Glossary of Mortgage Related Terms

Adjustable rate mortgage (ARM)

A mortgage in which the interest rate, after an initial period, is adjusted periodically according to a pre-selected index...

Agreement of sale

A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Amortization

The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.

Amortization Schedule

A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance

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.

Application fee

A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan.

Appraisal

A written estimate of a property's current market value prepared by an appraiser.

Appreciation

Increase in the value of a property or other asset.

APR The Annual Percentage Rate

, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.

Arrearage

Amount borrower owes to lender for missed payments and the associated costs of collecting the debt.

Assumable mortgage

A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a "due-on-sale" clause stipulating that the mortgage must be repaid upon sale of the property, is not assumable.

Balance

The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal.

Balloon mortgage

A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period.

Bi-weekly mortgage

A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.

Bridge loan

A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. To qualify for a bridge loan, the borrower must have a contract to sell the existing house.

Builder-financed construction

Having the builder finance the construction.

Cap

Provision in a debt contract or option agreement that protects the owner of a variable interest-rate instrument from interest-rate risk.  The cap locks in the maximum interest rate for which the owner is responsible, even if prevailing rates climb higher. 

Cash-Out Refinance

Refinancing for an amount in excess of the old mortgage loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.

Closing

On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.

Closing costs

Costs that the borrower must pay at the time of closing, in addition to the down payment. These include the origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey and prepaid items such as tax and insurance escrow payments.

Closing date

The date on which the closing occurs.

Co-borrowers

One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.

Commitment Letter

A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.

Conforming mortgage

A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

Construction financing

The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house.

Conventional loan

A mortgage that is not obtained under a government insured program (such as FHA or VA).

Convertible ARM

An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions

Co-signing a note

Assuming responsibility for someone else's loan in the event that that party defaults. A risk not to be taken lightly.

Credit report

A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.

Credit score

A single numerical score, based on an individual's credit history, that measures that individual's credit worthiness.

Credit Union

Cooperative organization of stockholding consumer members  joined by a common bond, such as employment, association or residence. The  institution serves members only, taking their deposits and extending mortgages  and loans to them.

Credit-Rating Agency

One of four recognized firms that support investors by analyzing, reporting and monitoring the credit risk of companies or bonds and other fixed-issue investments. The agency formulates a relative credit rating after collecting and analyzing relevant credit-related information.  Investors use the rating to help determine whether to invest in that bond.        

Credit-Bureau Score

Statistical summary of information contained in an  individual’s credit report that serves as a measure of the person’s creditworthiness. When used in the mortgage-lending industry, the score is  calibrated to predict the likelihood of a loan going into default. For example,  Fair, Issac and Co., one of the country’s more prominent scoring-system  developers, employs a spectrum of "FICO" values that range from a  high-default-risk score of around 400 to a low-default-risk score of around 800.

Cure

When a borrower makes restitution for loan arrearages by repaying missing installments, refinancing the loan or paying off the mortgage by selling the collateral property.

Cure Rate

Of a portfolio of delinquent mortgages, the percentage brought current or repaid. In the first case, the borrower makes missed payments, bringing the mortgage up to date. In the second instance, the borrower pays off the mortgage in full, thereby canceling the loan obligation.

Debt Ratio

Measure used by lenders to gauge the ability of a borrower to  repay a mortgage. The measure takes two forms. The housing debt-to-income  ratio reflects how much of a borrower’s income goes toward paying the  mortgage. The total debt-to-income ratio expresses how much income goes  toward making payment on all debts owed by a borrower. Generally, lenders  prefer to approve borrowers with a housing-debt ratio of 28 percent or less and  a total-debt ratio of 36 percent or less, although the growing use of automated  underwriting provides greater latitude in these areas.

Debt Restructuring

Term used in commercial real estate lending when a lender agrees to modify the terms of a loan, given the inability of the borrower to repay the debt as agreed. Often, the debt is restructured to include unpaid interest, penalties and other fees, and the borrower is given an extended time to pay.  Debt restructuring also can include a new mortgage rate.

Default

When a borrower is in breach of a note or a security instrument--such as a mortgage or deed of trust--thereby entitling a lender to initiate foreclosure proceedings.

Default Risk

Chance of loss to an investor arising from a borrower’s failure to  make promised interest or principal payments when due. Also known as Credit Risk.

Delinquency

Delinquency occurs when all or part of the borrower's monthly  installment of principal and interest (and possibly the escrow) remain unpaid  after the due date.

Department of Veterans Affairs (VA)

Federal agency that, among its functions,  provides lenders with low- or no-down-payment mortgage financing to offer to  eligible veterans. The agency partially guarantees a participating lender against  loss upon the foreclosure of a VA loan.

Deposit Insurance

Government-backed insurance of banks, thrifts and credit  unions that protects depositors in the event of an organization’s failure. The  fund, financed through premiums charged to insured institutions, currently  covers losses up to $100,000 per deposit account.

Down payment

The difference between the purchase price of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%.

Earnest Money

A portion of the down payment delivered with a purchase offer by the purchaser of real estate. Delivered to the seller, or an escrow agency, by the purchaser with the purchase offer as evidence of good faith. Also known as a deposit.

Equal Credit Opportunity Act (ECOA)

1974 federal law prohibiting lenders  from discriminating based on age, sex, religion, color, national origin or marital  status.

Equity

Value that an owner has in real estate over and above liens against it. Equity is measured as the difference between the property’s fair market value and current level of indebtedness. See Capital.

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.

Federal Home Loan Mortgage Corporation - FHLMC (FREDDIE MAC)

A quasi-governmental agency that purchases conventional mortgages in the secondary mortgage market from insured depository institutions and HUD-approved mortgage bankers. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal, and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages. Popularly know as Freddie Mac.

Federal National Mortgage Association - FNMA (FANNIE MAE)

A taxpaying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

Fees

The sum of all up front cash payments required by the lender as part of the charge for the loan.

FHA Mortgage

A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.

First Mortgage

A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.

Fixed rate mortgage (FRM)

A mortgage in which the interest rate and monthly mortgage payment remain unchanged throughout the term of the loan.

Float

Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing.

Foreclosure

The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.

Fully Indexed Rate

Interest rate on an adjustable-rate mortgage that is  determined by the value of the underlying index plus the margin before  discounts or rate caps, either periodic or lifetime, are applied.

Gift of equity

A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.

Ginnie Mae

Federal government corporation that issues and guarantees  securities backed by residential mortgages insured or guaranteed primarily by  the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA). Ginnie Mae, officially known as the Government National Mortgage  Association, was created in 1968.

Government-Backed Mortgage

Residential loan insured or guaranteed by the federal government against borrower default through programs administered by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or Rural Housing Service (RHS) programs.

Government-Sponsored Enterprise (GSE)

Entity created by Congress that  operates with private capital under a government-defined mission and charter.  Housing-related GSEs include Freddie Mac and Fannie Mae.

Grace Period

In mortgage business vernacular, a time interval specified by the lender that begins the day after the official mortgage due date and typically runs for one or two weeks. When a borrower fails to make the scheduled payment by the conclusion of the grace period, a late fee is imposed.

HUD Code

Name by which the Federal Manufactured Home Construction  and Safety Standards law is known because it is administered by the  Department of Housing and Urban Development (HUD). The code, first drawn up  in 1976, addresses design, construction techniques, strength and durability  issues, fire resistance and energy efficiency.

Hyper-inflation

Extremely high rate of inflation, which generally is defined as greater than 10 percent per month

Good faith estimate

A document, which the lender is obliged to provide the borrower within three business days of receiving the loan application. It specifies the settlement charges the borrower will have to pay at closing. Comparing good faith estimates is an important step in the mortgage process, as it allows the borrower to more accurately compare lenders' offers.

Government National Mortgage Association (GNMA)

A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages.

Grace period

The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily.

Hazard insurance

Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as "homeowner insurance."

Home equity line of credit (HELOC)

A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways.

Index

A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the 11th District COFI. Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. On ARMs, a predetermined margin is added to the index to compute the interest rate adjustment.

Initial interest rate

The interest rate that is fixed for some specified number of months at the beginning of the life of an ARM.

Interest due

The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.

Interest-only mortgage

A loan in which the borrower pays only the interest that accrues on the loan balance each month. During the interest-only period, the outstanding balance of the loan does not decline. After the interest-only period ends, the monthly mortgage payment is recalculated to include full principal repayment over the remaining years left on the loan. The longer the interest-only period, the larger is the new monthly mortgage payment.

Initial-Adjustment Period

Interval of time from the origination of an adjustable-rate mortgage(ARM) to the first scheduled adjustment. Loan’s  initial interest rate is locked in place for a designated time frame, for example,  one, three, five or 10 years. At the end of that time, the rate adjusts to reflect  prevailing market interest rates.

Initial Interest Rate

Interest rate, often discounted below the fully indexed rate that is in effect during the period before the first rate change of adjustable-rate mortgage(ARM).

Interest-Rate Cap

Limit on the amount an interest rate may increase and/or decrease during an adjustment period or over the life of an adjustable-rate mortgage(ARM).

Interest-Rate Ceiling

Option that protects the purchaser from a rise in a  particular interest rate above a certain level.  

Interest-Rate Floor

Option that protects the purchaser from a decline in a  particular interest rate below a certain level.  

Interest-Rate Option

Right, but not the obligation, to pay or receive a  specific interest rate on a predetermined principal for a set interval.

Interest-Rate Risk

Chance of loss due to fluctuations in interest rates that  cause a value change in a mortgage or other fixed-income instrument.  Generally, a rise in rates causes a decline in the price of an existing mortgage,  while a decline in rates causes a rise in its market value.

Interest-Rate Swap

Arrangement wherein two parties agree to exchange  interest payments based on a principal amount (referred to as the notional  amount) without exchanging the underlying notional amount. Typically, one party pays a fixed interest rate and the counterparty pays a variable interest rate.

Interest rate adjustment period

The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year. 

Interest rate index

The specific interest rate series to which the interest rate on an ARM is tied, such as "Treasury Constant Maturities, 1-Year," or "Eleventh District Cost of Funds." All the indices are published regularly in readily available sources.

Jumbo mortgage

A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $333,700 in 2004. However, some lenders use the term to refer to programs for even larger loans, such as, e.g., greater than $500,000.

Junk fees

A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.

Late fees

Fees that lenders are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later.

Late payment

A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days.

London InterBank Offer Rate (LIBOR)

Index used to benchmark floating-rate assets. It reflects the interest rate that the most creditworthy international  banks dealing in Eurodollars would charge each other on large loans.

Loan Modification

Restructuring of a mortgage for a borrower who faces a  long-term financial problem but can demonstrate the ability to meet the  modified payment terms. The modification can include lowering the original  interest rate or extending the loan term in which the borrower has to repay the  entire amount of the loan.

Loan Officer

Employee at a loan company who works with individuals to identify  and explain the various loan products available to mortgage borrowers. The  loan officer typically conducts the initial review of the mortgage application.

Loan Processor

Loan company employee who reviews the mortgage loan application and gathers required verifying documentation on the applicant and the real estate property.

Loan Prospector

Freddie Mac’s automated underwriting service that tells a  lender within minutes whether Freddie Mac will purchase a particular mortgage.  This determination reflects the likelihood that the loan applicant will default,  based on an analysis of the loan application, credit and property information  provided.

Loss Mitigation

Agreement reached by a lender and borrower to satisfy a delinquent mortgage obligation through a course of action that serves as an alternative to foreclosure. These efforts can range from simply bringing the delinquency to the borrower’s attention to working out an alternative repayment plan.

Low Income

Term, often used in the public policy arena, to designate  households earning 80 percent or less of area median income.

Lower Income

Situational term used to describe households earning 100  percent or less of area median income.

Lease-to-own purchase

A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period.

Lien

The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.

Loan amount

The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.

Loan-to-value ratio

The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.

Lock

An option exercised by the borrower, at the time of the loan application or later, to "lock in" the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.

Mandatory disclosure

The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.

Margin

Fixed amount that is added to an underlying index value to establish  the fully indexed rate for an adjustable-rate mortgage(ARM).

Market Value

Price at which an asset will sell in a fair market; also, the  current value of a security.

Mortgage

A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.

Mortgage Insurance

Insurance policy paid for by the borrower with the  lender as beneficiary, in which a third party--the insurer--takes some of the  loan-default risk. In the event of foreclosure, the insurer pays a set amount to  the lender to cover some or all of the outstanding loan balance.

Mortgage-Backed Security (MBS) 

 Financial instrument representing an  interest in a pool of loans secured by mortgages. Principal and interest  payments on the underlying mortgages are used to pay principal and interest  on the securities. The generic term encompasses passthrough securities and  mortgage-backed bonds. Freddie Mac and Fannie Mae guarantee the timely  payment of principal and interest on the mortgage-backed securities they issue.

Mortgage Broker

Company that, for a commission, matches borrowers and  lenders. A mortgage broker typically takes the borrower application and  sometimes processes the loan but, unlike a mortgage banker, does not use its  own funds to close the loan.

Mortgage Insurance

Financial protection paid for by a borrower with the lender as beneficiary, in which a third party--the insurer--assumes some of the default risk of the loan. In the event of foreclosure, the policy pays a set amount to the lender to cover some or all of the loan balance outstanding.

Mortgage payment

The monthly payment of interest and principal made by the borrower.

Negative Equity

Condition achieved when the market value of a property declines by more than the borrower’s equity position--that is, the sum of the original down payment, any loan principal repayments and house-price appreciation. For example, suppose a borrower puts down $20,000 to buy a home, and the value of the property promptly declines by more than $25,000. The negative equity amounts to $5,000, meaning the borrower would have to pay $5,000 out-of-pocket to immediately refinance into a 0-percent equity loan at a lower interest rate. 

No-Closing-Cost Mortgage

Loan that transfers to a lender the borrower’s  responsibility to pay the fees associated with executing a mortgage. Fees often  can exceed $5,000. This arrangement frees borrowers of the need to bring  cash to the closing table when refinancing, rendering obsolete the guidance  that interest rates must drop by 2 percentage points before the new loan  payments prove sufficient to offset refinancing costs.

Non-callable Debt

Liability that prohibits the issuer from redeeming the debt  before the scheduled maturity date. 

Non-conforming Mortgage

Loan in an amount that exceeds the qualification limits for GSE purchase or government insurance or warranty.See jumbo mortgage.

Non-performing Loan

Mortgage that is in foreclosure or is past due by 90  days or more.

Non-conforming mortgage

A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.

Note

A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.

Origination fee

An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.

Payment period

The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly.

Payment Cap

Limit on the amount a loan payment may increase or decrease  over the life of an adjustable-rate mortgage..

Payoff month

The month in which the loan balance is paid down to zero. It may or may not be the term.

Personal Cash

As defined by Freddie Mac’s underwriting guidelines, the  following loan-applicant funds can count as part of a borrower's down payment:  savings, checking account money on deposit, loan proceeds when fully secured  by the borrower’s owned assets, proceeds from the sale of owned assets, net  proceeds from the trade-in of a prior home, prior rent credit, trust fund  disbursements, verifiable cash deposits and pooled funds from extended  family members. The value of lots owned by the loan applicant qualifies as  well.

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. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed "discounts" and "premiums," respectively. 

Pre-approval

A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant's credit.

Pre-payment

A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment."

Pre-payment penalty

A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.

Primary residence

The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.  

Principal

The amount of money you borrow to buy a home, and to the outstanding loan balance at any point during the mortgage term.

Private mortgage insurance (PMI)

Insurance written by a private company protecting the mortgage lender against loss in the event of borrower default.

Processing

Compiling and maintaining the file of information about a mortgage 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.

Purchase money mortgage

A mortgage offered by a house buyer as partial payment for the house. From the seller's point of view, it is seller financing.

Prepayment

Payoff of the remaining principal balance of a loan occurring prior  to the stated maturity date. Also can refer to an amount paid to reduce the  principal balance of a loan in excess of the agreed-upon amortization schedule.

Present Value

Concept used by financial analysts to account for the fact that  a dollar today is worth more than a dollar at some point in the future.  Calculating the present value of future income involves discounting future  payments by an interest rate equal to the opportunity cost of funds. This  concept, for example, provides a way to define the borrower savings received  from refinancing by adjusting for the fact that the savings will be realized over  many years into the future.

Principal-Only (PO) Strip

Type of security that generates its cash flow only  from principal payments of the underlying instrument. 

Private Mortgage Insurance

Credit enhancement required by a lender, typically  on mortgages with down payments of 20 percent or less. Generally the  borrower pays a monthly premium to offset the risk of loan losses to the lender  or investor in the event the borrower defaults.

Private-Label Issuer

Companies other than Freddie Mac, Fannie Mae and  Ginnie Mae that create and sell mortgage-backed securities or other bonds.  Private-label mortgage-backed securities frequently are collateralized by loans  that are ineligible for purchase by Freddie Mac.

Qualification requirements

Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. They are less comprehensive than underwriting requirements, which take into account the borrower's credit record.

Rate cap

The limit of how much the interest rate may change on an ARM at each adjustment and over the life of the loan.

Rate protection

Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew.

Real Estate Settlement Procedures Act (RESPA)

1974 law requiring mortgage  lenders to provide borrowers with advance disclosures regarding loan  settlement costs and charges as well as information about the settlement  itself. RESPA prohibits fees for referring settlement business.

Recession

Downturn in the output of an economy. In the U.S., the length of a recession is measured from the start of two consecutive quarters of negative economic growth and concludes with two consecutive quarters of positive growth.

Recourse

In mortgage finance, a contingent liability (typically recorded as an  off-balance-sheet obligation) arising when a lender or investor sells a loan but  remains responsible for the payment of any outstanding debt in the event of its  default. By contrast, a mortgage sold without recourse means the new holder  bears the default risk.

Refinancing Incentive

Financial benefit obtained by a borrower from  refinancing an existing mortgage. Measured as the savings gained from trading  an existing mortgage for a new mortgage with a lower interest rate.

REO (Real-Estate Owned)

Residential property acquired by the investor  through a foreclosure in satisfaction of a mortgage debt that is then held in the  investors' inventory of foreclosure homes until sold.

Repayment Plan

Agreement reached between lender and borrower that increases the size of the borrower’s monthly loan contributions for a period of time until arrearages are repaid.

Reserves

Cash-equivalent assets available to a borrower at settlement after  all closing funds are deducted. One month’s reserves is equal to one monthly  mortgage payment. Reserves generally must be verified as a condition of  obtaining a home loan.

Reviewable-Rate Mortgage

Mortgage issued at the prevailing interest rate  but reset at a new rate, upon the investor's review, when market rates change.

Rural Housing Service

Program within the U.S. Department of Agriculture that insures and guarantees mortgages on residences located primarily in rural  areas and owned by low- and moderate-income borrowers. It is the successor  to the Farmers’ Home Administration loan program.

Seasoned Loan

Any loan more than one year old.  

Secondary Mortgage Market

Market in which previously issued mortgages and  mortgage-backed securities (MBS) are traded between lenders and investors.  Freddie Mac serves as one of the primary conduits in the secondary market by  linking investors and lenders.

Serious Delinquency

Point at which a mortgage payment is overdue by at  least 90 days or a loan has entered into foreclosure.

Servicer

Company that manages the mortgage-payment process, which the routine collection of monthly payments from borrowers, transferring principal and to investors, overseeing escrow accounts and handling delinquency foreclosure problems that may arise. Lending firms that originate mortgages occasionally run in-house servicing operations but frequently contract with outside firms.

Servicing

Routine collection and processing of monthly principal and interest  payments from homeowners, followed by the remittance of those payments to  secondary market investors, such as Freddie Mac. Other functions include management of delinquencies and foreclosures.

Short Payoff Sale

Transaction in which an investor such as Freddie Mac  accepts less than the full amount of a mortgage in exchange for a quick sale of  the house by the borrower before a pending foreclosure occurs.

Site-Built Housing

Residential structures built to state or local construction  standards that are constructed (stick built) or assembled (modular or  panelized) at the property site.

Spread

Yield premium over U.S. Treasury securities.

Standard Mortgage

Loan made in accordance with generally accepted  underwriting criteria to qualifying borrowers of all income levels.

Starting Rate

See Initial Interest Rate

Structured Debt

Security designed with customized cash flows intended to  meet particular investor objectives. For example, debt issuers can manipulate  a security’s maturity, nature of the interest rate (fixed or floating), market-index  linkages and interest-payment date to satisfy an investor’s need to implement  an interest-rate or currency view, hedge a specific risk, balance portfolio  performance characteristics or minimize transaction costs. Investors typically  are willing to pay a premium for tailored cash flows.

Structured Note

Financial instrument in which the interest rate or maturity is  linked to some external factor, which, for example, could be a time-period  trigger or a different interest-rate index.

Subordinated Debt

Debt that carries a lower-priority claim on issuer’s income or assets than that of other (senior) debt.

Subprime Mortgage Market

Market niche that finances mortgages that do not  meet traditional underwriting standards. This market serves borrowers who  have past credit problems or unconventional borrowing needs.

Targeted Mortgage

Loan made under a special-affordable lending program  limited to lower-income households typically earning 100 percent or less of  area median income and based on less strict borrower-qualifying criteria than is  normally the case.

Truth in Lending Act (TILA)

1968 law requiring lenders to provide borrowers  with complete written information about the terms of a loan--interest rate,  length of the loan and repayment structure--as well as a written disclosure of  the loan’s annual percentage rate (APR).

Underwriting

The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter. 

VA mortgage

A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration.

Variance

Statistical measure of the volatility or dispersion of a distribution  about its mean or average value.

Workout

Mutual agreement with a borrower who is experiencing an  involuntary but temporary financial setback to bring a mortgage current.

Workout Ratio

Measure of a servicer's effectiveness at averting  foreclosures, expressed as the number of delinquent loans saved from  foreclosure as a percentage of those same loans plus loans that became REO.

Waive escrows

Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.

Zero Point Option

An option which allows the borrower to opt to pay a slightly higher loan interest rate in lieu of paying the loan origination points generally charged for the particular loan product.