Mortgage Glossary
Team Simplist
Sep 25, 2019

We know that navigating your way around the homebuying process can be daunting, especially as a first-time homebuyer. That’s why we’ve put together this A-Z of key terms that you may encounter as you embark upon this process – and remember, if you still find yourself stumped, you can feel free to get in touch with Simplist’s expert loan officers. They’ll be happy to answer any questions you might have!

Amortization

The name for the process of reducing a debt by making regular payments.

Also used to describe the period of time it takes to pay off a debt through regular payments.

Example:

“Due to amortization of the money owed, the record shall reflect this debt discharged.”

“A mortgage with amortization of 30 years or less is attainable for most working Americans.”

Appraisal

An expert estimate of the value of a property. The valuation upon which a mortgage is given.

Appraisal Waiver

An offer by a lender to waive the appraisal in certain eligible transactions.

Appreciation

The increase in a property’s monetary value over time.

Example:

A property purchased in 2016 for $200,000 is appraised in 2019 at $220,000. It has appreciated by $20,000.

Adjustable-Rate Mortgage (ARM):

A home loan that begins with a fixed interest rate for an introductory period (usually from three to ten years) followed by periodic rate adjustments. See also: fixed-rate mortgage.

Automated Underwriting:

A computerized system by which a borrower’s loan eligibility is quickly ascertained based on a predetermined set of financial criteria.

Buyer’s Agent

A real estate agent who works on behalf of a buyer. Services include researching homes and neighborhoods, drawing up offers and contracts, and serving as an intermediary between buyer and sellers.

Capital

Wealth or assets that are available for new investments.

Cash Flow

The byproduct of leasing a property to a renter for a monthly fee, less associated expenses to the property. Can be either positive or negative.

Example:

Rental Income - Rental Expenses = (+/-) $$$

Closing Costs

Various costs associated with closing.

These typically include, but are not limited to, a loan origination fee, discount points, an appraisal fee, escrow and title fees, and the first year’s insurance premium.

Closing Disclosure

A five-page form that a lender provides within three days of closing to detail pertinent information about the mortgage. This includes loan terms, projected monthly payments, and how much the borrower will pay in closing costs.

Comparative Market Analysis

The examination of the prices at which similar properties in an area have recently sold. Conducted by a real estate agent, this assessment helps buyers determine a reasonable offering price.

Condominium

A type of development in which a resident owns one of many units along with shared amenities. The units are generally attached, with financial planning and decisions made by a collective of owners. See also: condominium association.

Condominium Association

A governing body, that consists of individual condominium unit owners, that conducts financial planning and collectively makes decisions regarding the maintenance of a condominium building and its grounds.

Counter-offer

A conditional acceptance by the seller to the buyer’s initial offer, as subject to seller’s desired changes. The buyer can subsequently accept, walk away, or submit a buyer’s counter-offer.

Credit

A consumer’s ability to obtain money based on the trust that it will be repaid in the future.

Credit Bureau

A private company that collects and maintains individuals’ credit histories, which is in turn provided to lenders for a fee. The three major credit bureaus are Equifax, Experian and TransUnion.

Credit Market

A market where fixed-income securities are traded. Among these are mortgage-backed securities: pools of mortgages that are sold to investors, allowing them to benefit from the mortgage business without ever buying or selling a home.

Credit Report

A tool used by lenders to assess the risk of making a loan. Produced by credit bureaus, these provide insight into the borrower’s payment history and current status of obligations.

Deed

The written document that transfers title and ownership of property from the seller to the buyer. Generally held by an escrow officer or title company while the loan is in escrow.

Down Payment

The initial payment made when purchasing a property via mortgage.

Dual Agency

When a buyer’s agent simultaneously represents the interests of a seller. Dual agency is generally not recommended, since real estate agents are bound by fiduciary duties that require undivided loyalty to their client: the seller.

Earnest Money

A deposit made to a seller to establish the buyer’s good faith to buy a home.

At closing, earnest money is applied against the down payment. If a contract to purchase is not agreed upon, it is returned to the buyer. If a contract is agreed upon but the sale is not consummated, disposition of the earnest money, either forfeited to the seller or returned to the buyer is dependent upon what is agreed to in the Purchase Contract.

Escrow

The period of time between when an offer is accepted and when the sale is finalized. During this period, loans may be categorized as “in escrow.”

Depending on the geographical region, the settlement agent who handles the closing of a purchase transaction could be an Escrow Company, an attorney or a representative from a title company.

Escrow accounts

Lender-established accounts into which a lender deposits allocated funds for annual property taxes, mortgage insurance premiums, and/or homeowner’s insurance premiums.

Escrow accounts are customary, especially when the LTV (loan to value) of an original loan exceeds 80%.

Escrow Officer

A neutral third party who holds title deeds, escrow payments and other documents until closing is complete. Ensures terms of sale are met on both ends, serving both the buyer and the seller.

Federal Reserve (also “The Fed”)

The central bank of the United States government, responsible for setting short-term interest rates that are applied to various types of loans.

FICO

Created by the Fair Isaac and Co., this is the most widely used scoring system used to assess the relative risk of an individual borrower.

Fixed-Rate Loan

A loan in which the interest rate doesn’t fluctuate, instead remaining constant for the life of the loan.

Foreclosure

The legal process by which a lender revokes title conveyance on a property secured by a mortgage, or deed of trust. During foreclosure, the lender evicts the borrower and sells the mortgaged property in an attempt to recoup the cost of the outstanding foregone mortgage. If the sale price is not enough to pay off the loan, the lender may pursue other remedies against the borrower as defined by state law.

For Sale by Owner Properties (FSBO)

Properties that are sold directly by owners rather than through an agency. A buyer may procure the services of a broker in a FSBO transaction, although the buyer – not the seller – will be responsible for the agent’s commission.

Home Protection Warranty Package

A warranty offered by the seller that covers the cost of remedying breakdowns in heating, plumbing, air conditioning or electrical systems, usually within the first year of ownership.

Homeowners insurance

A policy that protects the homeowner against damages to their property caused by fire and other common hazards. Liability insurance, which protects homeowners in the event someone is injured on their property, is also generally included.

Index

The benchmark on which an adjustable-rate mortgage is based. An adjustable rate mortgage’s fully indexed rate is the index (variable) + the margin (constant).

Interest

The rate at which a buyer is charged for borrowing money. Also, a portion of your mortgage payment.

Interest-Only Loan

A loan that requires a borrower to pay back interest only for a set number of years; subsequently, the remaining principal is typically amortized over the remainder of the life of the loan.

Interest Rate

The proportion of a loan that is charged as interest to a borrower and which fluctuates according to various economic forces.

Interest Rate Lock

An assurance from a lender that an interest rate will not increase (nor decrease) between the time a borrower locks in the terms of the loan and the time the loan closes.

Lien

A legal claim by one person or entity to keep possession of the property of another until a debt owed by that person is discharged. Commonly created by the lender when you mortgage a property. Also includes obligations not met or satisfied, judgments, unpaid taxes, materials, or labor.

Liquidity

The ease at which an asset can be bought or sold in the market at a price that reflects its intrinsic value. Liquidity is also used to determine the amount of funds available for down payment, closing costs, and reserves.

Listing Agent

The agent who works on behalf of a seller to market the property and secure a sale.

Loan Estimate

A required disclosure provided by a mortgage lender or broker, this is a list of estimated fees and costs associated with a home loan. Your lender must, by law, give you this and other disclosures within 3 days of your completed application.

Loan Servicer

The company that sends out your monthly statements and collects payments. May be the same as the original lender but can change during the life of the loan.

Loan to Value (LTV)

A ratio that expresses the amount of a first mortgage lien as a percentage of a property’s total value.

*Example: *

A borrower wants $100,000 to buy a home worth $130,000.

The LTV ratio is $100,000/$130,000 or 77%.

Lock Period

A set period of time during which a promised interest rate is protected from variance. Typically, a 15-, 30-, 45-, or 60-day period.

Margin

The fixed amount added to the index interest rate when calculating the fully indexed rate of an adjustable-rate mortgage (ARM).

Mortgage

A legal agreement by which a lender disburses funds in exchange for taking the title of a borrower’s property, with the condition that the conveyance of title becomes void upon total repayment of the debt.

Mortgage Loan Officer

A representative of a lending institution who originates loans, evaluates applications, and acts as an intermediary between the institution and the borrower.

Multiple Listing Service

A group of private databases that provides real estate brokers with a comprehensive look at available housing in a particular market or across markets.

National Association of Realtors

A North American trade organization consisting of a membership of more than one million Realtors. Realtors differ from real estate agents due, in part, to this distinction.

Negative Amortization

An increase in the principal balance of a loan when a borrower fails to make monthly payments. The portion of interest that remains unpaid is added to the principal balance of the loan, thus further accruing interest.

Piggyback Transaction

An alternative loan structure by which two separate mortgages are originated at once.

Also known as 80-10-10 mortgages, these are typically utilized by borrowers with a <20% down payment who wish to avoid purchasing private mortgage insurance.

The first mortgage has an 80% LTV, the second mortgage has a 10% LTV, and the borrower makes a down payment of 10%.

Points

Payments made up front to reduce the interest rate of a mortgage loan.

A “point” refers to 1% of the amount of the loan. Also called “buying down the rate,” paying points in exchange for a lower interest rate results in lower monthly mortgage payments.

Preliminary Title Report

A report that provides buyers with information on a property’s title and whether there are any outstanding liens on said property.

Pre-qualification

A preliminary assessment of how much money a person could potentially borrow from a lender. Not to be confused with pre-approval, pre-qualification is a nonbinding agreement based on a loose evaluation of user-provided, unverified information.

Principal

The balance of the loan on which interest is paid. Your mortgage statement will show the amount of your payment going toward principal, as compared to interest, each month.

Private Mortgage Insurance (PMI)

A type of insurance that lenders generally require when borrowers make down payments that are less than 20%. PMI protects lenders in the event of foreclosure.

Prorate

To divide, distribute, or assess proportionately. Accounts and payments may be adjusted to ensure both buyer and seller pay their respective share of costs in relation to property ownership.

Example:

A buyer who purchases a home in May will pay prorated property tax for the remainder of the calendar year. Meanwhile, the seller will pay a prorated property tax for January-May of the same calendar year.

Qualified Mortgage (QM)

A mortgage that meets certain borrower and lender standards as set forth by government regulations. These standards, legislated as a result of the 2008 mortgage crisis, are meant to ensure that the lender has done due diligence in concluding that the borrower will likely be able to repay the loan.

Real Estate Agent

A state-licensed professional who negotiates the sale of property, typically on behalf of the seller. See also: buyer’s agent.

Real-Estate Owned (REO)

A term used to describe properties that are owned by lenders as a result of foreclosure.

Realtor

A real estate broker or agent who is a member of (and certified by) the National Association of Realtors.

Reserve Account

Funds set aside for debt service or maintenance. Often referred to in the context of condominiums as the reserves set aside by a condo association to cover anticipated maintenance and other expenses.

Reserve Analysis

A technique used to determine a project budget. Utilized by condo associations to ensure that adequate reserve funds are collected to perform necessary maintenance.

Reserves

This refers to the dollar amount of liquid assets that a borrower has after paying the down payment and closing costs associated with their home. Also used as a risk mitigation factor in some mortgage approvals.

Example:

If, after closing, a borrower has $4,000 in savings, and a monthly mortgage payment of $1,000 per month, they have four months’ reserves.

Return on Investment (ROI)

In real estate, the amount of profit a property generates as compared to, and divided by, its value.

Example:

A $100,000 property that generates $8,000 per year would produce an 8% ROI.

Risk

Refers to the presumed likelihood that a borrower will or will not make on-time payments and, ultimately, pay off a loan.

Risk-Based Pricing

Describes the way lenders offer varying interest rates or loan terms to different consumers dependent on their perceived risk.

In short, if you have prior loan defaults or late payments on your credit report, you can expect to pay a higher interest rate than a borrower with a squeaky-clean record.

Single-Family Residence

A standalone structure on its own lot intended for one family. Differs from condominiums, townhomes, co-operatives, and multi-family homes which are all attached residences.

Subprime

Refers to loans offered to high-risk individuals with low down payments and/or bad credit scores which carry high interest rates and unfavorable conditions.

Termite Report

A report issued by a state-licensed inspector detailing any termite infestation or damage. Generally requested by lenders to verify structural integrity of a property in advance of purchase.

Tract Number

Refers to a designated Census Tract, each identifying subdivisions of between 2,500 and 8,000 inhabitants.

Uniform Standards of Professional Appraisal Practice (USPAP)

Designated by the Appraisal Foundation, these guidelines are the generally recognized ethical and performance standards intended to facilitate equitable appraisal practices.

Yield Curve

A graph that plots the interest rates, at a given point in time, of comparable bonds with differing maturity dates – from three months up to 30 years. When short-term bonds are paying more interest than comparable longer-term investments, it suggests that people think interest rates will be lower in the future than they currently are. This is known as an inverted yield curve and is seen by many as indicative of an economic slowdown. The yield curve typically sets the benchmark for mortgage interest rates and, dependent on the type of home loan you have, could mean variable monthly mortgage payments.

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