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Glossary

135 mortgage and title terms, in plain English.

Every piece of jargon you will meet in a loan or title file, defined without circular definitions.

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1031 Exchange A tax provision allowing deferral of capital gains when investment property is exchanged for like-kind property within strict timelines. 2-1 Buydown A temporary rate reduction of two percentage points in year one and one point in year two, funded upfront, often by a seller or builder. 40-Year Mortgage An extended-term loan lowering the payment but substantially increasing lifetime interest.

A

Abstract of Title A condensed history of the ownership of a parcel of land, listing every recorded transfer, lien and encumbrance. Acceleration Clause A provision in the note allowing the lender to demand the entire balance immediately if you default. Adjustable-Rate Mortgage A loan whose rate is fixed for an initial period, then adjusts periodically against an index plus a margin, subject to caps. Adjustment Period How often an ARM rate resets after the initial fixed period. Amortization The schedule by which a loan is repaid to zero over its term using level payments, with the interest and principal split shifting each month. Annual Percentage Rate The interest rate plus certain finance charges expressed as a single annualised percentage. Appraisal An independent opinion of a property's market value, prepared by a licensed appraiser and required by nearly every lender. Appraisal Contingency A contract clause allowing the buyer to renegotiate or withdraw if the property appraises below the contract price. Appraisal Gap The difference between contract price and appraised value. Assumable Mortgage A loan a qualified buyer can take over on its existing terms.

B

Balloon Payment A large lump sum due at the end of a loan term that was not fully amortized over that term. Bank Statement Loan A non-QM programme qualifying self-employed borrowers on 12 to 24 months of deposits rather than tax returns. Basis Point One hundredth of a percentage point. Bridge Loan Short-term financing allowing a buyer to purchase before selling an existing property. Buydown Paying upfront to reduce the interest rate, either permanently (discount points) or temporarily (a 2-1 or 3-2-1 structure).

C

Cap A limit on how much an ARM rate can change at first adjustment, at each subsequent adjustment, and over the life of the loan. Capitalization Rate Net operating income divided by property value. Cash-on-Cash Return Annual pre-tax cash flow divided by total cash invested. Cash-Out Refinance Replacing an existing mortgage with a larger one and receiving the difference in cash. Certificate of Eligibility The VA document confirming a borrower's entitlement to VA loan benefits. Chain of Title The sequence of recorded ownership transfers for a property, from the earliest record to the present owner. Closing Costs All fees and charges payable at closing beyond the down payment, including loan costs, title, government charges, prepaids and escrow reserves. Closing Disclosure The five-page federal form detailing final loan terms and costs, required at least three business days before consummation. Cloud on Title Any claim, lien or encumbrance that impairs clear ownership and must generally be resolved before a sale can close. Collateral The property pledged as security for a loan, which the lender may foreclose upon if the note is not paid. Combined Loan-to-Value All liens secured by the property divided by its value, including second mortgages and home equity loans. Commitment Letter A lender's formal written agreement to make a loan on stated terms, usually subject to remaining conditions. Comparable Sales Recently sold properties similar in location, size and condition, used to establish market value. Conforming Loan A loan meeting Fannie Mae and Freddie Mac guidelines, including the annual conforming loan limit, and therefore saleable to them. Contingency A condition in a purchase contract that must be satisfied for the deal to proceed. Conventional Loan A mortgage not insured or guaranteed by a government agency. Credit Utilization Revolving balances as a percentage of available credit.

D

Debt Service Coverage Ratio Gross rental income divided by PITIA. Debt-to-Income Ratio Total monthly debt obligations divided by gross monthly income. Deed The legal instrument transferring ownership of real property from one party to another. Deed in Lieu of Foreclosure Voluntarily transferring the property to the lender to satisfy the debt and avoid foreclosure proceedings. Deed of Trust A security instrument used instead of a mortgage in many states, involving a trustee who holds title until the debt is satisfied. Delayed Financing An exception permitting a cash buyer to take cash-out financing shortly after purchase, without the usual seasoning requirement. Discount Point A fee equal to 1% of the loan amount paid at closing in exchange for a lower interest rate. Down Payment The portion of the purchase price paid from your own funds rather than borrowed.

E

Earnest Money A good-faith deposit made when a purchase contract is signed, credited toward your costs at closing. Easement A right allowing someone else to use part of your property for a specific purpose, such as utility access or a shared driveway. Encroachment A structure or improvement that intrudes onto a neighbouring property or across a setback line. Encumbrance Any claim, lien, easement or restriction affecting title to a property. Equity The difference between a property's market value and the total debt secured by it. Escrow Two distinct meanings: the neutral third party holding funds and documents during a transaction, and the ongoing account a servicer uses to pay taxes and insurance. Escrow Waiver An arrangement in which the borrower pays taxes and insurance directly rather than through a lender-held account.

F

Fannie Mae The Federal National Mortgage Association, a government-sponsored enterprise that purchases conforming loans and sets widely used underwriting guidelines. FHA Loan A mortgage insured by the Federal Housing Administration, permitting lower credit scores and 3.5% down, with mortgage insurance that is permanent on most current loans. FICO Score The credit scoring model most widely used in lending. First Lien The mortgage with priority over all other liens, paid first in a foreclosure. Fixed-Rate Mortgage A loan whose interest rate remains unchanged for the entire term. Float Down A provision allowing a borrower with a locked rate to take a lower rate if the market improves before closing, usually for a fee. Forbearance A temporary agreement to reduce or suspend payments, with the missed amounts handled later by repayment plan, deferral or modification. Foreclosure The legal process by which a lender takes possession of the collateral after default. Freddie Mac The Federal Home Loan Mortgage Corporation, a government-sponsored enterprise that purchases conforming loans. Fully Indexed Rate On an ARM, the index value plus the margin — the rate that applies once the initial fixed period ends, subject to caps. Funding Fee A one-time charge on VA loans, payable in place of ongoing mortgage insurance and waived for some disabled veterans.

G

Gift Funds Money given by an eligible donor toward down payment or closing costs, documented with a gift letter confirming no repayment is expected. Ginnie Mae The Government National Mortgage Association, which guarantees securities backed by government-insured loans including FHA and VA. Good Faith Estimate The predecessor to the Loan Estimate, replaced for most mortgages in 2015.

H

Hazard Insurance Property insurance covering physical damage, required by lenders as a condition of the loan. HELOC A home equity line of credit — a revolving, usually variable-rate credit line secured by the property, typically in second lien position. Home Equity Loan A fixed-rate lump-sum loan secured as a second lien against the property. Homeowners Association An organisation governing a community or building, funded by dues and empowered to levy assessments and enforce covenants. Homestead Exemption A property tax reduction available on a primary residence in many states, and in some states a protection against certain creditors. Housing Ratio The front-end debt-to-income ratio, measuring only the housing payment against gross income. HUD-1 The former settlement statement, replaced by the Closing Disclosure for most consumer mortgages in 2015 but still used in some cash and commercial transactions.

I

Impound Account Another term for an escrow account, used more commonly in western states. Index A published benchmark rate an ARM tracks, most commonly SOFR on current loans. Interest-Only Loan A loan on which only interest is due for an initial period, with no principal reduction during that time.

J

Jumbo Loan A loan exceeding the conforming limit for its county, underwritten to the lender's own guidelines rather than agency standards. Junior Lien Any lien subordinate to the first mortgage, paid only after it in a foreclosure.

L

Lender Credit A contribution from the lender toward closing costs, given in exchange for a higher interest rate. Lien A legal claim against a property securing payment of a debt, recorded in the county land records. Loan Estimate The standardised three-page disclosure a lender must provide within three business days of application, showing rate, terms and estimated costs. Loan-to-Value The loan amount divided by property value, expressed as a percentage. Lock Period The number of days a quoted rate is guaranteed, commonly 30, 45 or 60 days.

M

Margin The fixed percentage added to an ARM's index to produce the fully indexed rate. Mechanic's Lien A claim recorded by a contractor or supplier for unpaid work on a property. Mortgage The security instrument pledging property as collateral for a loan. Mortgage Insurance Premium Insurance on FHA loans, charged both upfront and annually, and permanent on most current loans with less than 10% down. Mortgage-Backed Security An investment instrument composed of pooled mortgages.

N

Negative Amortization A situation in which the payment is insufficient to cover accrued interest, so the balance grows. Net Operating Income Rental income less all operating expenses, before debt service. Non-QM Loan A loan that does not meet the Qualified Mortgage standard, typically because income is documented differently. Non-Warrantable Condo A condominium that fails agency project standards — often due to investor concentration, litigation or inadequate reserves — requiring specialty financing. Note The promissory note: your written promise to repay a specific sum on specific terms.

O

Origination Fee A charge by the lender for processing the loan, expressed as a percentage of the loan amount or a flat sum. Owner's Title Policy Title insurance protecting the buyer's ownership interest, optional in most states and lasting as long as you hold an interest in the property.

P

PITI Principal, interest, taxes and insurance — the four core components of a mortgage payment. PITIA PITI plus association dues. Points See discount points. Portfolio Loan A loan a lender keeps on its own books rather than selling, allowing underwriting flexibility outside agency guidelines. Pre-Approval A lender's conditional commitment based on verified income, assets and credit. Pre-Qualification An informal estimate based on unverified information. Prepaid Interest Interest from the closing date to the end of that month, collected at closing. Prepayment Penalty A charge for paying off a loan early. Principal The outstanding loan balance, and the portion of each payment that reduces it. Private Mortgage Insurance Insurance protecting the lender on conventional loans above 80% LTV. Proration The division of ongoing costs such as property taxes and HOA dues between buyer and seller as of the closing date.

Q

Qualified Mortgage A loan meeting federal standards for verifying repayment ability, giving the lender certain legal protections. Quitclaim Deed A deed transferring whatever interest the grantor has, without warranting that they have any.

R

Rate Lock A lender's commitment to hold a quoted rate for a defined period regardless of market movement. Recast Re-amortizing an existing loan after a lump-sum principal payment, lowering the payment while keeping the rate and payoff date. Reconveyance The instrument recorded when a deed of trust is satisfied, releasing the lien and returning clear title to the owner. Recording Entering a document into the public land records, which establishes priority among competing claims. Reserves Liquid assets remaining after closing, expressed in months of housing payments. RESPA The Real Estate Settlement Procedures Act, governing settlement practices and prohibiting kickbacks for referrals of settlement services. Right of Rescission A three-business-day window to cancel a refinance on a primary residence after signing.

S

Seasoning The length of time funds have been in an account or a loan has been held, used to satisfy sourcing and eligibility requirements. Second Lien A mortgage subordinate to the first, paid after it in a foreclosure and therefore priced higher. Seller Concession A negotiated contribution from the seller toward the buyer's closing costs, subject to programme limits. Servicer The company collecting your payments and managing escrow, which may or may not own the loan. Settlement Agent The neutral party conducting the closing, disbursing funds and recording documents. SOFR The Secured Overnight Financing Rate, the benchmark index now used on most new adjustable-rate mortgages. Streamline Refinance A simplified refinance for existing FHA, VA or USDA borrowers, typically with reduced documentation and often no appraisal. Subordination An agreement in which an existing lienholder accepts a lower priority position, commonly required when refinancing a first mortgage behind an existing HELOC. Survey A drawing showing property boundaries, improvements, easements and encroachments.

T

Tax Lien A claim by a taxing authority for unpaid taxes, which generally takes priority over a mortgage. Title The legal right of ownership in real property, as distinct from the deed, which is the document transferring it. Title Commitment The title insurer's document stating the terms on which it will issue a policy, including exceptions and requirements. Title Insurance Insurance against defects in the ownership history of a property, paid once and covering past rather than future events. Title Search An examination of public records to establish the chain of ownership and identify liens, easements and other encumbrances. TRID The TILA-RESPA Integrated Disclosure rule, which introduced the Loan Estimate and Closing Disclosure and their timing requirements. Truth in Lending Act Federal law requiring disclosure of credit terms and costs, including APR and trigger-term rules in advertising.

U

Underwriting The process of evaluating a borrower and property against programme guidelines to decide whether to make the loan. USDA Loan A government-guaranteed loan offering no down payment in eligible rural and suburban-fringe areas, subject to income limits.

V

VA Loan A loan guaranteed by the Department of Veterans Affairs for eligible service members and veterans, offering zero down payment and no monthly mortgage insurance.

W

Warranty Deed A deed in which the seller warrants they hold clear title and will defend against claims. Wire Fraud The interception or spoofing of closing wire instructions to divert funds.

Y

Yield Spread Premium Compensation historically paid to a broker for delivering a higher-rate loan.

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