Following are some of the most common loan terms and definitions that you may encounter.
Additional Principal Payment - A payment by a borrower of more than the scheduled
principal amount due in order to reduce the remaining balance on the loan.
Adjustable Rate Loan/Mortgage (ARM) - A home loan where the interest rate
can be adjusted periodically on the basis of changes in an index, as stated in the
Adjustment Periods - Adjustment periods are terms set out in the loan document
that call for possible changes in the interest rate and payments during a particular
time frame of an ARM loan, which could be from one month to several years.
Amortization Schedule - The amortization schedule of a loan is the timetable
for loan re-payment that shows how much of each payment is applied to interest and
how much to principal, as well as the remaining balance after each payment.
Annual Percentage Rate (APR) - The cost of credit on a yearly basis, expressed
as a percentage.
Appraisal - An appraisal is a written analysis of the estimated value of
real estate, usually conducted to determine the loan amount. Appraisals on behalf
of lenders are prepared by licensed appraisers.
Asset - An asset is anything a person owns that has monetary value.
Balloon Loan - A balloon loan is one that calls for a large sum to be paid
at the end of the loan term.
Balloon Payment - A lump-sum payment that may be required at the end of some
mortgage loans, or at a specified period of time (e.g. 5 years into a loan).
Bankruptcy - A proceeding authorized by federal law which provides debtors
with various kinds of relief from their debts.
Basis Point - One one-hundredth of one percent. Used primarily to describe
changes in yield or price on debt instruments, including mortgages and mortgage-backed
securities. Commonly used to describe differences in mortgage interest rates.
Before Tax Income - Earnings calculated before income taxes are deducted.
Buy-Down Loan - A temporary buy-down is a loan on which a borrower makes
a one-time payment to reduce the interest rate during the first year or years of
a loan. A permanent buy-down reduces the interest rate over the course of the entire
Cap - A cap is a provision of an adjustable rate loan (ARM) that limits how
much the variable interest rate may increase or decrease during the life of the
Cash Out Refinance - A cash out refinance is a loan in which the amount borrowed
exceeds the total amount needed to repay the original loan and loan expenses, in
essence putting cash into the borrower's pocket.
Chapter 7 Bankruptcy - A court petition that requires that you liquidate
your non-exempt assets, including your home in certain cases, in exchange for a
discharge of most of your debts.
Chapter 13 Bankruptcy - A court petition that allows you to enter into a
payment plan with the court to repay some or all of your debts over a three- to
Closing - The "closing" is the period that marks that a loan transaction
Closing Costs - Fees paid at closing, including attorneys’ fees, fees for
preparing and filing a mortgage, fees for title search, taxes and insurance.
Co-Signer/Co-Borrower - Another person who signs the loan and assumes equal
responsibility for its payments.
Collateral - Property used to secure repayment of a loan.
Collection - A loan goes into collection when payment on a loan is delinquent
and efforts are made to collect the amount due. This is also the stage at which
the lender files the papers necessary to prepare to proceed with foreclosure.
Combined Loan to Value (CLTV) - The sum of all liens on the property divided
by the value (or purchase price, if applicable) of the property.
Conventional Loan - Consumers need to demonstrate excellent credit in order
to obtain an "A" or conventional loan, generally a credit score of 670-680 or higher.
Credit Bureau - An organization that gathers, records, updates, and stores
financial and public records information about the payment records of individuals
who are being considered for credit.
Credit Report - Information collected by credit bureaus about your credit
history, including where you owe money, how much you owe, your credit cards and
their balances, and whether you pay your bills on time.
Credit Score - A number, based on information in your credit report that
is used by most lenders to decide whether to extend credit and at what cost. The
most common score used is called a FICO score.
Creditor - A person or business from whom you borrow or to whom you owe money.
Credit Limit - The maximum amount that may be borrowed.
Debt Consolidation - Refinancing one or more existing debts into a new loan.
In the mortgage-lending context, relatively short-term, unsecured debt is often
rolled into a long-term mortgage loan.
Debt-to-income Ratio - The amount of money you have to pay out each month
as a percent of your gross income. For example, $2,500 of debt service / $5,000
of gross income = 50% DTI (debt-to-income) ratio.
Default - Default on a loan is when a borrower fails to comply with any of
the terms of an agreed-upon loan, including timely repayment.
Depreciation - Loss of value in real property brought about by age, physical
deterioration, or functional/economical obsolescence. Generally, the loss of value
due to any cause.
Disclosures - Information that must be given to consumers to make them aware
of acts and laws that affect their financial dealings.
Equal Credit Opportunity Act (ECOA) - The Equal Credit Opportunity Act (ECOA)
is a federal law that prohibits lenders from discrimination on the basis of race,
color, religion, national origin, age, sex, marital status, or receipt of income
from public assistance programs or the exercise of certain consumer rights.
Equity - The difference between the fair market value (appraised value) of
your property and any outstanding loans, liens and encumbrances.
Escrow - Escrow is a separate account where money and/or documents are held
by a third party until previously specified conditions are met. Often times, escrow
is referred to as the time period between an offer to purchase a home being accepted
by the sellers(s) and the financial details being settled.
Fair Credit Reporting Act - The Fair Credit Reporting Act is a federal consumer
protection law that regulates the disclosure of consumer credit reports and establishes
procedures for correcting any errors that may appear on a credit report.
Fair Market Value - The value of a property, which is typically based on
comparable sales of similar properties within the last six months.
FICO Score - A credit score developed by Fair Isaac & Co. that determines
the likelihood that credit users will pay their bills. Scoring is widely accepted
by lenders as a reliable means of credit evaluation.
Fixed-rate Loan - A fixed-rate loan is one in which the interest rate or
scheduled payment amount does not change during the course of the loan.
Foreclosure - The process by which your lender sells your property at public
auction to pay off your loan.
Home Equity Line of Credit - A credit agreement, secured by the home, in
which the borrower can borrow up to a fixed credit limit.
Impounds - A trust account established by lenders for the accumulation of
borrower funds to meet certain expenses such as taxes and hazard insurance.
Index - A published rate that serves as a base for the interest rate charged
on a loan and also as the base for rates changes used by the lender.
Interest Rate - The percentage rate that lenders charge for use of their
Jumbo Loan - Generally, a loan that is larger than the limits set by the
Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Because jumbo loans cannot be funded by these two agencies, they usually carry a
higher interest rate.
Lender - The individual or company that loans you money.
Lien - A legal claim upon a piece of property generally for the payment of
a debt or obligation.
Loan-to-Value Ratio - The amount of money you owe on your loans as a percent
of the market value of your home.
Minimum Payment - The minimum amount that you must pay, usually monthly,
on your loan. Under some plans, the minimum payment may cover interest only; under
others, it may include both principal and interest.
Mortgage (Deed of Trust) - A pledge of collateral as security. In some states,
the term mortgage also describes the document signed to show that the lender is
granted a lien on the home. It may also show the amount of money borrowed.
Mortgage Broker - An individual in the business of assisting in arranging
funding or negotiating contracts for a client but who does not loan the money himself.
Brokers usually charge a fee or receive a commission for their services.
Non-Prime/Sub-Prime - Nonprime, also known as sub-prime, is the designation
given to borrowers with less than perfect credit ratings. Such ratings may be the
result of limited credit histories, past credit difficulties, high debt-to-income
ratio or other factors.
Note - An abbreviation for promissory note. It discloses the interest rate
and terms of your loan.
Partial Payment - A payment that is not sufficient to cover the scheduled
monthly payment on a mortgage loan.
Partial Prepayment - A payment by a borrower of more than the scheduled principal
amount due in order to reduce the remaining balance on the loan.
Payoff - The act of paying off your loan by paying the outstanding principal
amount and any additional payments due.
PITI - The total monthly housing loan expenses = Principal + Interest + Taxes
Points - Points are finance charges paid at closing. Each point equals 1%
of the loan amount. Some lenders charge a flat fee, rather than points.
Prepayment Penalty - A lender may impose a prepayment penalty if a loan is
paid off before it is due. This is usually because the lender incurs costs when
making a loan and will build these costs into the borrower's payments over the life
of the loan. When a borrower pays the loan off early, the lender tries to recoup
some of its costs through a prepayment penalty.
Principal Balance - The outstanding balance of a loan. This usually does
not include expenses advanced in the event a loan is in default.
Promissory Note - The document in which you promise to repay the money that
was loaned to you. It discloses the interest rate and terms of your loan.
Refinance - Obtaining a new loan on your property to pay off your existing
loan(s). The new loan usually has some kind of benefit to the borrower, either lower
interest rates or lower monthly payments.
Rescission - A rescission period is required by the Federal Government to
allow a property owner to cancel a loan transaction. This period is 3 business days
between the loan closing and the disbursement of funds, which applies when a security
interest is taken in a consumer’s principal dwelling.
Revolving Debt - Credit account that establishes a maximum dollar amount
that can be borrowed, requiring monthly payments of less than the full amount due.
The balance carried forward is subject to a finance charge. Also, an arrangement
whereby credit is extended up to a specified limit and for a specified period with
a fee charged for the commitment. Also called open-end credit or revolving line
Second Mortgage - Second priority lien against the equity in a home, usually
following a purchase money mortgage.
Secured Loan - A secured loan is one in which the borrower offers up something
of value as collateral for the loan.
Securitization - The process of pooling loans into securities backed by mortgage
loans. This is one process used to provide capital for the creation of mortgage
Servicer - A servicer is a company that handles all payment-related transactions
with borrowers. A servicer is often used to collect payments of loans that have
been purchased by an investor in the secondary loan market.
Sub-Prime - Sub-prime, also known as non-prime, is the designation given
to consumers with less than perfect credit ratings. Such ratings may be the result
of limited credit histories, past credit difficulties, high debt-to-income ratio
or other factors.
Title - The evidence of the right to ownership of real property.
Transaction Fee - A fee charged each time you draw on your credit line.
Trust Deed - The document that secures the promissory note to your home and
is recorded in the county as evidence of the debt.
Truth in Lending Act - The Truth in Lending Act is a Federal law that requires
creditors to fully disclose the terms and conditions of consumer loans, in writing.
Disclosure must include the loan's annual percentage rate and any additional fees
and charges to be paid by the borrower.
Underwriting - Underwriting is the process lenders use to determine the risk
involved in any given loan.
Variable Rate - An interest rate that changes periodically in relation to
an index. Payments may increase or decrease accordingly.