Mortgage Glossary

Debt-to-Income Ratio: Long-term debt expenses as a percentage of monthly income. Lenders use this ratio to qualify borrowers for mortgage loans, typically setting a maximum debt-to-income ratio of 36%.

Deed of Trust: In many states, this document is used in place of a mortgage to secure the payment of a note.

Department of Veteran Affairs (VA): An independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low downpayment mortgages to eligible veterans by guaranteeing the lender against loss.

Discount Fee: In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give the borrower a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate.

Down Payment: When you borrow money for a home, any lender will ask you to contribute some of your own money to the purchase of the house. A lender will usually require a down payment of at least 20% of the sales price unless the buyer purchases mortgage insurance.

Due-on-sale Clause: A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money: A sum of money given to bind a sale of real estate; a deposit.

Equal Credit Opportunity Act (ECOA): Is a federal law that requires lenders and other 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.

Equity: The home owner's interest in a property; the difference between fair market value and the current amount the owner owes on the property.

Escrow: An amount set up by the lender into which the borrower makes periodic payments, usually monthly, for taxes, hazard insurance, assessments, and mortgage insurance premiums.

Fair Market Value: The price at which property is transferred between a willing buyer and a willing seller, each of whom has reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

Fannie Mae: See FNMA.

Farmers Home Administration (FmHA): Provides financing to farmers and other qualified borrowers.

Federal Home Loan Mortgage Corporation (FHLMC): Is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. Also called Freddie Mac.

FHA: FEDERAL HOUSING ADMINISTRATION - A division of the Department of Housing and Urban Development. It's main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA): A taxpaying corporation created by Congress that purchases and sells conventional residential mortgages, as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

FHA Loan: A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans (loan amount varies by region), they are generous enough to handle moderately-priced homes almost anywhere in the country.

FHA Mortgages: The Federal Housing administration, a government agency created in 1934, provides insurance on some types of mortgage loans. An FHA-insurce loan also allows you to buy a house with a low down payment, ranging from 3% to 5% depending on the price of the home. The buyer pays a one-time fee of 3.8% of the loan amount for the mortgage insurance premium at closing time, and there is an additional annual fee for low down payment loans.

First Mortgage: A real estate loan that creates a primary lien against real property. Also known as First Trust.

FNMA: FEDERAL NATIONAL MORTGAGE ASSOCIATION - A private corporation created by Congress to support the secondary mortgage market. FNMA sells mortgage-backed securities backed by pools of conventional loans. Payment of principal and interest on these securities is backed by the U.S. Government. Popularly known as Fannie Mae.

Freddie Mac: Federal Home Loan Mortgage Corporation.

Fixed Rate Mortgage: A mortgage on which the interest rate is set for the term of the loan.

Foreclosure: In the event that the borrower fails to pay back the loan through mortgage payments, the lender has the right to put the home up on the market for sale to recover the money owed to the lender. This is known as foreclosure.