinion of a property's fair market value based on the appraiser's analysis of the property and recent sales in the area.

Appraiser - A person licensed to evaluate the worth of real estate.

APR - The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.
Balloon Mortgage - Usually a short-term fixed-rate loan that involves small payments for a certain period of time and one large payment for the remaining balance of the principal at a time specified in the contract.

Balloon Payment - A loan installment that is larger than the other periodic payments and pays off the remaining principal.

Biweekly Mortgage - A mortgage that schedules 26 payments per year instead of the normal 12. Biweekly payments are equal to one-half of a normal monthly payment and reduce interest payments (since the loan is paid off more quickly).

Blanket Mortgage - A loan secured by more than one property. Usually refers to commercial property.

Borrower (Mortgagor) - One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan principal in full.

Break Even Point - The time it takes to recoup the cost of refinancing a loan or paying discount points.

Bridge Loan - A Loan to "bridge the gap" between the purchase of a new home and the sale of the borrower's current home. The borrower's current home is used as collateral, and the money is used to close on the new home before the current home is sold.
Cap - A provision of an adjustable-rate loan (ARM) that limits how much the interest rate or loan payments may increase or decrease. These can be lifetime payment cap, lifetime interest rate cap, periodic payment cap, and periodic interest rate caps.

Cash Out - The money left over when refinancing a mortgage and the money being borrowed is greater than the principal balance remaining on the original loan.

Cash Out Refinance - A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.

Ceiling - The highest percentage a lender can charge for an adjustable-rate mortgage.

Collateral - Property pledged as a security to a debt. If a borrower fails to pay on a loan, the lender may seize the collateral and sell it to recover money.

CLTV(Combined LTV) - The unpaid principal balances of all the mortgages on a property (first and second, usually) divided by the property's appraised value.

Conforming Loan - Conforming loans meet two criteria: 1.) They cannot exceed the current year's maximum loan amount limits. The 2006 conforming loan limit is $417,000 2.) They also must conform to the credit history, income, loan-to-value, and debt guidelines established by Fannie Mae and/or Freddie Mac.

Conventional Loan - A mortgage that is not insured or guaranteed by a government agency such as the Federal Home Administration (FHA) or Veterans Administration (VA).

Credit History - A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Report - A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.

Credit Score - A measure of your credit worthiness.

Creditor - One who is owed money.
Debt - Money that one person/business owes to another person/business.

Debt-to-Income Ratio - The ratio, expressed as a percentage, which results from a borrower's monthly payment obligations on long-term debts divided by gross monthly income. This also is referred to as a back-end ratio and is generally expected to come in at about 36-38 percent. Some lenders, especially those offering FHA or subprime loans, will stretch this ratio to 40 percent or even beyond. Also known as Total Debt Ratio.

Deed - Document that provides title to property owner and is recorded with a county recorder.

Deed of Trust - Similar to a mortgage, except title is conveyed to the trustee, rather than the borrower.

Default - Condition where a borrower fails to make payments on a loan.

Documentation - Information a borrower is required to provide for proof of income. Primarily, this includes W2’s, tax returns and pay stubs.

Down Payment - The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

Earnest Money - Money offered by a prospective buyer when making a formal offer on a property. Earnest Money is used to indicate to the seller that the buyer is seriously interested in purchasing the property.

Earnings - All monies earned or received that are considered income.

Equity - The difference between the fair market value of a home and current indebtedness; the value an owner has in real estate over and above the amount still owed on the property. Also referred to as the owner's interest.

Escrow - An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, 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 Account - Account where property taxes and home owner's insurance are held until being paid.

Fair Market Value (FMV) - The selling price that both a buyer and seller would agree on for a property. Also known as Property Value.

Federal Home Administration (FHA) - An agency within the federal Department of Housing and Urban Development that provides mortgage insurance and sets construction and underwriting standards.

FHA Mortgage Insurance - A type of Mortgage Insurance offered by the Federal Housing Authority that is similar to PMI, but carry additional restrictions. For example, mortgage insurance lasts through the life of the loan, instead of until a certain point of equity is attained.

FICO Score - A mathematical equation developed by Fair Isaac Corp. that determines how likely you are to pay your bills on time. Many lenders use this score to determine not only if a mortgage loan will be made, but also the interest rate you will be charged. Because of differences in calculation methods, not all credit scores are the same. Your credit scores may differ among the credit-reporting agencies and likely also will vary from your FICO score.

Fixed Rate Mortgage - Mortgage where the interest rate does not change during the entire term of the loan.

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.

Future Real Estate Value - The value that a piece of Real Property (which is a dwelling permanently attached to land) will be worth in the future based on a specified period of time and Real Estate Appreciation value.

Funding - How a loan will be paid off; frequently from another type of account the borrower holds, such as a checking or savings account.

Good Faith Estimate - A written estimate of expected closing costs that a lender must provide a prospective home buyer within three days of the homeowner submitting a mortgage loan application.

Gross Income - Total amount of income before taxes or other deductions. Used to calculate ratios such as housing expense ratio and Debt-to-Income Ratio.

Home Equity Line of Credit (HELOC) - A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan - A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Home Inspection - Process where third-party inspector is hired, usually by the prospective buyer(s), to inspect the property before closing. Many times, the loan closing will be contingent on the results of the home inspection.

Home Owner's Insurance - Insurance policy that includes coverage for property damage or loss, as well as personal liability and theft.

Housing Expense Ratio - The ratio, expressed as a percentage, calculated by dividing a borrower's monthly housing expenses by gross monthly income. Also known as Primary Housing Ratio.

Housing Expenses - Payments for housing, rent or mortgage, plus any taxes and insurance paid. Also known as PITI.

Housing Payment - Payment (usually monthly) used to pay off principal balance of a loan. Also known as an Installment.

Index - A published interest rate against which lenders measure the difference between the current interest rate on an adjustable-rate mortgage and that earned by other investments. Common indices include one-, three-, and five-year U.S. Treasury security yields; the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost of funds incurred by S&Ls. These data are then used to adjust up or down the interest rate on an adjustable-rate mortgage.

Installment - Payment (usually monthly) used to pay off principal balance of a loan. Also known as a Housing Payment.

Installment Debt - Money owed to a creditor that is expected to be in equal amounts over a pre-determined period of time.

Insurance - There are two types of insurance that have relevance in the context of a monthly mortgage payment: homeowner's and private mortgage insurance (PMI). A typical homeowner's insurance policy includes coverage for property damage or loss, as well as personal liability and theft. You may need supplemental coverage for other risks (for example, you may need flood insurance if your home is in an area with a high risk of flooding). If you buy your home with less than a 20 percent down payment, you may also be required to hold private mortgage insurance to protect the lender from default. Both homeowner’s insurance and, if applicable, private mortgage insurance (PMI), may be included in your monthly mortgage loan payment. The lender is then responsible for disbursing these funds on your behalf to the appropriate parties.

Interest - Money paid to the lender by the borrower over the life of the loan, in return for being able to borrow money from the lender.

Interest Rate - Rate at which interest is charged on a loan.

Investment Property - Real estate that generates income, such as an apartment building or a rental house.

Joint Account - A bank account owned by two or more persons who share equally in the rights and liabilities of the account.

Jointly - Not individually; with a co-applicant.

Jumbo Mortgage - A loan that is larger (more than $417,000 as of 1/1/2006) than the limits set yearly by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, jumbo loans usually carry a higher interest rate. Also called a non-conforming loan.

Lender - One who gives a loan to a borrower .

Lien - Legal claim against a property for payment of a debt.

Loan - Money borrowed that is repaid, usually with interest.

Loan Amount - Amount of money borrowed to be repaid, usually with interest.

Loan Application - A document in which a prospective borrower details his or her financial situation to qualify for a loan.

Loan Closing - Meeting where the sale of property is completed. Buyer and Seller will agree to terms and conditions of the loan, and sign selling agreements. Also, the buyer will pay the down payment and closing costs at the time of closing.

Loan Programs - The different types of programs available for obtaining rates and qualification parameters.

Loan To Value (LTV) Ratio - The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage calculated by dividing the amount of the loan by the appraised value. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered.

Locked - (also known as Rate-lock) A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time.

Margin - Expressed as percentage points, the amount that a lender adds to an index to establish the adjusted interest rate.

Marginal Tax Bracket - See Tax Bracket.

Monthly Debt - The total amount of credit card, auto loan, mortgage or other debt upon which you must pay.

Monthly Household Debt Amount - Total of recurring monthly payments (e.g. credit cards, student loans, car payments, etc.). Amount should exclude current housing expenses (current rent, current mortgage, etc.)

Mortgage - A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower gives the lender a lien on the property as collateral for the loan.

Mortgage Application - An initial statement of personal and financial information which is required to approve your loan.

Mortgage Insurance - Insurance required to be carried by a borrower if they fall under certain criteria. For example, a borrower may be required to carry private mortgage insurance if they have an LTV of higher than 80%, or they will have to carry FHA Mortgage Insurance if they have obtained an FHA loan and have a poor credit history.

Multi-Family Mortgage - Mortgage to buy property that will be inhabited by more than one family, but having one property tax-payer. (e.g. mortgage to purchase an apartment building.)

Needed Loan Amount - The amount of money a borrower needs to borrow. If the purpose of the loan is to purchase a new property, this amount represents the difference between the purchase price of the property and the down payment amount. If the purpose of the loan is to refinance a loan for an existing property, this amount is determined by the current loan balance and cash-out options.

Non-conforming Loan - See Jumbo Mortgage.

Origination Fee - A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.

Owner's Interest - See Equity.

Payment - Payment (usually monthly) used to pay off principal balance of a loan. Also known as an Installment.

Payment Amount - A number of a particular mortgage payment used to determine a certain value for that point in time.

PITI - The sum of principal, interest, (property) taxes, and (home owner's) insurance, also known as monthly housing expense.

Points - Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Pre-Approval Letter - Letter from a lender stating the approximate amount that a borrower can borrow, based on current interest rates and a preliminary look of the borrower's credit history.

Prepaid Fees - 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.

>Primary Housing Ratio - See Housing expense ratio.

Principal or Principal Balance - The amount of debt, not counting interest, remaining on a loan.

Private Mortgage Insurance (PMI) - Money paid to insure the mortgage when the down payment is less than 20 percent. Lenders will allow a smaller down payment or no down payment at all, in some cases, but in those cases borrowers are usually required to carry private mortgage insurance that generally calls for an initial premium payment and may require an additional monthly fee, depending on the structure of the loan. PMI is not tax-deductible and as a result, most homeowners have it removed once the value of the equity in the home reaches 20 percent. Also, paying PMI may be avoided by using a split loan to purchase property.

Property - Item that is sold from one person to another.

Property Use - How the property will be used by the borrower. Property can be designated as a primary residence, investment property, commercial property, or some other designation.

Property Value - See Fair Market Value.

Purchase - Obtaining a new mortgage loan on a property the consumer does not already own.

Purchase Agreement - A document in which a buyer and seller agree on terms and price of the subject property. Also known as a Selling Agreement.

Qualifying Loan Amount - The amount which a person is able to borrow based on income and debts.

Qualifying Ratios - The percentage of income that is spent on housing debt and combined household debt. The first qualifying ratio, called the front ratio, or Housing Expense Ratio, is the percentage of monthly before-tax income that goes toward a house payment. The back ratio, or Debt-to-Income Ratio, is the sum of the house payment and all other monthly debt - credit cards, car payments, student loans and the like - divided by before-tax income.

Rate-lock - See Locked.

Recurring Debt - Credit card payments, child support, car loans, and other obligations that will not be paid off within a relatively short period of time (6-10 months).

Refinance - Obtaining a new mortgage loan on a property already owned, often to replace existing loans on the same property.

Rental Income - Income received from rental properties.

Repossession - See Foreclosure.

Revolving Debt - Money owed to a creditor where the amount is calculated by the current balance (e.g. Credit Cards).

Selling Agreement - See Purchase Agreement.

Settlement - See Closing.

Single Family Mortgage - Mortgage to purchase property that will only be inhabited by one family, and have one property tax-payer.

Split Loan - Loan where a large amount of money is borrowed through multiple, smaller loans. In most cases, a single, large amount is borrowed as a conventional loan, along with a second, smaller loan, usually an ARM or Home Equity Loan and a down payment. This type of loan is usually made to avoid paying PMI. An example is an 80-10-10 loan, where 80% of the fair market value of the property is borrowed through a conventional loan, 10% of the FMV is borrowed through a home equity loan, and the last 10% is a down payment. In general, the second loan will have a shorter term and higher interest rate than the conventional loan.

Subprime Loans - Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.

Tax Bracket - The level of income tax of a given individual, as indicated by the amount of taxes they pay on their final dollar of taxable income. Also called marginal tax bracket or tax rate.

(Property/Real Estate) Taxes - Taxes owed to the local municipality based on the fair market value of property. The tax revenues are then used by the local municipality to pay for community schools, roads, police and other municipal services.

Tax Deductible - Exempt from inclusion in one's taxable income.

Title - Ownership of property to the exclusion of anyone else to make claim on the property. Evidence of Title is held in a deed, which is held at the county Recorder's Office.

Title Insurance - A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages.

Total Debt Ratio - See Debt-to-Income Ratio.

Truth-In-Lending - A federal law that requires lenders and brokers to fully disclose, in writing, the terms and conditions of a loan, including the annual percentage rate and charges.

Trustee - A person who holds and manages assets for the benefit of beneficiaries.

Underwriting - The decision whether to make a loan to a potential homebuyer based on credit, employment, assets and other factors, and the matching of this risk to an appropriate rate and term or loan amount.

Veteran's Administration (VA) - Now called the U.S. Department of Veterans Affairs, which overseas the VA loan program, a benefit to veterans that allows them to buy homes with no down payment.

Verification of Deposit (VOD) - A document signed by the borrower's financial institution verifying the status and balance of the person's financial accounts.

Verification of Employment (VOE) - A document signed by the borrower's employer verifying the person's position, length of service, and salary.