Mortgage Glossary

Below is a list of common used terms in the mortgage industry. If you have any you think we should add, or specify please send us an email, [email protected].

Common Terms

Amortization: A loan amount, including projected interest, divided into equal periodic payments calculated to pay off a debt at the end of a specified period. The payments are calculated to include any debt that will accrue during a set time. (i.e. amortization of a 30-year fixed-rate mortgage)

Amount Financed:  found on the Truth-In-Lending (TIL) disclosure. The amount financed is less than your actual Loan Amount and represents the Loan Amount minus the Prepaid Finance Charge.

Appraisal:  An appraisal is a comprehensive report compiled by an independent third party that is used to evaluate a property or the collateral for a new mortgage. The appraisal report will determine the subject property’s current market value and ensures a property meets the Federal, Fannie Mae, and Freddie Mac lending guidelines.

Appraisal Fee: The appraisal fee is simply the cost of having a home appraised. For home mortgages the appraisal fee may vary depending on the appraiser or the size of the property. It is between $300 and $450.

APR (Annual Percentage Rate):  The Variable APR rate is found in any mortgage rate advertisements and on the Truth-In-Lending (TIL) disclosure. APR represents your interest rate but also accounts for a majority of the fees being paid to obtain that rate and your new mortgage. The APR is almost always slightly higher than the note rate being offered to you but does not determine your monthly mortgage payments are.

ARM (Adjustable Rate Mortgage): Also known as a variable-rate or floating-rate mortgage, the rate of this mortgage is adjusted periodically over the life of the loan. The terms are based on a pre-selected index and are generally reset monthly or annually. Sometimes the ARM starts with a period during which the rate is fixed, after which the rate becomes adjustable.

Cash-Out Refinance:  If a property is being refinanced and the new loan amount is significantly higher than the current primary mortgage balance, the new mortgage is considered a cash-out refinance. If any other debt is being paid off at closing aside from the primary mortgage the loan is also considered a cash-out refinance. Cash-out refinances are popular for people looking to consolidate debt or use there home’s equity for extra cash.

Commitment Fee:  Our Lender Fee or Origination Charge is also referred to as a Commitment Fee. Our Commitment Fee covers our underwriting, processing, doc prep, flood and tax certification etc. The fee varies depending on the interest rate and mortgage program HFA is offering you. This charge is collected at closing only a can change with fluctuations in external market conditions.

Conventional Mortgage: A mortgage of less than $510,400 (as of July 2020) that conforms to Fannie Mae and Freddie Mac’s lending guidelines.

Credit Score:  A number is determined by each of the three credit reporting bureaus. Your credit score gives an indication of your worthiness or how responsible you’ve been with their debt in the past. Some mortgage companies require a minimum credit score of 660. The score used to decide is the lowest of the middle scores of all borrowers on the loan.

Debt-to-Income Ratio (DTI):  The total amount of a borrower’s documented pre-tax income divided by their total monthly debts.

Escrow Account: An account established by a mortgage servicer to pay for the subject property’s taxes and insurance. A borrower will pay a portion of the property tax and insurance bills with each mortgage payment to fund the account. When closing on a home, a fully funded escrow account will have to be established.

Escrow Waiver: If a borrower opts to pay their property tax and homeowner’s insurance bill on their own as they wish they will have to opt for an escrow waiver. If this is the case for you, be sure to let your Loan Originator know up front.

Fixed Rate Home Mortgage: A mortgage in which the interest rate and monthly payment does not change over the entire loan term.

Good Faith Estimate: Document designed by the U.S. Department of Housing and Urban Development (HUD) that discloses the material terms of a mortgage offered by a lender.

Investment Property (Rental Property): A property in which any rental income has been collected or in which rental income is intended to be collected at any time in the future.

LTV (Loan-to-Value) Ratio: The loan amount divided by the subject properties appraised value.

Mortgage Application 1003 Form: A comprehensive form used to display nearly all of the information a mortgage lender needs to know about a borrower(s) or potential borrower(s) in order to issue a mortgage.

Points (Discount Points, Origination Points): Charges or fees assessed at closing that are based on a percentage of the Loan Amount. 0.25 PTS on a $100,000 mortgage is the equivalent of $250. HFA may assess points to offer a lower interest rate to a borrower or account for Risked Based Pricing Adjustments.

Pre-Approval Letter: Document issued by a mortgage lender that indicates that a borrower is likely to qualify for a certain loan amount based on their mortgage application. This document is very helpful to buyers and sellers of real estate.

Pre-Paid Interest: Mortgage payments are made in in arrears (they account for the previous month). When a mortgage closes, a certain amount of interest will always be owed to the new lender from the day of funding to the end of that month. Prepaid Interest accounts for money owed to the lender in the funding month. There will be no mortgage payment due on the 1st day of the following month after a mortgage funds.

Prepaid Finance Charge: Prepaid interest is found on the Truth-In-Lending (TIL) disclosure. It is a subtotal of certain loan fees that will determined the APR.

Primary Residence: A home that is occupied by a borrower for the majority of the year and commutes to and from work from on a regular basis.

Private Mortgage Insurance: Insurance that protects conventional mortgage lenders against default on loans with higher than normal LTV (Loan-to-Value) Ratios. Generally required when the ratio is above 80%.

Rate Lock Agreement: A document given by a lender that makes material terms of a mortgage available to a borrower for a specified period of time subject to certain conditions. Until this document is issued you are subject to pricing increases of external market conditions change.

Risked Base Pricing: Adjustments in the pricing of mortgage based on certain risk factors that have been determined to increase a lender’s exposer to a borrower’s likelihood of default. Typically, these adjustment are in the form of points and determined by federal regulators and secondary market investors.

Second Home (or Vacation Home): A home owned by a borrower for recreational use typically located in a resort area at a reasonable distance from the primary residence. A second home will have has no rental income generated or intentions of rental income collections in the future.

Secondary Mortgage Market: How the mortgage industry is structured. Nearly all individual mortgages are bundled together in packages and re-sold to various entities as investments and securities. This provides liquidity in the market, lowers a lender’s risk, and allows lenders to offer lower rate. This concept is know as the Secondary Mortgage Market. It is also the cause for the Housing Crisis from 2007-2010.

Supporting Documentation: A set of documents to be included in a borrower’s loan file before closing is able to occur. Supporting documentation guidelines are stipulated by the Federal Government, State Governments, Fannie Mae, Freddie Mac, Secondary Market Investors, and mortgage lenders themselves.

Subordination: The process by which a primary mortgage on a property is refinanced while another lien or mortgage is left standing. The secondary lien holder must agree to be placed in a secondary lien position behind the new primary mortgage holder.

Underwriting (Underwriter): The process by which a borrower’s mortgage file and supporting documentation is reviewed to ensure the loan meets federal and investor guidelines before it closes. The member of a mortgage company responsible for this review is know as the underwriter.

Term: The amount of time if will take for a mortgage to fully amortize if the minimum monthly principal and interest payment is made each month.

Title Insurance: A type of insurance required for mortgages to ensure the lender that the borrower is the legal owner of a home or property. Title history is reviewed, and title insurance is typically issued by a third party.