Mortgage terminology, and loan jargon language most commonly used in the loan process can be confusing if you’re new to it. This Franklin Mortgage dictionary is your one-step resource for user-friendly definitions to our most commonly used terms.
1040 FEDERAL TAX RETURN
The Federal tax form used by U.S. citizens and residents to report their annual income to the Federal government. The 1040 tax return must be accompanied by any applicable schedules, which provide line-item detail of various sources of income.
- Schedule A details itemized deductions.
- Schedule B details investment income.
- Schedule C details business income.
- Schedule D details capital gains/losses.
- Schedule E details supplemental income, such as rental income.
- Schedule F details farming profit/loss.
1st POSITION LIEN
A secured claim against a property that will be the first claim to be repaid should the property owner declare bankruptcy or default on the secured loan.
ABSTRACT OF TITLE
A history of a property’s title record used to prepare the Title Commitment report. An Abstract of Title lists anyone who’s ever had a claim to the property, past and present. Most states condense the abstract into a document called either the Preliminary or Title Commitment which lists only current claims to the property.
ADJUSTABLE-RATE MORTGAGE (ARM)
A mortgage loan where the interest rate is not fixed for the entire term of the loan, and can change during the life of the loan in line with movements or an index rate.
A. The interest rate on an ARM is fixed for an initial period. Following the initial fixed-rate period, the remainder of the loan term is divided into one year-long or three year-long adjustment periods.
B. Your loan has “caps” which limit the amount of interest rate adjustments. The cap limits increases and decreases in your interest rate at each adjustment. In addition, over the term of your loan, your interest rate will never increase above or decrease below the lifetime cap, from your initial interest rate.
C. ARM loans are best for customers who:
- Want lower initial payments
- Plan to move or refinance within a few years
- Are purchasing or refinancing when interest rates are expected to move lower
- Underwriting standards for ARMS are generally more flexible than with a fixed-rate loan
- Purchasing acreage or subdivision lots
A rider is an addition to a security instrument. The adjustable-rate rider outlines terms and conditions specific to an adjustable-rate loan. It must be recorded along with the security instrument at the county recorder’s office.
The adjustment cap limits the degree of interest rate changes during a specific period, during the life of the loan.
Amortization is the process of reducing principal and interest in equal installment payments at specific intervals over a set term. For example, a fully amortized loan payment is a portion of which will be applied to pay accruing interest on the loan with the remainder being applied to principal. Over time, the interest portion decreases as the loan balance decreases and the amount applied to principal increases so that the loan is paid off in the specified term.
ANNUAL PERCENTAGE RATE
The Annual Percentage Rate(“APR”) is a measure of the cost of credit, expressed as a yearly rate. The APR takes into account the amount financed, the finance charge, and the amounts and timing of the payments.
Opinion as to the monetary value of the property. For example, an appraisal of property provides an idea of how much money the property is worth in the housing market at a given time by comparing like houses that have recently been sold.
Acronym for Annual Percentage Rate.
One who borrows money and is responsible for repaying it to the lender. Also known as obligor. If the loan is secured by a mortgage, the borrower is known as a mortgagor.
The maximum increase of an adjustable-rate mortgage period and lifetime. Example: The original loan is made at 6% with a 6% cap. The interest rate on the loan may never exceed 12%, regardless of index changes. See ADJUSTABLE-RATE MORTGAGE (ARM).
A refinance transaction in which the borrower receives cash that may be used for any purpose: such as debt consolidation or home improvements.
A meeting between a lender and borrower when the loan documents are signed and the funds legally change hands. Also known as settlement.
Costs such as title insurance premiums, appraisal fees, recording fees, etc.
A 2nd borrower on a loan.
A company that collects and organizes information about an individual’s credit and payment habits. The 3 national credit bureaus are Experian, TransUnion and Equifax.
A report provided by a credit reporting bureau that provides a detailed account of the applicant’s credit history which reflects if the borrower has met financial obligations on time in the past.
A numerical assessment assigned to the customer by credit bureaus that represents a measurement of the customer’s overall credit rating. The scores are weighted and range from approximately 365 to 840. Lower scores reflect a “high risk”, while higher scores reflect a “lower risk”. Your credit score could impact your interest rate. Each credit bureau has its own credit score system.
DEED OF TRUST
A security instrument used by financial institutions that places a lien on the property.
A document issued by the court that dissolves the marriage relation.
The difference between the purchase price and the mortgage amount for home purchase transactions.
The cash deposit paid by the prospective buyer of real property, as evidence of good faith intentions, to complete the purchase transaction.
EQUAL CREDIT OPPORTUNITY ACT (ECOA)
A Federal act passed in 1974 that prohibits discrimination in lending on the basis of sex, marital status, race, color, religion, national origin, age or receipt of public assistance.
Usually refers to a non interest bearing account, in which the borrower contributes to monthly in addition to their standard Principal & interest payment. When real estate taxes or homeowners insurance is due, the mortgage company is responsible fro collecting and paying those bills.
The nation’s largest mortgage investor created in 1968 by an amendment to Title III of the National Housing Act. This stockholder-owner corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential property.
FIRST POSITION LIEN
A secured claim against a property that will be the first claim to be repaid should the property owner someday declare bankruptcy or default on the secured loan.
A mortgage having a rate of interest that remains the same for the life of the mortgage. A fixed-rate loan offers the security of a predictable monthly principal and interest payment over the life of the loan. This allows protection from rising interest rates in the markets. Fixed-rate mortgages are best for customers who:
- Plan to reside in their homes a long time
- Are on limited or fixed incomes
- Are more comfortable with regular payments
- Are buying or refinancing when interest rates are relatively low
Insurance against loss by flood damage. Required in federally designated special Flood Hazard Areas.
The disbursement of loan funds.
A letter to the lender from the donor stating a gift of money has been made to the buyer in order to purchase specific property. The relationship of the donor and donee is stated, as well as the amount of the gift.
One who received property rights when a grant is made.
One who grants property or property rights to another.
GROSS MONTHLY INCOME (BORROWER)
The total amount the borrower earns per month, before any expenses are deducted.
Insurance protecting real property against loss caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.
HOMEOWNERS’ ASSOCIATION (HOA)
An association of people who own homes in a given area, formed for the purpose of improving or maintaining the quality of the area.
HOMEOWNERS’ ASSOCIATION DUES
A monthly payment paid to the association for the maintenance and care of the common areas.
HUD-1 (or HUD-1a)
Final statement of the actual settlement costs of the loan and all other disbursements of a loan’s proceeds.
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable-rate mortgage and that earned by other investments, which is then used to adjust the interest rate on an adjustable-rate mortgage. The Wall Street Journal publishes index information.
Money charged over time for the use of money.
Percentage paid for the use of money, usually expressed as an annual percentage.
Property used for investment purposes, such as rental properties and vacant land.
A method of geographically identifying a parcel of land that is acceptable in a court of law.
LENDER PAID MORTGAGE INSURANCE (LPMI)
A secured financial interest or legal encumbrance on a property. For example, a secured loan appears as a lien on the property’s title report.
The order in which liens will be repaid when the property is transferred to a new owner.
The amount of money originally lent to a borrower.
The loan term is the period of time over which the loan will be paid. First mortgage loans typically have terms of 40, 30, 20 or 15 years.
LOAN TO VALUE RATIO (LTV)
The loan amount in relationship to the appraised value or selling price expressed as a percentage.
A constant number, set in the terms of the note, added to an rate index to compute the interest rate on an adjustable-rate mortgage. This fixed number is added to an index to determine the new interest rate when a new change period begins.
A written instrument that creates a lien upon real estate as collateral for the payment of a specified debt. The borrower retains possession and use of the property.
A property used as a residence by a renter/tenant instead of the owner of the property.
An agreement containing an expressed and absolute promise of the signer to pay to a named person or bearer a definite sum of money at a specified date or on demand.
NOTICE OF RECISION
Borrowers’ signed acknowledgement that they wish to cancel their loan. This applies only to customers who are refinancing.
NOTICE OF RIGHT TO CANCEL
Under Regulation Z, customers refinancing must be notified they are entering into a transaction that will result in a lien against their primary residence. This document explains they have the right to cancel (right of recision) the transaction, at no cost, within 3 business days from the date of signing the closing documents on a loan.
The owner's primary residence.
A charge which is assessed when the loan is paid before it’s due to compensate the investor for the loss of anticipated interest income.
The property in which the customer resides the majority of the time.
PRINCIPAL AND INTEREST (P & I)
This refers to the principal and interest portions of a monthly mortgage payment.
PRIVATE MORTGAGE INSURANCE (PMI)
Insurance against a loss by a lender normally required in the event the lender has lent more than 80% of the value of the property securing the loan. The premium is paid by the borrower and is included in the mortgage payment.
QUIT CLAIM DEED
A deed operating as a release; intended to pass any title, interest or claim that the grantor may have in the property, but not containing any warranty that such title is valid, or containing any warranty or covenants for title.
The amount charged by a public record documents office to record within the county.
The creation of a new loan to pay off existing debts.
RELEASE OF LIEN
When a lien against the property is satisfied (paid off) the note holder records a document that reflects the discharge of the obligation and releases the lien recorded against the property. This document must be recorded with the county.
A 2nd loan on the same property, that is in a junior lien or subordinate position.
A property used by a person as a second residence, not as an investment.
Final statement of the actual settlement costs of the loan.
A lien taking a legal title position junior to another lien that recorded later. For example, if a mortgage lien recorded in 2000, it can subordinate to a lien recorded in 2003.
A document prepared by a licensed surveyor that verifies the accuracy of a property’s legal description, plat maps, easements or other information found in a title search.
The right or ownership in land; also, the evidence of such ownership.
A written report showing all current claims against a property before a sale or loan transaction. After completion of the transaction, a title insurance policy is issued.
Insurance against certain loss resulting from undisclosed defects or title to a specifically described parcel of real property.
Discloses loan amount, finance charges and APR. This disclosure also states what property is being purchased or refinance as well as if there is a pre-payment penalty.
The analysis of a customer’s credit capacity and the loan’s collateral upon which a risk is given.
VERIFICATION OF MORTGAGE (VOM)
Documentation that establishes the customer’s mortgage payment history.
VERIFICATION OF DEPOSIT (VOD)
Documentation that confirms the customer has access to specified amounts of money through a bank or investment account.
VERIFICATION OF EMPLOYMENT (VOE)
Documentation that confirms the customer works in the job and at the employer listed on the handwritten loan application and receives a stream of income from this source. Verifications of Employment confirm the customer’s position title, date of hire, employment type, hours of work per week, frequency of payment and salary.
A document that reports to the Federal government income earned by salaried employees. This document reports employees’ total gross and withholdings made during the previous tax year. Employers must mail W-2s by January 31 of each year for the prior tax year.
A deed in which the grantor or seller warrants or guarantees good title is being conveyed to the buyer and essentially gives the buyer ownership of the property.