Glossary

1003 Loan Application (URLA): The 1003 is the HUD form number. It is used for collecting all of a borrower’s data relevant to qualifying for the loan applied for.

Adjustable-rate mortgage (ARM): A home loan in which the interest rate changes periodically based on a standard financial index. Most ARMs have caps on how much an interest rate may increase.

Amortization: The paying down of principal over time. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the term of the loan.

Annual percentage rate (APR): A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes such items as interest, mortgage insurance and certain points or credit costs. Because it includes these other items, it is higher than the interest rate a lender will quote.

Appraisal: A written report by a qualified appraiser estimating the value of a property.

Basis Point: One one-hundredth of a percentage point. For example, if mortgage rates fall from 7.50% to 7.47%, then they’ve declined three basis points. A full percentage point is 100 basis points.

Balloon mortgage: A loan that offers lower monthly payments for a specific period of time, which usually is anywhere from three years to 10 years. After that, a borrower must pay off the principal balance in a lump sum, or balloon payment. Under certain conditions, the mortgages can be converted to fixed-rate or adjustable-rate loans.

Balloon payment: A lump sum payment that is larger than the other, periodic payments. It pays off the remaining balance of a loan.

Cash-Out Refinance: A refinancing of a mortgage in which the new principal (the borrowed amount) exceeds the outstanding principal of the original loan by at least 5%. In other words, the homeowner is taking equity out of the home.

Closing costs: Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs normally include an origination fee, attorney’s fee, taxes, escrow payments, title insurance and sometimes discount points.

Closing Disclosure (CD): The Closing Disclosure form provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).

Collateral: Property used as security to a debt. If the borrower fails to repay the loan, the lender may gain ownership of the collateral and sell it to recover the money.

Contingency: A specified condition in a sales contract that must be satisfied before the home sale can occur. When purchasing a home, the two most common contingencies are the home inspection and a borrower being approved for the loan.

Credit Report: A report of borrowing and repayment history for an individual.

Credit Score: A three-digit number based on an individual’s credit report used to indicate credit risk.

Down payment: The amount of a property’s purchase price that the buyer pays in cash and does not finance with a mortgage.

Debt to Income (DTI): The debt to income ratio is a comparison of the gross income to housing and non-housing expenses and is expressed as a percentage.

Escrow: An account in which a neutral third party holds the documents and money in a real estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.

Fannie Mae and Freddie Mac: The nation’s two federally chartered and stockholder-owned mortgage finance companies. Forbidden by their charters from originating loans (that is, from providing mortgage loans on a retail basis), these two Government-Sponsored Enterprises (GSEs) purchase and/or securitize mortgage loans made by others. Due to their directive to serve low, moderate, and middle-income families, the GSEs have loan limits on the purchase or securitization of mortgages.

Fixed-rate mortgage: A home loan in which the interest rate will remain the same through the life of the loan, most often 15 years or 30 years.

Foreclosure: The process by which a homeowner in default on a mortgage loses interest in the property. This typically involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Home Equity: The difference between the current value of the house and the amount of money owed on the mortgage.

Home Equity Line of Credit (HELOC): A HELOC is a revolving account that works like a credit card.  HECLOCs are usually a second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.

Homeowners insurance: An insurance policy that includes hazard coverage, covering loss or damage to property, as well as coverage for personal liability and theft.

Jumbo mortgage: A mortgage that exceeds the conforming limit. The single-family limit changes annual. Rates on jumbo mortgages tend be one-eighth to one-quarter of a percentage point higher than comparable conforming mortgages.

Loan Estimate (LE): The Loan Estimate form provides you with important information, including the estimated interest rate,monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.

Loan to Value Ration (LTV): The LTV is a percentage calculated by dividing the amount borrowed by the lesser of the purchase price or appraised value of the subject property.

Margin: The amount of percentage points, or spread, added to the index to come up with the rate your adjustable-rate mortgage will charge after each adjustment.

Mortgage Broker: An intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower, and passes that paperwork along to a mortgage lender for underwriting and approval.

Mortgage Insurance Premium (MIP): MIP is paid by a borrower for FHA loans. FHA charges MIP both upfront  and annually for most loans.

Mortgage Registration Tax (MRT): A fee charged in some states or counties to record a mortgage or a deed in the official registry.

Point: As part of the loan’s APR, a point equals 1 percent of a mortgage loan. Some lenders charge “origination points” to cover expenses of making a loan. Some borrowers pay “discount points” to reduce the loan’s interest rate.

Prepayment penalty: This is a fee charged to borrowers who pay a loan off faster than the prescribed payment schedule.

Principal: The amount of debt, excluding interest, left on a loan.

Principal, Interest, Taxes and Insurance: PITI used to show the total monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (HOI and mortgage and flood, when applicable) goes into an escrow account to cover the fees when they are due. PITI is used in determining DTI ratios as well as how many months of PITI reserves a borrower has in verifiable assets. Even though they’re typically are payed directly and outside of the mortgage payment, HOA dues are also factored into this equation as they still represent part of a borrower’s monthly housing expense.

Private mortgage insurance (PMI): An insurance policy that protects the lender against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI should be terminated when the home buyer has built up 20 percent equity in the property.

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. A policy may protect the mortgage lender, the home buyer or both.

Underwriting: The determination of the risk a lender would assume if a particular mortgage loan application is approved.

Verification of Employment (VOE): The Verification of Employment is a process used by banks and mortgage lenders in the United States to review the employment history of a borrower, to determine the borrower’s job stability and cross-reference income history with that stated on the Uniform Residential Loan Application (Form 1003).

Verification of Income (VOI): Verification of Income is a process where there is a requirement that a potential borrower must show complete and accurate proof of income when applying for a loan.