Within the lending industry there are a lot of acronyms like LTV, DTI, PITI, VOE, VOD, LOE, DU, LE, CD, etc. We want to ensure you understand the loan approval process and know how all the moving parts fit together.
So no matter how much you 'really' want to know, here is a list of the common words you may hear in discussions during your loan approval process.
Abstract of Title - A summary of recorded transactions concerning the title of a property. Usually prepared by a title insurance company and used to determine any title defects which could affect the property.
Accrued Interest - Interest which has been incurred but not paid.
Amortization - The process of paying off a mortgage in regular monthly principal and interest payments.
Annual Percentage Rate (APR) - An interest calculation that expresses the total cost of a mortgage loan as a yearly rate. The federal government has mandated a procedure for determining the APR. It includes origination fees, projected interest payments, discount points, and other fees paid at origination. It is usually a higher rate than the stated note rate.
Appraisal - A written estimate of a property's value. It can reflect either the "as is" value of a property or a "subject to" value based on projected improvements that are to be made to the property. There are 3 ways of determining a property's value: the sales approach, the cost approach, and the income approach.
Balance Sheet - A statement showing the financial condition of an individual or company at a specific point in time. It includes assets, liabilities, net worth, and stockholder's equity.
Borrower - An individual who requests a loan and agrees to payment terms on the loan.
Cashier's Check - A check issued by a banking institution which is guaranteed by the banking institution.
Certificate of Occupancy - A document issued by a local authority having jurisdiction over a property stating that the property complies with requirements pertaining to building codes and health codes.
Closing - A process during which a buyer, seller, and lender execute documents which change the ownership of a piece of property and during which funds change hands.
Closing Costs - Costs associated with the settlement of a loan. These include origination fees, title fees, taxes, insurance, recording fees, inspection fees, appraisal fees, etc.
Cloud on Title - Any claim or encumbrance which would impair or affect title to a property.
Collateral - Any asset used to secure a loan.
Debt To Income Ratio - An amount determined by dividing total recurring debt by gross income.
Deed - A legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property and is signed, witnessed, and delivered to the buyer at closing.
Deed Of Trust - A document creating a lien on a property as security for the payment of a debt.
Default - Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due.
Deferred Interest - Amount added to the balance of a loan when monthly payments are insufficient to cover the interest incurred. This results in negative amortization.
Delinquency - Failure to make required payments on time.
Down Payment - The difference between the purchase price and the loan amount.
Draw Request - A request for payment for work completed in conjunction with a construction project.
Earnest Money - A good faith deposit made by a purchaser of property.
Encumbrance - A legal right or interest in a property that affects title to the property.
Equity - The difference between the current market value of a property and the outstanding mortgage balance.
Escrow - The closing of a transaction through a third party called an escrow agent, or escrowee, who receives certain funds and documents to be delivered upon the performance of certain conditions outlined in the escrow instructions.
Escrow Account - An account held by a lender containing funds collected in conjunction with monthly mortgage payments. The funds in this account are held in trust by the lender on behalf of the borrower, and are used to pay expenses such as property taxes and homeowner's insurance.
Fannie Mae (FNMA) - Federal National Mortgage Association. A corporation chartered by Congress that buys and sells residential real estate mortgages.
Federal Housing Administration (FHA) - Federal Housing Administration. A government agency that is a division of the Department of Housing and Urban Development (HUD) which insures residential mortgage loans made by FHA approved lenders.
Federal Reserve - The central bank of the United States which regulates monetary policy through interest rates and supply.
Fee Simple - The absolute ownership of real property.
Fixed Rate - An interest rate that is fixed for the term of the loan.
Flood Insurance - A form of hazard insurance required on residential properties which lie within a flood zone as determined by The Federal Emergency Management Association (FEMA).
Forbearance - A grace period given by a lender who postpones foreclosure on a property to give the borrower time to catch up on overdue payments.
Foreclosure - A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parties to a conclusion and passes the title in the mortgaged property to either the holder of the mortgage or a third party who may purchase the realty at the foreclosure sale, free of all encumbrances affecting the property subsequent to the mortgage.
Freddie Mac (FHLMC) - Federal Home Loan Mortgage Corporation. A quasi-governmental corporation chartered by Congress that purchases mortgages from insured depository institutions and HUD-approved mortgage bankers.
General Liability Insurance - A policy that protects owners against any claims of negligence, personal injury or property damage.
Ginnie Mae (GNMA) - Government National Mortgage Association. This agency buys home loans from lenders, pools them with other loans and sells shares to investors. Ginnie Mae differs from its cousins, Fannie Mae and Freddie Mac, in that it only purchases loans backed by the federal government.
Graduated Payment Mortgage (GPM) - A mortgage that requires a borrower to make progressively larger monthly payments over the term of the loan. The payment is unusually low for the first few years but gradually rises until year three or five, then remains fixed.
Grace Period - A specified amount of time to make a loan payment after its due date without penalty.
Gross Monthly Income - The total monthly income of a household before taxes or expenses are subtracted.
Guarantee or Guaranty - A promise by one party to pay a debt or perform an obligation contracted by another in the event of that person's default.
Hazard Insurance - This provision of homeowners insurance covers damage by fire, wind or other disaster.
HUD-1 Settlement Statement - A form mandated by the federal government that itemizes the closing costs associated with a real estate transaction.
Interest - A periodic charge paid for borrowing money.
Interest Rate - The sum, expressed as a percentage, of the outstanding balance charged on a loan.
Interest Reserve - An amount that is included in a loan to cover periodic interest charges during the life of the loan.
Joint Tenancy - Ownership by two or more people that gives equal shares of a piece of property. Rights pass to the surviving owner or owners.
Jumbo Loan - A mortgage with a principal balance that exceeds the amount eligible for purchase by Fannie Mae and Freddie Mac. A Jumbo loan usually carries a higher interest rate.
Late Charge - A fee a lender imposes on a borrower when the borrower does not make a payment on time.
Lender - A bank, mortgage company, or individual offering a loan.
Lien - A legal claim laid by one person or company on the property of another as security for money owed.
Loan Application - A document required by a lender prior to loan approval containing detailed information about the borrower and the property.
Loan Approval - The process that lenders go through to evaluate the risks posed by a particular borrower and to set appropriate conditions for the loan. Also referred to as underwriting.
Loan Estimate (LE) - An estimate from an institutional lender that shows the costs a borrower will incur, including loan-processing charges.
Loan Origination Fee - A fee charged by a lender for the work required in evaluating a loan for approval.
Loan Processing Fee - A fee charged by a lender for the work required to process a loan for evaluation.
Loan To Value (LTV) Ratio - A measure used by lenders to assess the relationship of the loan amount to the value of the property.
Lot Acquisition - The purchase of a parcel of real estate within a platted area.
Lot Cost - The purchase price or acquisition cost of a parcel of real estate.
Market Value - The price that a buyer is willing to pay to a willing seller at a particular point in time.
MIP (Mortgage Insurance Premium) - Insurance purchased by the borrower to insure against default on VA or FHA loans.
Mortgage - A legal document specifying a certain amount of money to purchase a home at a certain interest rate, and using the property as collateral.
Mortgagee - The lender in a mortgage loan transaction.
Mortgage Banker - A company that provides home loans using its own money. The loans are usually sold to investors such as insurance companies and Fannie Mae.
Mortgage Broker - A company that matches lenders with prospective borrowers who meet the lender's criteria. The mortgage broker does not make the loan, but receives payment from the lender for services.
Mortgage Insurance - Insurance purchased by the borrower to cover the lender's risk of loss. Mortgage Insurance is usually required by lenders when the loan to value ratio is greater than 80%.
Mortgage Loan - A loan in which real estate serves as collateral to provide for repayment in case of default.
Mortgage Note - A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time.
Mortgagor - The borrower in a mortgage loan transaction.
Net Effective Income - Gross income less federal taxes.
Non-Assumption Clause - A clause in a mortgage contract forbidding the assumption of the mortgage by another borrower without the prior approval of the lender.
Note - A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Notice Of Default - A formal written notice to a borrower that a default has occurred and that legal action may be taken.
Origination Fee - A fee charged by most lenders--also called points--for processing a loan. A point is 1 percent of the total loan amount.
Owner Financing - A transaction in which the seller of a property agrees to finance all or part of the purchase.
Per Diem Interest - Interest charged or accrued daily.
Permanent Loan - A long term mortgage.
PITI (Principal, Interest, Taxes & Insurance) - The components of a monthly mortgage payment. If you have an "impounded" loan, then your monthly payment to the lender includes all of these and probably includes mortgage insurance as well. If you do not have an impounded account, then the lender still calculates this amount and uses it as part of determining your debt-to-income ratio.
Plans & Specifications - These documents consist of a set of architectural drawings. They typically include a site plan showing how the building will be placed on the property, a floor plan showing all dimensions, a foundation plan, exterior elevations of the building, electrical and plumbing details, as well as other details of the actual construction of the improvements.
PMI (Private Mortgage Insurance) - Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Power of Attorney - A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.
Prepaid Expenses - The costs for taxes, insurance and assessments paid before the due date.
Prepaid Interest - Interest paid before it is due. For example, at the close of a real estate transaction borrowers usually pay for the interest on their loan that falls between the closing period and the first monthly payment.
Prepayment - Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.
Prepayment Penalty - A fee that may be charged to a borrower who pays off a loan before it is due.
Prequalification - This usually refers to the loan officer’s written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.
Prime Rate - The interest rate that banks charge to their preferred customers. Changes in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.
Principal - The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Profit & Loss Statement - A financial statement showing income, expenses, and net profit over a period of time.
Property Tax - A tax imposed by a governmental entity based on the market value of a property.
PUD (Planned Unit Development) - A type of ownership where individuals actually own the building or unit they live in, but common areas are owned jointly with the other members of the development or association.
Purchase Agreement - A written contract signed by the buyer and seller stating the terms and conditions under which a property will be purchased.
Qualifying Ratios - Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The "top" or "front" ratio is a calculation of the borrower’s monthly housing costs (principal, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The "back" or "bottom" ratio includes housing costs as will as all other monthly debt.
Rate Lock (Lock In) - A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.
Real Estate Agent/Broker - A real estate agent has a state license to represent a buyer or a seller in a real estate transaction in exchange for a commission. Most agents work for real estate brokers.
Real Property - Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.
Realtor - A real estate agent, broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.
Rescission - The cancelation of a contract by law or consent by the parties involved.
Recording - The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Recording Fee - Money paid to an agent for entering the sale of a property into the public records.
Refinancing - The process of paying off one loan with the proceeds from a new loan using the same property as security.
Repossession - A legal process by which the lender forces the sale of a property because the borrower has not met the mortgage terms. Also known as foreclosure
Sale Agreement - A contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Satisfaction - The payment of a debt which satisfies an obligation.
Second Mortgage - A mortgage that has a lien position subordinate to the first mortgage.
Secondary Mortgage Market - A financial market into which primary mortgage lenders sell mortgages to obtain funds to originate more new loans. Investors include Fannie Mae and Freddie Mac.
Settlement (Closing) - A meeting between the buyer, seller, and settlement/closing agent at which title to property and funds legally change hands.
Settlement Statement - See HUD-1 Settlement Statement.
Simple Interest - Interest calculated only on the principal balance.
Survey - A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.
Sweat Equity - The non-cash value put into a piece of property by the owner, such as do-it-yourself home improvements
Tax Lien - A claim against a property for unpaid taxes.
Tenants in Common - As opposed to joint tenants or joint tenancy, when there are two or more individuals on title to a piece of property, this type of ownership does not pass ownership to the others in the event of death.
Term - The amount of time necessary to pay off a loan.
Title - A legal document evidencing a person's right to or ownership of a property.
Title Company - A company that specializes in examining and insuring titles to real estate.
Title Insurance - Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.
Title Search - A check of public title records to ascertain that the seller is the legal owner and that there are no claims or liens against the property.
Trust Account - Special accounts used by brokers and escrow agents to safeguard funds for a buyer or seller.
Trustee - A legally empowered person who holds or controls a piece of property for another person.
Truth-In-Lending-Act - A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Underwriting - The process that lenders go through to evaluate the risks posed by a particular borrower and to set appropriate conditions for the loan.
Usury - Interest charged in excess of the legal rate established by law
VA (Veterans Administration) - An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.
Variable Rate Mortgage - A loan with an interest rate that hinges on factors such as the rate paid on bank certificates and Treasury bills.
Verification Of Deposit (VOD) - A document signed by the borrower's bank or other financial institution verifying the borrower's account balance and history.
Verification Of Employment (VOE) - A document signed by the borrower's employer verifying the borrower's position and salary.
Verification of Mortgage/Rent (VOM/R) - A document signed by the borrower's lender or landlord verifying the borrower's account balance and history
Waiver - A voluntary relinquishing of certain rights or claims.
Worker's Compensation Insurance - A policy or endorsement covering the contractor, subcontractor and others who will be working on the subject property
Zoning Regulations - Regulations that control the use of land within a jurisdiction.