Mortgage Glossary

Mortgage Glossary

Adjustable-rate mortgage (ARM):
Also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

Amount financed:
On the Truth in Lending form, the loan amount less “prepaid finance charges”, which are lender fees paid at closing.

Annual percentage rate (APR):
Is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.

Application:
A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision. In a narrower sense, the application refers to a standardized application form called the “1003″ which the borrower is obliged to fill out.

Appraisal:
A written estimate of a property’s current market value prepared by an appraiser. Please refer to our article I paid for an appraisal. Why won’t the bank give it to me? for more information.

Balloon mortgage:
A mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. A balloon payment mortgage may have a fixed or a floating interest rate.

Callable debt:
A debt security whose issuer has the right to redeem the security at a specified price on or after a specified date, but prior to its stated final maturity.

Cash-Out refi:
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes “cash-out” of the transaction.

Charge-off:
The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.

COFI:
Cost of funds index.

Combined Loan to Value Ratio (CLTV):
A ratio which compares the person’s overall mortgage debt (i.e. first and second lien) to the home’s fair market value. This is expressed as a percentage.

Common stock:
A security that represents ownership in a company but gives no legal claim to a definite dividend or to a return of capital.

Consolidation, Extension and Modification Agreement (CEMA):

For further information check our our article I need help!!! Can I really avoid paying mortgage tax in New York?

Conventional mortgage:
A mortgage loan that is not insured or guaranteed by the federal government.

Credit enhancement:
A method to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it will be recompensed to some degree in the event of a financial loss.

Credit loss ratio:
The ratio of credit-related losses to the dollar amount of MBS outstanding and total mortgages owned by the corporation.

Credit-related expenses:
The sum of foreclosed property expenses plus the provision for losses.

Credit-related losses:
The sum of foreclosed property expenses plus charge-offs.

Credit scoring:
A process that uses recorded information about individuals and their loan requests to assess - in a quantifiable, objective, and consistent manner - their future performance regarding debt repayment. For further information please check out our Credit Center.

Debt security:
A security in which the issuing company generally agrees to repay the principal (typically, the original amount borrowed) and make interest payments according to an agreed schedule.

Deed in lieu of foreclosure:
Deeding the property over to the lender as an alternative to having the lender foreclose on the property. Please see our article Thinking outside the Box for more information.

Default:
The failure of a borrower to comply with the terms of a note or the provisions of a mortgage.

Delinquency:
A mortgage loan on which a payment has not been made by the due date.

Derivative:
A financial instrument which derives its value from an underlying security or notional amount.

Duration:
The weighted-average life of the present value of all future cash flows, both principal and interest, of a security. It is used as a measure of the sensitivity of the value of a security to changes in interest rates.

Earnings per share (EPS):
The net earnings of a corporation divided by the average number of shares of its common stock outstanding during a period. A common method of expressing a corporation’s profitability.

Early Payment Default (EPD):
Typically, any of the first four payments being 30 or more days delinquent. EPD varies from investor to investor and is calculated from the date of sale to the investor.

Early Payoff (EPO):
Generally, the satisfaction of any lien type within the first twelve months. EPO may subject a mortgage banker or broker to forfeit any monies paid (including SRP) by the investor to the banker or broker.

Escrow:
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.

Escrow Waiver:
When a buyer borrows less than 80% of the cost of the house (except in CA and DC were the option is available when the loan is less than 90%), and he/she elects not to open an escrow account for taxes and insurance, but rather to pay them on there own.

Fixed-rate mortgage:
A mortgage loan in which the interest rate does not change during the entire term of the loan.

Forbearance:
The lender’s postponement of legal action when a borrower is delinquent. It is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.

Foreclosure:
The legal process by which property that is mortgaged as security for a loan may be sold to pay a defaulting borrower’s loan.

Global Debt Facility:
A debt issuance facility through which U.S. dollar and foreign currency debt securities may be offered to investors worldwide with the feature of clearing and settlement through a variety of clearing systems.

Good faith estimate:
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.

Guaranty fee:
Compensation paid by a lender to Fannie Mae for the guarantee of timely payments of principal and interest to MBS security holders.

Interest rate swap:
A transaction between two parties in which each agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional principal amount.

Intermediate-term mortgage:
A mortgage loan with a contractual maturity at time of purchase equal to or less than 20 years.

Lender option commitments:
An agreement giving a lender the option to deliver loans or securities by a certain date at agreed-upon terms.

Loan origination fees:
Fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.

Loan servicing:
The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.

Loan-to-value (LTV) ratio:
The relationship between the dollar amount of a borrower’s mortgage loan and the value of the property.

Lock-in Agreement:
A written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 30, 45, 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

Loss mitigation:
Activities designed to reduce either the likelihood of the corporation suffering financial losses on a loan or the final dollar value of those losses in the event of a borrower default.

Mandatory delivery commitment:
An agreement that a lender will deliver loans or securities by a certain date at agreed-upon terms.

Medium-term notes:
Unsecured general obligations of Fannie Mae with maturities of one day or more and with principal and interest payable in U.S. dollars.

Modification:
Any change to the original terms of a mortgage.

Mortgage:
A legal document that pledges property to a lender as security for the repayment of the loan. The term also is used to refer to the loan itself.

Mortgage-Backed Security (MBS):
A Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Mortgage suitability:
The doctrine that mortgage lenders should be held liable for providing loans that are not suitable for the borrower. Please refer to our article Suitability Standards … if imposed who should they apply to? for more information about the topic.

Multifamily housing:
A building with more than four residential rental units.

Negative amortization:
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.”

No asset loan:
A documentation requirement where the applicant’s assets are not disclosed.

No income loan:
A documentation requirement where the applicant’s income is not disclosed.

No ratio loan:
A documentation requirement where the applicant’s income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not applied.

Nonperforming asset:
An asset such as a mortgage that is not currently accruing interest or on which interest is not being paid.

Notional principal amount:
The hypothetical amount on which interest rate swap payments are based. The notional principal amount in an interest rate swap generally is not paid or received by either party.

Payment shock:
A very large increase in the payment on an ARM that may surprise the borrower. Also used to refer to a large difference between the rent being paid by a first-time home buyer, and the monthly housing expense on the purchased home.

Piggyback mortgage:
A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.

PITI:
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.

Points:
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “3 points” means a charge equal to 3% of the loan balance. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.

Preferred stock:
Stock that takes priority over common stock with regard to dividends and liquidation rights. Preferred stockholders typically have no voting rights.

Preforeclosure sale:
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower’s debt.

Prepayment penalty:
A charge imposed by the lender if the borrower pays off the loan early.

Real Estate Mortgage Investment Conduit (REMIC):
A security that represents a beneficial interest in a trust having multiple classes of securities. The securities of each class entitle investors to cash flows structured differently from the payments on the underlying mortgages.

Real Estate Settlement Procedures Act (RESPA):
The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.

Repayment plan:
An agreement between a lender and a borrower who is delinquent on his or her mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.

Return on average common equity:
Net income available to common stockholders, as a percentage of average common stockholders’ equity.

Reverse mortgage:
A financial tool which provides seniors with funds from the equity in their homes. Generally, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.

Risk-based capital:
The amount of capital necessary to absorb losses throughout a hypothetical ten-year period marked by severely adverse circumstances.

Right of rescission:
The right of refinancing borrowers, under the Truth in Lending Act, to cancel the deal at no cost to themselves within 3 days of closing. Please see our article The Power of Rescission for more information.

Second mortgage:
A loan with a second-priority claim against a property in the event that the borrower defaults.

Secondary mortgage market:
The market in which residential mortgages or mortgage securities are bought and sold.

Security:
A financial instrument showing ownership of equity (such as common stock), indebtedness (such as a debt security), a group of mortgages (such as MBS), or potential ownership (such as an option).

Serious delinquency:
A single-family mortgage that is 90 days or more past due, or a multifamily mortgage that is two months or more past due.

Servicing release premium (SRP):
A payment made by the purchaser of a mortgage to the seller for the release of the servicing on the mortgage.

Short sale:
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.

Stated assets:
A documentation requirement where the borrower discloses her assets but they are not verified by the lender.

Stated income:
A documentation requirement where the lender verifies the source of the income but not the amount. Please see our article Borrower’s Affidavits for more information.

Stockholders’ equity:
The sum of proceeds from the issuance of stock and retained earnings less amounts paid to repurchase common shares.

Stripped MBS (SMBS):
Securities created by “stripping” or separating the principal and interest payments from the underlying pool of mortgages into two classes of securities, with each receiving a different proportion of the principal and interest payments.

Tangible Net Benefit:
The net gain to a borrower from a refinancing, which some proposed legislation would make the responsibility of lenders.

Title insurance:
Insurance against loss arising from problems connected to the title to property. Title insurance, unlike typical insurance, looks backwards and insures against any clouds on title or issues which affect marketability that may have arisen prior to taking ownership.

Transfer agent:
A bank or trust company charged with keeping a record of a company’s stockholders and canceling and issuing certificates as shares are bought and sold.

Truth in Lending (TIL):
The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.

Underwriting:
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s ability and willingness to repay the debt and the value of the property.