Mortgage & Lending Definitions

Terminology Explained to Help You Navigate the Homebuying Process

It can be difficult to keep all the different terminology thrown around straight when selling or purchasing a home. That’s why we’ve come up with a great list of Mortgage & Lending Definitions to help you fully understand what you are getting into and what your lender is telling you. Knowledge is power and understanding all the terms being used is crucial to getting the best possible lender and deal on your mortgage.

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Abstract of Title – summary of transactions regarding a particular property.

Acceleration Clause – this is a condition within a mortgage that allows the lender to require immediate repayment of the balance of the loan if the regular payments are not made or for other contractual breaches by the borrower.

Accrued Interest – interest that has been earned, but not yet paid.

Adjustable Rate – this is an type of interest rate that changes periodically according to an index.

Adjustable Rate Mortgage (ARM) – a type of mortgage with an interest rate that will adjust according to a selected index. This adjusting rate can cause the interest rate and therefore mortgage payment to rise or fall with the market.

Adjustment Interval – time between rate changes and monthly payments for an Adjustable Rate Mortgage (ARM).

Agent – a person who represents or acts for another person.

Amortization – this is a monthly loan repayment plan, or schedule, for which the payments are fixed in terms of amount of interest and principal.

Annual Percentage Rate (APR) – the annual cost of a loan, shown as a yearly rate. APR takes into account lender fees, discount points, mortgage insurance, and account interest. APR may be slightly higher than the interest rate on the loan.

Application – initial statement required to approve your loan, consists of both personal and financial data.

Application Fee – charged by the lender to process the application. Often includes costs associated with running a credit report and property appraisal.

Appraisal – expert estimate of the value of your house. This is what the lender uses to determine how much your home is worth. You have a right to receive a copy of the appraisal.

Asset – anything of value that a person owns. This can include stocks, vehicles, etc. Assets include personal property and enforceable claims against others.

Assignment – transfer of property rights from one person to another.

Assumability – a feature of a loan that allows it to be transferred from the seller to the buyer, without the buyer having to get a new loan.

Assumption – the agreement between the seller and buyer for the buyer to take over the seller’s loan.

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Balance Sheet – document showing the full financial picture. This includes all assets, liabilities, and net worth of a person at a given point in time.

Bank Check – same as a Cashier’s Check. A check for which payment is guaranteed because the money was paid to the bank in advance, and it is the bank’s account, not the customer’s, that backs the check.

Balloon Payment – having a balloon payment means that the final mortgage payment is paid in a lump sum. This lump sum is often much higher than the regular monthly payments, often by tens of thousands of dollars. This is not a feature in all loans.

Bearer – legal owner of a piece of property.

Bequest – a gift of property by will.

Bill of Sale – document that transfers ownership of property from one person to another.

Biweekly Mortgage Payment – a payment plan in which the borrower makes mortgage payments every two weeks instead of once a month. This can save on interest payments over the life of the loan.

Borrower – person who applies for and receives a mortgage loan, with intent to repay in full.

Broker – person who helps negotiate contracts or arrange funding for another, but does not actually lend any money himself.

Buyer’s Market – this refers to an influx of sellers with limited buyers on the market. This can drive housing prices down, making the market good for buyers.

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mortgage & lending definitions

Cashier’s Check – same as a Bank Check. A check for which payment is guaranteed because the money was paid to the bank in advance, and it is the bank’s account, not the customer’s, that backs the check.

Ceiling – maximum allowable interest rate for and Adjustable Rate Mortgage (ARM).

Certificate of Eligibility – document required for VA loans, can be obtained from local VA office by submitting DD-214 (Separation Papers) and VA form 1880 (request for Certificate of Eligibility).

Certificate of Occupancy – document showing that property meets health and building code requirements.

Certificate of Reasonable Value (CRV) – establishes limit on a VA loan after a VA-approved appraiser has done a full appraisal of the property.

Certificate of Title – written document stating status of title to a property, given by an attorney or title company.

Clear Title – title free of disputes, liens, or other issues that is fully marketable.

Closing – also called Settlement. Meeting with buyer, seller, and lender (or representatives) during which property legally changes hands.

Closing Costs – up front costs that you will pay in their entirety at the time of closing. Estimated closing costs can be found on your Loan Estimate during the purchase process.

Closing Disclosure – this is a five-page form that provides final details about the mortgage loan you have selected. This form includes the loan terms, your projected monthly payments, and how much you will pay in closing costs.

Closing Statement – document detailing all money to be received and expected at closing.

Collateral – assets that back a loan.

Commission – money paid to the real estate agent(s) by the seller, usually a percentage of the sale price.

Contingency – condition that must be met prior to a contract becoming legally binding and the home being sold. An example of this would be the contingency that person A will buy person B’s house after person A’s house is sold.

Contract of Sale – agreement between the buyer and seller on the terms, conditions and purchase price of a home.

Conventional Loan – a mortgage not guaranteed by the VA or insured by the FHA.

Covenants, Conditions and Restrictions (CC&Rs) – document defining restrictions, requirements and proper uses of a property.

Credit Report – report detailing a person’s credit history, including prior defaults, revolving debt, and other such information. Used to determine creditworthiness.

Credit Risk – possibility that the borrower may default on the loan.

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Debt-to-Income Ratio – this is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage. It is one way lenders determine a person’s ability to repay debt and manage monthly payments.

Deed – legal document that transfers a property from one owner to another. The deed contains a description of the property. It is signed, witnessed, and delivered to the buyer at closing.

Deed of Trust – an agreement to pledge property as security for a loan.

Default – failure to meet the legal obligations of a contract, such as not making monthly mortgage payments.

Deferred Interest – interest that is added to the balance of a loan when the monthly payments are not enough to cover it.

Delinquency – failure to make payments on time.

Deposit – cash paid when a sales contract is signed.

Depreciation – decline in property value.

Down Payment – cash paid at closing from a person’s own finances. The difference between the sale price of the home and the down payment is the loan amount.

Due-on-Sale Clause – provision that allows the lender to demand immediate payment of the loan balance upon sale of the property.

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Earnest Money – deposit made the buyer as a show of good faith when the purchase agreement is signed.

Effective Interest Rate – cost of a mortgage conveyed as a yearly rate. This is usually higher than the interest rate on the mortgage since it includes upfront costs.

Encumbrance – a charge on property or assets, such as a lien, claims, unpaid taxes, etc.

Equal Credit Opportunity Act (ECOA) – federal law requiring creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs. More information and the full text can be found here.

Equity – this is the percentage of the home value held by the owner, it is the difference between the market value of the home and the outstanding mortgage balance.

Equity Loan – loan based on the equity a homeowner has in his home.

Escrow – neutral third party that holds money and/or documents until the escrow instructions are fulfilled. An escrow can be a title company or an attorney, depending on state regulations.

Escrow Account – Account held by the lender to pay for additional costs associated with the home, such as property taxes and homeowners insurance (if applicable).

Escrow Waiver – waiver of the requirement to fund an escrow account with the lender. Instead, insurance and taxes would be paid separately. This is not an option with all loans.

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Fair Housing Act – act that prohibits discrimination in real estate transactions because of race, color, religion, sex, handicap, familial status (families with children), or national origin. Learn more about the Fair Housing Act here.

Fee Simple – the absolute ownership of real property.

First Mortgage – mortgage that is in first lien position, it takes priority over all other liens or mortgages. In the case of foreclosure, the first mortgage will be repaid before any others.

Fixed Rate – interest rate that is fixed and will not change for the life of the loan.

Fixed Rate Mortgage – mortgage loan with a fixed interest rate that is guaranteed for the life of the loan.

Flood Insurance – type of Hazard Insurance that is required by lenders for properties located within flood zones.

Floor – minimum rate of interest payable on an Adjustable Rate Mortgage (ARM).

Forbearance – grace period given when a lender delays foreclosure to give the borrow the opportunity to catch up on payments.

Foreclosure (or Repossession) – legal process by which the lender can force the sale of the home due to the borrower not meeting the terms of the mortgage. This is usually the last step when it comes to nonpayment of the monthly mortgage for an extended period of time.

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Graduated Payment Mortgage – mortgage loan within initially low payments that increase over time. The payments eventually level off.

Grace Period – period of time during which a loan payment can be made late without incurring a late fee.

Gross – before taxes.

Gross Income – income before deducting taxes and expenses.

Gross Monthly Income – total monthly income earned before deducting taxes and expenses.

Guarantee – formal pledge to pay another person’s debt in the case of default.

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Hazard Insurance – protects against loss due to fire or other natural disasters, a premium is paid to the insurance company for this coverage.

Home Equity Loan – loan secured by the equity the owner has in the property. Often used for home upgrades, very large purchases, or paying off other debt.

Homeowners Warranty – type of insurance that will cover repairs to a specific part of a home for a specific amount of time.

Housing Code – local government ordinances that set sanitation and safety standards for existing residential buildings.

Housing Expense-to-Income Ratio – ratio of a borrower’s housing expenses divided by monthly income, expressed as a percentage.

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Index – published rate used by lenders to determine interest rates.

Initial Rate – rate used for the first interval of an Adjustable Rate Mortgage (ARM).

Insolvency – condition of a person who is unable to pay debts as they are due.

Interest – the lender’s charge for letting you borrow money.

Interest Rate – periodic charge for use of credit, expressed as a percentage.

Interest Rate Cap – built into Adjustable Rate Mortgages (ARMs), this is a safeguard to prevent drastic changes in interest rates.

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Joint Liability – responsibility shared by two or more people, each of whom is responsible for the full debt on their own.

Joint Tenancy – ownership of property by two or more people, with survivors taking the share of the property of the deceased.

Jumbo Loan – a mortgage larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Jumbo loans cannot be financed by either of these agencies. Therefore, they usually carry a higher interest rate.

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Late Charge (or Late Fee) – penalty paid by the borrower when a payment is made after the due date.

Lender – the bank, mortgage company, or other entity that is offering the loan.

Lender Credits – lender credits (or rebates) are often given to help offset closing costs. These may be given in exchange for a higher interest rate, always find out the details.

Lien – claim by one person on a property as repayment of debt.

Loan Administration – daily administration of a loan, such as collecting payments, processing payments, handling escrows, foreclosing, etc.

Loan Application – document containing detailed information about the borrower and the property to be purchased, required by lenders prior to approving a loan.

Loan Application Fee – a charge paid by the borrow to the lender when applying for a mortgage.

Loan Estimate – a form the lender must give the borrower that outlines all costs associated with purchasing the home through said lender. We have an entire page dedicated to the Loan Estimate.

Loan Origination Fee – fee paid by the borrower to the lender that pays for the work done to evaluate and process the loan.

Loan Servicing – same as Loan Administration, daily administration of everything having to do with the loan.

Loan-to-Value Ratio – the percentage of the property value being borrowed (loan amount/property value=loan-to-value ratio).

Lock (or Lock-In) – a lender’s guarantee of the interest rate for a loan for a certain period of time. Period of time covered is usually from loan application to closing. This ensures the borrower’s rate will not increase during that period of time.

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Margin – number of percentage points added to an index to calculate the interest rate on an Adjustable Rate Mortgage (ARM) at each adjustment.

Marketable Title – title free and clear of liens or other defects that could prevent the sale of property.

Market Rate – the average interest rate charged by lenders for a loan.

Market Value – the lowest price a seller would accept for a property and the highest a buyer would pay for said property. The intersection of these numbers is the Market Value of a home.

Monthly Housing Expense – monthly total of principle, interest, insurance, and taxes.

Mortgage – legal document that creates a lien on a property as security for the payment of a debt.

Mortgage Banker – profession who originates mortgage loans and finances them with his own funds.

Mortgage Broker – someone who arranges financing for borrowers, placing loans with lenders, not using their own funds.

Mortgagee – the lender in a mortgage loan transaction.

Mortgage Insurance – an insurance policy that will compensate the lender if you default. Generally required for home purchases with a down payment that is less than 20 percent.

Mortgage Loan – loan in which the collateral to be provided in case of default is real estate.

Mortgage Note – legal document that obligates a borrower to repay a loan at a stated interest rate and within a specific period of time.

Mortgagor – the borrower in a mortgage loan transaction.

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Negative Amortization – increase in principal balance that occurs when monthly payments are not large enough to pay all interest due on a loan, usually caused when payment caps prevent sufficient payment increases. Unpaid deferred interest is added to the loan balance, causing the borrower to owe more than the loan’s original amount.

Net – after taxes.

Net Effective Income – gross income minus federal income tax.

Non-Assumption Clause – statement in a mortgage contract forbidding the assumption of the loan by another person without the lender’s prior consent.

Non-Discharge Debt – debt that can’t be forgiven in a bankruptcy liquidation, such as taxes owed.

Note – legal document stating terms of a debt and the promise to repay it.

Notice of Default – written notice to a borrower stating that a default has occurred and that legal action may possibly be taken.

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Origination Fee – charges fromĀ  your lender for making the loan. These can include application fees, underwriting fees, and rate-lock fees, to name a few.

Owner Financing – purchase in which the seller provides part or all of the financing.

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Payment Cap – a limit on the amount by which a borrower’s Adjustable Rate Mortgage (ARM) payments can increase, regardless of rise in interest rates.

Per Diem Interest – interest that is calculated daily.

Points – up front cost that you pay to your lender in exchange for a lower interest rate for the loan.

Power of Attorney – legal document that authorizes one person to act on behalf of another.

Prepaid Expenses – assessments, insurance, taxes, paid ahead of their due date, possibly at closing.

Prepaid Interest – an amount paid by the borrower at closing to cover the interest between closing and the end of that month.

Prepayment – payment of part or all of the loan before it is due. This may happen if the borrow sells the home, refinances, or makes extra principle payments.

Prepayment Penalty – the fee a lender can charge you for paying off your mortgage early. This is not a feature in all loans.

Prequalification – the process of determining how much money a person may borrow for a home, before an application has been formally submitted.

Prime Rate – lowest commercial interest rate, for short-term loans, that a bank can give its most credit-worthy customers.

Principal – the amount of debt left on a loan, not including interest.

Private Mortgage Insurance (PMI) – insurance purchased by a buyer (or added on to the overall loan cost) on a conventional loan when a down payment is less than 20 percent of the purchase price. PMI is purchased to protect the lender against default.

Profit and Loss Statement – financial document showing profits, revenue and expenses over a period of time.

Property Tax – government tax which is based on the market value of the property.

Purchase Agreement – contract stating terms and conditions of a home sale, signed by buyer and seller.

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Qualifying RateVariable Rate Mortgages or fixed terms under five years typically require that you qualify at a higher rate, which is called the “benchmark qualifying rate.”

Qualifying Ratio – comparison between a borrower’s expenses , housing or total debt, to his income.

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Real Estate Agent – professional who is a member of the National Association of Realtors.

Real Estate Broker – the agent who represents the buyer or seller in a real estate transaction.

Real Estate Settlement Procedures Act – law governing acceptable fees and practices in real estate transactions. Text of the Act can be found here.

Real Property – the land and everything that is permanently affixed to it.

Reclamation – the right of the title holder of a property to recover said property from a debtor in the case of bankruptcy.

Reconveyance – transferring a property back to the owner after the mortgage has been fully repaid.

Recording – entering documents into the public records.

Recording Fee – cost paid for an agent to enter the sale of a property into the public records.

Refinancing – paying off one loan on a property using the proceeds of a new loan on the same property.

Rent to Own – this type of deal usually requires buyers to pay extra rent each month plus up-front fees of about 5% of the purchase price. The regular rent then goes in owner’s pocket, but the additional payments are used to buy down the price of the home. In the end, depending on the terms, the renter becomes the owner.

Repossession (or Foreclosure) – legal process by which the lender can force the sale of the home due to the borrower not meeting the terms of the mortgage. This is usually the last step when it comes to nonpayment of the monthly mortgage for an extended period of time.

Rescission – (to rescind) cancellation of a contract, permitted by law within three days of signing a mortgage not used to purchase a home.

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Sale Agreement – contract stating terms and conditions under which property will be sold, signed by both buyer and seller.

Satisfaction – the payment of debt that fully satisfies the obligation.

Second Mortgage – mortgage taken out on a home in addition to the first mortgage. Usually for up to 80% of the difference between what is still owed on the original mortgage and the value of the home.

Seller’s Market – when there are more buyers on the market than there are houses for sale, it is considered a Seller’s Market and a seller is likely to get more for their home than they would when it’s a Buyer’s Market.

Servicing – this is the handling of the loan once it has gone through. This includes things such as receiving and processing payments, answering questions from borrowers, and other daily tasks associated with the loan. The lender may choose to do the servicing themselves, or hand it off to another company.

Settlement Costs – same as closing costs. Up front costs that you will pay in their entirety at the time of closing. Estimated closing costs can be found on your Loan Estimate during the purchase process.

Simple Interest – interest that is calculated only on the principal balance.

Survey – measurement of property taken by a professional surveyor that shows boundaries, relation of land to neighboring plots, elevations, etc.

Sweat Equity – value added to the house through improvements the owner has completed.

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Tax Lien – claim against property for unpaid taxes.

Tax Sale – public sale of the property due to unpaid taxes, sale performed by a government agency.

Term – number of years until a loan is to be paid in full.

Title – document giving evidence of ownership of property. Also shows rights of ownership and possession of property.

Title Company – the company that insures the title to the property.

Title Insurance – insurance protecting the lender or buyer against loss due to disputes over property ownership.

Title Search – search of municipal records to ensure the title is clean (no liens) and that the seller is the legal owner of the property.

Total Interest Percentage (TIP) – this helps you understand how much interest you will pay over the life of the loan. This can be used to compare lenders and make sure you are getting a good deal.

Transfer Tax – tax paid when title passes from one person to another.

Truth In Lending Act (TILA) – federal law that requires the lender to provide written disclosure of mortgage terms after an application. Full text of the law can be found here.

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Underwriting – the process of data verification and loan application evaluation. The underwriter gives final loan approval.

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VA Loan – loan guaranteed by the United States Veterans’ Administration, available to veterans with little or no down payment.

Variable Rate – interest rate that changes in relation to an index, the rate changes periodically.

Variable Rate Mortgage – see Adjustable Rate Mortgage (ARM).

Verification of Deposit (VOD) – document to verify borrower’s account balance and history, signed by borrower’s bank or other financial institution.

Verification of Employment (VOE) – document to verify borrower’s position and salary, signed by borrower’s employer.

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Waiver – voluntary surrender of some privilege or right.

Walk-through – the final home inspection to determine if anything needs to be fixed or corrected before closing.

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Zoning Ordinances – local laws determining building codes and uses for buildings or property sites, such as commercial or residential.

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