Mortgage Glossary

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Today's most popular terms:

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes. See all related terms in the ARM Glossary.

Amortization Schedule

A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.

Closing Costs

Closing costs such as title insurance, escrow fees, settlement fees, appraisal, recording fees, notary fees, and others are separated into what are called "non-recurring closing costs" and "pre-paid items." Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate, which they must issue to the borrower within three days of receiving a home loan application.

Credit Rating

Borrowers are rated by lenders according to the borrower's credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrower's payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower's credit, and different lenders may assign different grades to the same borrower.

Debt-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. See housing expense ratio.

Discount Points

In the mortgage industry, this term is usually used only in reference to government loans, (FHA and VA loans). Discount points refer to any "points" paid in addition to the one percent loan origination fee. A "point" is one percent of the loan amount.

Equity

A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.

Fannie Mae (FNMA)

The Federal National Mortgage Association, which is a corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which is the nation's largest supplier of home mortgage funds, makes mortgage money more available and more affordable.

Freddie Mac

The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans.

Front-End Ratio

The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers. Also see qualification requirements.

Good Faith Estimate

An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

Ginnie Mae

A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for making home loans. The difference is that Ginnie Mae provides funds for government loans (FHA and VA).

Gross Monthly Income

The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a particular loan.

Index

A number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM. This interest rate is subject to any caps that are associated with the mortgage.

Jumbo Loan

A loan that exceeds Fannie Mae's and Freddie Mac's loan limits, currently at $333.700. Also called a nonconforming loan. Freddie Mac and Fannie Mae loans are referred to as conforming loans.

Loan-To-Value Ratio (LTV)

The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).

Mortgage Broker

A mortgage company that originates loans then places those loans with a variety of other lending institutions with which they usually have pre-established relationships.

Mortgage Program

A bundle of characteristics of a mortgage including whether it is an FRM, ARM, or Balloon, the term, the initial rate period on an ARM, whether it is FHA-insured or VA-guaranteed, and if is not FHA or VA whether it is "conforming" (eligible for purchase by Fannie Mae of Freddie Mac) or "non-conforming".

Payment-to-Income Ratio

The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers. Also see qualification requirements.

PITI

This stands for principal, interest, taxes and insurance. Payments of principal and interest go directly towards repaying the loan. The portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due if you have an "impounded" loan. If you do not have an impounded account, then the lender still calculates this amount and uses it as part of determining your debt-to-income ratio.

Processing

What the lender does with your loan application. Processing involves compiling and maintaining the file of information about the transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.

Qualification Ratios

Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The "top" or "front-end" ratio is a calculation of the borrower's monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowner's association fees) as a percentage of monthly income. The "back-end" or "bottom" ratio includes housing costs as will as all other monthly debt.

Revolving Debt

A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.

Settlement/Settlement Costs

Subprime Loans

Subprime loans are priced higher than prime loans. Loans to borrowers whose credit is less than perfect will almost always be subprime loans. There are also other circumstances that lead to subprime loans, including high outstanding debt, unproven income, etc.

Term

The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years.

Title Search

A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Total Expense Ratio

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Truth-In-Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Variable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

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