The highest credit-rating of a borrower. Different lenders may have different FICO scores to qualify for this rating; usually, most lenders consider a FICO score of 720 or higher for this rating. Borrowers with this rating are given better loans and lower rates of interest.

Adjustable Rate Mortgage (ARM)

A mortgage or mortgage refinance loan whose interest rates remains fixed for an initial number of years and is then adjusted, usually every year. For example, a 3/1 ARM means a fixed interest will apply for the first three years and then the rate will change every year therafter.


A credit-rating between prime and sub-prime, but nearer to prime. May also be referred to as Alt-A.


The structure of repayments against a loan that finally leads to the paying-off of the loan plus interest over a specified period of time.

Amortization schedule

A chart that shows a breakdown of each monthly repayment amount into: 1) how much of it will go towards the principal amount, and 2) how much of will go towards interest payment.

Annual Percentage Rate (APR)

The exact annual cost of a loan. It is more than the interest rate because it includes upfront payment, closing costs or pre-paid percentage points. It is a better indicator of the actual repayment outgoings than interest rates. Every lender and broker is required by US federal law to clearly state the APR in the specified column of the loan documentation.


The form that an intending borrower must complete as the first step towards obtaining a loan. The intending borrower must enter information about his or her income, assets, liabilities, and such data that will enable the lender to assess the borrower's creditworthiness.

Balloon Loans

A category of loan in which the regular monthly repayments have to be followed by a lump sum payment of the total remaining balance.


A pre-specified maximum rise in interst rate or monthly payment whether at adjustment time (in an ARM loan) or through the entire duration of the mortgage loan. ARM loans normaly have both annual and lifetime caps. Also known as Rate Cap.

Cash Reserve

Cash the borrower has to hold in reserve over and above the down payment and closing costs. that is sometimes required to be held in reserve in addition to the down payment and closing costs. The amount of cash reserve is specified by the lender. Not al lenders insist on casr reseve.


The formal transfer of ownership of a property from seller to buyer. This happens through a formal face-to-face meeting between the buyer, seller, settlement agent, and the buyer and seller's agents. Clsoing costs are paid by the buyer and/or seller. Also known as Settlement.

Closing Costs

The full cost of transferring ownership of the property from the seller to the buyer. It does not include the purchase price. Closing costs usually includes fees for obtaining loan, appraisal of the property, survey, real estate agent's commission, taxes, etc. Usually amounts to 2% to 4% of the purchase price.

Conforming loans

Loans that conform to GSE guidelines (see GSE Guidelines).

Conventional Mortgage

A mortgage that is not backed by any insurance or guarantee by the US federal government.

Credit Report

A report providing information about a borrower's credit history and current debts. This report is provided by credit bureaus.

Credit Score

An electronically generated score indicating how likely a person is to smoothly repay a loan. Lenders use this score to analyze a loan applicant's credit report and to assess his or her your creditworthiness.

Debt-to-Income Ratio

A ration arrived at by dividing gross monthly debt by gross monthly income. It is experessed as a percentage. A crucial indicator of an applicant's creditworthiness. Also known as debt-to-earnings ratio.


Failure to make monthly payments on a mortgage as agreed between the lender and the borrower.

Down Payment

The amount of money the buyer pays the lender at the time of closing. It is paid by the buyer in advance and is not part of the mortgage loan. Standard down payment is 20%. Smaller down payments may require mortgage insurance.

Earnest Money

Money paid by a buyer to a seller to indicate the former's seriousness abouit buying the property. It becomes part of the down payment if the buyer's offer to buiy is accepted; is returned to the buyer if the offer is rejected; or is forfeited by the buyer if he or she backs out.

Fannie Mae

Acronym for the Federal National Mortgage Association, a privately-owned but publicly charted company created by the US Congress. It increases the supply of home mortgage loans in the United States.

Federal Home Loan Banks (FHLBs)

These are GSEs (see GSE below). They number 12 FHLBs in total. They are owned by more than 8,000 financial institutions all 50 states, possessions, and territories of the United States. The shares of FHLBs are not publicly traded and their owning institutions are able to obtain low-cost funds for home mortgage lending and other purposes such as small businesses, and rural / agricultural development.

First Mortgage

The primary lien against the property being mortgaged. In the event of default, the first mortgage has first claim.

Fixed-Rate Mortgage (FRM)

A mortgage loan whose monthly repayments are decided at the commencement of the loan and remain constant throughout the lifetime of the loan.


The legal process that entitles the lender sell a property to recover his dues after the mortgage loan-taker has failed to make the repayments as agreed. Also known as Repossession of Property.

Freddie Mac

Acronym for the Federal Home Loan Mortgage Corporation, a privately-owned but publicly charted company created by the US Congress. Like Fannie Mae, It increases the supply of home mortgage loans in the United States.


Short for 'government-sponsored enterprise'. GSEs are a group of companies created by the US Congress to enhance the flow of low-cost credit to the following sectors: agriculture, home mortgage, and education. Of these three sectors, home mortgage forms a majority portion of credit flowing out of GSEs. There are three groups of mortgage finance GSEs: Fannie Mae, Freddie Mac, and Federal Home Loan Banks.

GSE Guidelines

Guidelines issued by GSEs for amounts of loan disbursable. In 2008, the amounts are $ 417,000 for single family home, $ 533,850 for two family, $ 645,300 for three family, $ 801,950 for four family, and $ 208,500 for second mortgage loan. The GSE guideline for a single family home in a high cost-area is $ 625,500.

Homestead Credit

A property-tax credit program provided by the state in some states only. It reduces property taxes. Also known as Homestead Exemption.

Jumbo Loans

Loans that become non-conforming because the loan amount exceeds the GSE guideline limits. (see GSE Guidelines and Non-Conforming Loans).

Late Payment Charge

Penalty to be paid by the homeowner in the event of delay in mortgage repayment. Varries from state to state, type of loan, etc.


A formal guarantee by a lender that the borrower will be charged a specific interest rate for a specific period of time. Also known as Rate Lock and Rate Lock-In. Market Value - The amount that a seller may expect to obtain in the open market, based on current market conditions and recent comparable sales. An appraised value is an estimate of the current fair market value.


A legal agreement between a lender and a borrower in which the latter provides a property to used as collateral for the loan.

Mortgage Broker

An individual or company that brings to borrowers offers from different lenders, and is paid a commission for the service.

Mortgage Insurance

Insurance cover purchased by the borrower to protect the lender in the event of default. When this insurance is obtained from a private company instead of the federal government, it is also known as Private Mortgage Insurance or PMI.

Non-conforming loans

Loans that don't conform to the GSE guidelines. Non-conforming loans are typically priced higher by 0.25% to 0.50% than conforming loans. (see GSE Guidelines and Conforming Loans).

Origination Fee

The money the borrower pays the lender to meet with administrative costs of making the mortgage loan. Usually, origination fees amount 1% to 2% of the mortgage are common, and paid at the time of closure.

Owner Financing

A property purchase in which the seller is also the lender providing all or part of the financing for the buyer.

Payment Cap

See Cap.


The first letters of the typical elelemts of a mortgage repayment: Principal, Interest, (property) Taxes, and Insurance.


Money that is sometimes paid by the buyer to the lender at closing in order to reduce the monthly interest rate. as a way to lower the monthly payment interest rate. One point equals 1% of the mortgage loan amount. Also known as Discount Points.

Prepayment Penalty

A penatlty charged to a borower who repays a mortgage debt in full before the due date. The logic behind this is that the lender does not make the interest earnings that he has expected to make through the agreed life of the mortgage loan.


The actual amount of money borrowed. It does not take into account the interest and other fees that are included in repayments by the borrower.

Qualifying Ratios

Ratios calculated by a lender to determine if a loan applicant qualifies for the loan. The factors considered include income and current debt, size of the loan applied for, etc.


The taking of a new mortgage loan to pay off an existing mortgage loan, usually to take advantage of a lower interest rate or to take encahs part of the home's equity.

Second Mortgage

A mortgage obtained after another mortgage has come in place for a single property. Second mortgage is subordinate to first mortgage, which means that in the event of default, the lender of the second mortgage is paid after the lender of the first mortgage.


A US federal law mandating disclosure of the Annual Percentage Rate (APR) to home buyers shortly after they apply for the loan. It also makes it obligatorty for the lender to fully disclose all terms and conditions. Such details are provided by the lender in statement known as the 'Truth-in-Lending Statement'.