sense of all the mumbo-jumbo...
to: US Mortgage Glossary | Canadian
U.S. mortgage industry is full of terms that are gibberish
to many people. The following glossary of terms should help
you translate the mortgage language into everyday English
thereby helping you make better sense of the mortgage process.
Percentage Rate - This is not the note rate applied for,
but rather is a government mandated formula that shows the
cost of the loan in a yearly rate by using the note rate plus
certain other upfront costs, in other words this is the rate
you are paying at the end of the day.
- An expert opinion on the value of a property by a accredited
Loan - Adjustable Rate Mortgage. Mortgage characterized
by an interest rate that can adjust up or down at certain
intervals based on a current index (commonly the 1 year T-Bill)
plus a preset margin.
- A mortgage that is characterized by level fixed payments
for a predetermined time frame followed by either a refinance
or adjustment in interest rate after this time.
to Close - The amount needed from the borrower at closing.
Consists of down payment, closing costs and prepaid items.
This amount needs to be in the form of a cashier check made
payable to the buyer.
Date - Date stated on the purchase agreement that buyer
and seller agree to finalize or close the transaction.
Gains - The tax paid upon certain types of real estate
transactions. When it comes to anything that involves the
IRS and your money it's best to contact an accountant for
Costs - Costs associates with the setting up and funding
of the transaction - including closing fee, title insurance,
appraisal fees, underwriting fee, mortgage registration tax
Bureaus - Agencies that provide compilations of your credit
history. The three main credit bureaus are Experian, Trans
Union, and Equifax.
Report - A report provided by the credit bureaus which
shows the history, current status, and profile of an individual
that is used by a lender in deciding whether or not to lend
to an individual.
Scores - The number generated by the credit bureaus which
is a numerical representation of the subjects credit profile,
range is from 450 on the low side to 900 being the highest
Home - These property types usually have the following
characteristics: they are attached, have a homeowners association
and monthly dues, the outside & common area maintenance
is taken care of by the association, and the common areas
as well as the amenities are available to all owners in the
association for their use and enjoyment.
Financing - Standard, non-government financing.
Ratios - Ratio of debt to pretax income, often expressed
as a front (housing payment only) or back (all debt) ratios.
Ex- $5000 monthly income, $1500 housing payment, $2000 total
debt would equal ratios of 30% / 40%.
Payment - Difference between loan amount and purchase
Points - One point equals one percent of the loan amount.
Points are used to lower the interest rate. One point does
not equate into lowering the interest rate one percent. Generally
lowering the interest rate 1/8 will cost about 1/2 point,
although this can vary based on daily pricing. Typically this
is tax deductible.
Money - Deposit toward down payment submitted with a purchase
agreement as evidence of the buyers commitment. This demonstrates
that you're serious.
PO Box 740243
Atlanta, GA 30374
PO Box 2002,
Allen, TX 75013-3742
- The portion of the monthly payment that is not applied to
principal or interest, but rather is used to pay mortgage
insurance, homeowners insurance and property taxes.
Mae - Short name for the Federal National Mortgage Association.
One of the main Government Sponsored Agencies which are the
companies who sell mortgage backed bonds to investors. They
are the ultimate source of the money that we lend. Fannie
Mae protects its investors by issuing underwriting guidelines
that are to be followed to ensure quality lending.
Mac - Short name for Federal Home Loan Mortgage Corporation
- see above.
Financing - Government backed minimum down financing program
which has a lower mortgage insurance premium and greater credit
leeway as compared to conventional minimum down programs.
- Not locking in a rate, but rather choosing to float the
interest rate as the market moves up or down. Not for everyone
as a major fluctuation can cause cash flow issues.
Certification - Required document on all loans. Confirms
if the property is in or out of a FEMA designated flood zone.
Loan - Most common type of financing. Terms ranging from
10 to 30 years. Interest rate and P&I payment remains
constant throughout life of loan.
held in Escrow - Generally only applies to new construction.
Monies held from the seller to provide payment for repairs
or non completed items.
Financing - Financing provided from government agencies
such as FHA , VA etc .
Faith Estimate - Document prepared by lender which estimates
and delineates the various fees and closing costs associated
with the home purchase.
- Home Equity Line of Credit. Second mortgage product, generally
characterized by interest only payments and the ability to
draw, pay back, and redraw it's an extremely flexible lending
Inspection - Not required by a lender but a wise idea
for a purchaser in helping determine the overall condition
of a property it should be done be a licensed or accredited
property inspector. The buyer is free to choose whomever he
or she wants.
Association Dues - Amount paid by owners of a townhome
or condo to cover various amenities or services provided by
the homeowners association (examples -- common areas, hazard
insurance, garbage, mowing, snow removal).
Insurance - Insurance which covers damage or loss to the
property. The premium is usually paid into an escrow account
held by the mortgage company, which then pays the insurance
company once a year.
(Settlement statement) - Document prepared by title company
at closing which shows where all of the money in the transaction
was coming from and going to.
Loan - Loan with an initial balance greater than $300,700
Pricing - Refers to the fact that rates are generally
slightly higher on jumbo loans.
Period - Time period that a rate is protected for during
the loan process.
in - Choosing to protect a particular rate and program
for a specific period of time.
(LTV) - Ratio of liens versus value of property or sales
price. Ex. 100,000 owed on a property worth 200,000 equals
an 50% LTV.
Insurance (MI) - Insurance which protects the LENDER against
default. Generally the higher the loan-to-value the higher
the monthly premium to help offset the risk.
Document - This document signed at closing is the collateralization
of the property to the note or loan.
- Document. This document signed at closing is the promise
by the signers to repay the loan.
Fee - 1% of the loan amount. It can be avoided by paying
a higher rate; typically is tax deductible.
Days Interest/Per Diem Interest - Collected at closing,
it is money collected/refunded to borrower to synchronize
the closing to the monthly payments.
Back - A second mortgage closed at the same time as a
first mortgage. It's primary purpose is to avoid mortgage
insurance, jumbo pricing, or for future needs.
- Monthly payment. Stands for Principal, Interest, Tax escrow,
Insurance (both hazard and mortgage) escrow.
- A preliminary approval that is based on documented income,
assets, and credit.
- Group of items paid at closing including monies to set up
the escrow account and to pay prepaid or odd days interest.
- A pre-qualification is based on stated income, assets and
debt. Information is not verified during this process therefore
it's not as useful or informative as a Pre-Approval.
Points - Money paid upfront to lower the interest rate.
Rule of thumb - breakeven point is (where monthly savings
meets/exceeds money paid upfront) usually around 60 payments
or 5 years. This means that in many cases paying points will
pay off as long as you do not sell or refinance your loan
before the breakeven point. (actual breakeven point may vary,
make sure you discuss your specific situation with your lender
and or mortgage broker) There are instances in which some
specialty products and products may require points to be paid.
Payment Penalty - An option on certain loan types. A benefit
in that the rate is lower on these products compared to other
Taxes - Amount of tax due on a property. Usually is collected
as part of the escrow portion of the monthly payment, with
the lender being responsible to forward the escrowed money
as the bills come due on May 15 and Oct 15.
Agreement - Contract between buyer and seller outlining
the terms of the agreement mutually agreed upon.
Family Residence - Standard, one unit home, as opposed
to a Condo/Town Home with a homeowners association.
Company - Company that prepares title work and is where
the closing is held.
Union Information Services
PO Box 1000
Chester , PA 79022
Insurance - Policy provided by the title company on their
title work guaranteeing the accuracy and completion. Lenders
Policy is required and only protects the Lender from loss,
Owners Policy is available at buyers discretion and protects
Work - Document prepared by title company which outlines
the ownership of the property and other various details.
- Act of approving a loan application. Underwriters are bound
by guidelines set forth by Fannie Mae, Freddie Mac, FHA or
VA as applicable.
Financing - Government backed financing available only
for service veterans, characterized by no down payment, no
mortgage insurance, but with a funding fee. It's there to
help making home ownership for servicemen and women.
of Purchase and Sale - A legal agreement that offers a
certain price for a home. The offer may be firm (no conditions
attached), or conditional (certain conditions must be fulfilled
before the deal can be closed).
Period - The time over which all regular payments would
pay off the mortgage. This is usually 25 years for a new mortgage,
however can be greater, up to a maximum of 35 years.
- The process of determining the value of property, usually
for lending purposes. This value may or may not be the same
as the purchase price of the home.
Value - An estimate of the market value of the property.
- Allows the buyer to take over the sellers mortgage
on the property. Guidelines on this vary from lender to lender.
Arms Length - A transaction between unrelated entities where
a willing seller (the seller is not compelled to sell) transacts
with a willing buyer (the buyer is not compelled to buy).
Payments - Payments consisting of both a principal and
an interest component, paid on a regular basis (e.g. weekly,
biweekly, monthly) during the term of the mortgage. The principal
portion of payment increases, while the interest portion decreases
over the term of the mortgage, but the total regular payment
usually does not change.
Mortgage and Housing Corporation (CMHC) - The National
Housing Act (NHA) authorized Canada Mortgage and Housing Corporation
(CMHC) to operate a Mortgage Insurance Fund which protects
NHA Approved Lenders from losses resulting from borrower default.
CMHC provides this mortgage insurance where the overall loan
to value is in excess of 80%.
of Location or Survey - A document specifying the exact
location of the building on the property and describing the
type and size of the building including additions, if any.
of Search or Abstract of Title - A document setting out
instruments registered against the title to the property,
e.g. deed, mortgages, etc.
Mortgage - A mortgage agreement that cannot be prepaid,
renegotiated or refinanced before maturity, except according
to its terms.
Costs - Various expenses associated with purchasing a
home. These costs can include, but are not limited to, legal/notary
fees and disbursements, property land transfer taxes, as well
as adjustments for prepaid property taxes or condominium common
expenses, if any.
Date - The date on which the sale of a property becomes
final, and monies and title exchange hands. In some cases
this is also the possession date, the date on which the new
owner takes possession of the home.
or GENWORTH or AIG Insurance Premium - Mortgage insurance
insures the lender against loss in case of default by the
borrower. Mortgage insurance is provided to the lender by
CMHC or GENWORTH or AIG and the premium is paid by the borrower.
Offer - An offer to purchase subject to conditions. These
conditions may relate to financing, or the sale of an existing
home. Usually a time limit in which the specified conditions
must be satisfied is clearly spelled out.
Mortgage - A mortgage that does not exceed 80% of the
purchase price of the home. Mortgages that exceed this limit
in Canada must be insured against default, and are referred
to as high-ratio mortgages.
Period - The number of times per year in which the interest
rate is compounded. In Canada, mortgages are generally compounded
semi-annually which is twice per year.
Debt-Service Ratio - The percentage of the borrower's
gross income that will be used for monthly payments of principal,
interest, taxes, heating costs and condominium fees.
(Certificate of Ownership) - The document signed by the
seller transferring ownership of the home to the purchaser.
This document is then registered against the title to the
property as evidence of the purchaser's ownership of the property.
This is handled by the lawyers or notaries involved in the
- A sum of money deposited in trust by the purchaser when
making an offer to be held in trust by the vendor's agent,
broker, lawyer or notary until the closing of the transaction
at which time these funds are applied against the total proceeds
- The interest of the owner in a property over and above all
claims against the property. It is usually the difference
between the market value of the property and any outstanding
Interest Rate - This is the actual interest rate paid
on a loan or mortgage. In Canada, mortgages typically have
a higher effective interest rate because of the fact that
interest rates are compounded semi-annually or twice per year.
In Canada, effective interest rates have to be disclosed to
Insurance - Before a mortgage can be advanced by the lender,
the purchaser must have arranged fire insurance. A certificate
or binder from the insurance company may be required on closing.
& Binding Offer - An offer to buy the property as
outlined in the offer to purchase with no conditions attached.
Mortgage - A mortgage for which the rate of interest is
fixed for a specific period of time (the term).
- A legal procedure whereby the lender eventually obtains
ownership of the property through the courts after the borrower
has defaulted on payments.
Mortgage - The first mortgage in the mortgage agreement
that is considered to be in first place, and will have first
claim on assets in the event of any default. This is
not necessarily the largest mortgage, but rather, the one
that is registered first against the title.
Debt Service (GDS) Ratio - The percentage of gross income
required to cover monthly payments associated with housing
costs. Most lenders recommend that the GDS ratio be in the
range of 32% - 35% of your gross (before tax) monthly income.
Household Income - Gross household income is the total
salary, wages, commissions and other assured income, before
deductions, by all household members who are co-applicants
for the mortgage.
Ratio Mortgage - If you don't have 20% of the lesser of
the purchase price or appraised value of the property, your
mortgage must be insured against payment default by a Mortgage
Insurer, such as CMHC.
- An amount of money required to be withheld by the lender
during the construction or renovation of a house to ensure
that construction is satisfactorily completed at every stage.
Equity - The difference between the price for which a
home is sold or could be sold (market value as determined
by an appraiser) and the total debts registered against it.
- (Home Equity Line Of Credit) This is an open mortgage product
offered by most lending institutions that allows borrowers
a vast amount of flexibility in re-payment options. For most
lenders the minimum payment requirement is typically interest
only, the interest rate for these products is also tied to
the institutions prime rate and fluctuates accordingly. This
is also a fully open product as such there is no bonus of
interest penalty for full repayment of the outstanding principal.
- The examination of the house by a licensed building inspector
selected by the purchaser. An excellent idea when purchasing
a property in helping to avoid any costly surprises.
Rate Differential Amount (IRD) - An IRD amount is a compensation
charge that may apply if you pay off your mortgage principal
prior to the maturity date or pay the mortgage principal down
beyond the prepayment privilege amount. The IRD amount is
calculated on the amount being prepaid using an interest rate
equal to the difference between your existing mortgage interest
rate and the interest rate that a lender can now charge when
re-lending the funds for the remaining term of the mortgage.
The formula and guidelines used for calculating this vary
from lender to lender, for specifics it's best to contact
your mortgage holder.
Financing - Short-term financing to help a buyer bridge
the gap between the closing date on the purchase of a new
home and the closing date on the sale of the current home.
Alia Mortgage - Inter Alia also known as a
blanket mortgage. An Inter Alia Mortgage is a mortgage
that is secured by more than one property. A single
mortgage document is executed and registered against each
property that is used as security.Loan to Value Ratio - The
ratio of the loan to the appraised value or purchase price
of the property, whichever is lower. For example, if you purchased
a home for $400,000 and it appraised for the same, and you
needed a mortgage for $200,000 that would be a 50% loan to
LOC - LOC is short for line of credit. There are two distinct
types of lines of credit, secured and unsecured. Generally
most mortgage lenders grant secured lines of credit, which
use the property as additional security.
Maturity Date - Last day of the term of the mortgage agreement
and the date on which any and all outstanding principal &
interest is due.
Insurance - Mortgage Insurance is offered through most
lenders, it comes in a variety of forms covering both disability
and death. It's a good idea to review all of the documentation
relating to your specific coverage prior to signing.
and Mortgagor - The lender is the mortgagee and the borrower
is the mortgagor.
Life Insurance - A form of reducing term insurance recommended
for all mortgagors. If you die, have a terminal illness, or
suffer an accident, the insurance can pay the balance owing
on the mortgage. The intent is to protect survivors from the
loss of their homes.
Disability Insurance - A form of insurance, designed to
protect the mortgagor should he or she suffer a disability
that would prevent them from working and thereby not being
able to make their payments.
Term - The number of years or months over which you pay
a specified interest rate. In Canada terms usually range from
six months to 10 years.
Interest Rate - An interest rate which does not necessarily
correspond to the effective interest rate. In Canada, these
two rates do not correspond.
Mortgage - A mortgage which can be prepaid at any time,
without penalty such as a HELOC.
(Outstanding balance) - The amount of principal which
is still outstanding at the end of the term, or at any point
in time during the mortgage.
Frequency - The choice of making regular mortgage payments
every week, every other week, twice a month or monthly.
P.I.T. - Principal, interest and taxes. Together, these make
up the regular payment on a mortgage if you elect to include
property taxes in your mortgage payments
- This allows you to move to another property without having
to lose your existing interest rate. You can keep your existing
mortgage balance, term and interest rate plus save money by
avoiding early discharge penalties provided the new property
and overall mortgage terms meet the lenders criteria. Once
again policies related to this do vary between lenders so
if this may become important to you down the road it's best
to confirm the details surrounding it today.
Charge - A fee charged by the lender when the borrower
prepays all or part of a closed mortgage more quickly than
is set out in the mortgage agreement.
Option - The ability to prepay all or a portion of the
principal balance. Prepayment charges may be incurred on the
exercise of prepayment options. Again prepayment privileges
vary between lenders and it's best to compare these prior
to signing any mortgage documentation.
- The amount of money borrowed for a new mortgage.
Mortgage - Qualifies you for a mortgage before you start
shopping. You know exactly how much you can spend and
are free to make a firm offer when you find the
right home. Even with pre-approvals, its generally
recommended that any and all offers for the purchase of a
subject property be made with a subject to financing
- Renegotiating your existing mortgage agreement. May include
increasing the principal, reducing it or paying out the mortgage
- At the end of a mortgage term, the mortgage may "roll
over" on new terms and conditions acceptable to both
the lender and the borrower. This is known as renewing a mortgage.
Otherwise, the lender is entitled to be repaid in full. In
this case, the borrower may seek alternative financing. Typically
a lender will contact you 2-3 months prior to the maturity
of a mortgage to discuss renewal terms.
Commitment - A lenders commitment to offer to hold
a specific rate for a certain length of time. Rate commitments
or rate holds can vary from 30 to 180 days depending again
on the lender and institution.
- In the case of mortgages, the real estate offered as collateral
for the loan is the security.
Mortgage - Secondary or additional financing, usually
has a shorter term and higher interest rate than the first
mortgage. The primary reason for this is, that the secondary
lender usually has increased risk, as the loan to value ratio
increases with additional financing.
- The length of the current mortgage agreement. A mortgage
may be amortized over a long period (such as 35 years) with
a shorter term (six months to five years or more). After the
term expires, the balance of the principal then owing on the
mortgage can be repaid or a new mortgage agreement can be
entered into at the then current interest rates.
Total Debt Service (TDS) Ratio - The percentage of gross income
needed to cover monthly payments for housing and all other
debts and financing obligations. This requirement does vary
somewhat from lender to lender but typically most lenders
like to have borrowers fall within a range of 42% - 44%.
- Legal ownership in a property.
Rate Mortgage - A mortgage for which the rate of interest
fluctuates with changes in the prime rate. This is sometimes
referred to as a floating rate mortgage.
Vendor Take-Back Mortgage - When the seller provides
some or all of the mortgage financing in order to sell their
property. In this situation, the vendor is the mortgagee.