Glossary

Adjustable-Rate Mortgage (ARM)

A mortgage loan that permits the lender to periodically adjust the interest rate on the basis of changes in a specified index.

Amortization

Gradual reduction of the mortgage debt through periodic payments scheduled over the mortgage term.

Amortization Schedule

A timetable for payment of a mortgage that shows the amount of each payment that should be applied to interest and principal and the remaining unpaid principal balance after each payment is applied.

Appraisal

A report that sets forth an opinion or estimate of value.

Cash-Out Refinance

A refinancing transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens.

Closing Costs

This generally includes an origination fee, title exam, title insurance, survey, attorney’s fees, prepaid items such as taxes and insurance escrow payments, and any discount points paid.

Conventional Mortgage

A mortgage that is not insured or guaranteed by a federal government agency—the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), or Rural Development (RD). Conventional mortgages delivered to Fannie Mae must also be conforming mortgages.

Debt-To-Income Ratio

A ratio derived by dividing the borrower’s total monthly obligations (including housing expense) by his or her stable monthly income. This calculation is used to determine the mortgage amount for which a borrower qualifies. This term is used interchangeably with “total debt-to-income ratio” and “expense ratio.”

Earnest Money Deposit

A deposit submitted with a purchase offer to show that the buyer’s offer is being made in good faith.

Escrow Account

A trust account that is established to hold funds allocated for the payment of a borrower’s property taxes and assessments by special assessment districts, ground rents, insurance premiums, condo or homeowners’ association or planned unit development association dues and similar expenses as they are received each month in accordance with the borrower’s mortgage documents and until such time as they are disbursed to pay the related bills.

Lender-Purchased Mortgage Insurance

Mortgage insurance coverage for a conventional mortgage loan that the lender pays for by using its own funds, rather than requiring the borrower to include periodic accruals for such coverage as part of his or her mortgage payment.

Loan Estimate

A form required by federal law that provides disclosures to borrower(s) to help them understand the key features, costs, and risks of the mortgage loan for which they are applying. References to the “loan estimate” include the Loan Estimate and Good Faith Estimate forms, as applicable, based on the application date of the mortgage loan.

Loan-to-Value (LTV) Ratio

The relationship between the original loan amount of the first mortgage and the property’s appraised value (or sales price, if it is lower).

Mortgage Insurance (MI)

A financial backing type under which a private insurer (and sometime a state or local entity) insures the mortgagee against losses from borrower default, by agreeing to cover a percentage of the losses in return for the payment of a specified mortgage insurance premium.

Mortgage Interest Rate

The rate of interest in effect for the periodic installment due. For fixed-rate mortgages or for ARMs that have an initial fixed-rate period, it is the rate in effect during that period. For ARMs after any initial fixed-rate period, it is the sum of the applicable index and the mortgage margin (rounded as appropriate and subject to any per-adjustment or lifetime interest rate ceilings).

Refinance 

The repayment of a debt from the proceeds of a new loan using the same property as security. Fannie Mae also considers the current owner’s placement of financing on a property that is not financed as a refinance transaction.

Settlement Statement

A form required by federal law that provides disclosures to borrower(s) of the final loan terms and costs of the mortgage loan transaction. References to “settlement statement” include the HUD-1 Settlement Statement and Closing Disclosure forms, as applicable, based on the application date of the mortgage loan.

Title Insurance

Insurance against loss resulting from defects in the title to real property.

Underwriting Documents

All of the documentation used to support the lending decision for a mortgage—such as the loan application and other documents used to verify a borrower’s employment, income, deposits, and credit history.