Mortgage Terminology

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Adjusted Basis

The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
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Adjustment Date

The date that the interest rate changes on an adjustable-rate mortgage (ARM).
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Adjustment interval

On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years depending on the index.
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Adjustment Period

The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
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Affordability Analysis

An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
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AIG United Guaranty

One of three organizations in Canada offering mortgage default insurance on high-ratio mortgages.
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Amortization

Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
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Amortization Term

The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
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Annual percentage rate (A.P.R.)

APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans.
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Appraisal

An estimate of the value of property, made by a qualified professional called an "appraiser".
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Appraised Value

An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
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Assessment

A local tax levied against a property for a specific purpose, such as a sewer or street lights.
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Assignment

The transfer of a mortgage from one person to another.
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Assumability

An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
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Assumption

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.
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Assumption Fee

The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
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Balloon Mortgage

A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty-year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.
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Balloon Payment

The final lump sum paid at the maturity date of a balloon mortgage.
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Biweekly Payment Mortgage

A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
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Blanket Mortgage

A mortgage covering at least two pieces of real estate as security for the same mortgage.
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Borrower (Mortgagor)

One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
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Bridge Loan

A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."
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Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
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Cash Flow

The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.).
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Caps (interest)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage which may change per year and/or the life of the loan.
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Caps (payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
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Change Frequency

The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
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Closing

The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about approx.1.5 - 2% of the mortgage amount.
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Closed Mortgage

Any mortgage with restrictions on additional payments made before its maturity. Most mortgages in Canada are closed. This is the opposite of an open mortgage.
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CMHC (Canadian Mortgage and Housing Corporation)

One of three organizations in Canada offering mortgage default insurance on high-ratio mortgages.
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Closing Costs

These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an Origination fee (if one is being charged) property taxes, charges for title insurance and appraisal fees, etc. Closing costs will vary.
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Construction loan

A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.
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Consumer Reporting Agency (or Bureau)

An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.
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Contract sale or deed:

A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.
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Conventional Mortgage

Any mortgage with a loan to value (LTV) ratio of 80% or less (ie - a mortgage with a down payment of 20% or more).
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Conversion Clause

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
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Credit Report

A report documenting the credit history and current status of a borrower's credit standing.
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Credit Risk Score

A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.
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Debt-to-Income Ratio

Also known as the TDS, or Total Debt Service Ratio. The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.
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Deed of trust

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

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
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Deferred interest

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.
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Delinquency

Failure to make payments on time. This can lead to foreclosure.
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Discount Point

see point
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Down Payment

Money paid to make up the difference between the purchase price and the mortgage amount.
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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.
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Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
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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.
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Equity

The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property.
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Escrow

An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.
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Escrow Disbursements

The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
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Escrow Payment

The part of a mortgagor's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

 

First Mortgage

The primary lien against a property.
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Fixed Installment

The monthly payment due on a mortgage loan including payment of both principal and interest.
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Fixed Rate Mortgage

The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
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Fully Amortized ARM

An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
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Foreclosure

A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
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GDS (Gross Debt Service Ratio)

The annual charges for principal, interest, taxes and heat divided by the annual gross household income. This can also be figured out on a monthly basis. The maximum GDS ratio for mortgage qualification is 35% for clients with credit scores under 680 and 44% for those with scores over 680. The GDS ratio along with the TDS ratio (total debt service ratio) are used in conjunction with each other to determine mortgage qualification on income.
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Genworth Financial

One of three organizations in Canada offering mortgage default insurance on high-ratio mortgages.
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Gross Debt Service Ratio (GDS)

The annual charges for principal, interest, taxes and heat divided by the annual gross household income. The maximum GDS ratio for mortgage qualification is 35% for clients with credit scores under 680 and 44% for those with scores over 680. The GDS ratio along with the TDS ratio (total debt service ratio) are used in conjunction with each other to determine mortgage qualification on income.
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Guaranty

A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
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Guarantee Mortgage

A mortgage that is guaranteed by a third party.
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Hazard Insurance

A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
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High Ratio Mortgage

Any mortgage in Canada with a loan to value (LTV) of more than 80% requiring CMHC mortgage default insurance. For example, a mortgage with less than 20% down payment. The opposite of this would be a Conventional Mortgage.
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Initial Interest Rate

This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as "start rate" or "teaser."
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Interest Only Mortgage

A loan where the payments cover the interest only and no principal is paid down. These mortgage loans are typically for one year terms and as there is not principal paid back, there is no amortization period. Interest Only mortgages are primarily given in Canada through private mortgage lenders.
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Installment

The regular periodic payment that a borrower agrees to make to a lender.
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Interest

The fee charged for borrowing money.
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Interim Financing

A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
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Investor

A money source for a lender.
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Late Charge

The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
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Lease-Purchase Mortgage Loan

An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.
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Liabilities

A person's financial obligations. Liabilities include long-term and short-term debt.
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Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
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Loan

A sum of borrowed money (principal) that is generally repaid with interest.
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Loan-to-Value Ratio (LTV)

The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
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Lock

Lender's guarantee that the mortgage rate quoted will be good for a specific number of days from day of application.
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Market Value

The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
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Maturity

The date on which the principal balance of a loan becomes due and payable.
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Monthly Fixed Installment

That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing.
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Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.
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Mortgage Banker

A company that originates mortgages exclusively for resale in the secondary mortgage market.
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Mortgage Broker

An individual or a company who arranges mortgage loans. A mortgage broker works for the borrower and not the bank and has access to the lowest mortgage rates by dealing with multiple mortgage lenders. This is a free service for qualified borrowers.
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Mortgage Term

The actual length of time for which the money is borrowed. The most common mortgage term in Canada is 5 years, but can also be 6 months, 1, 2, 3, 4, 5, 6, 7 or 10 years. Not to be confused with Amortization.
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Mortgagee

The lender.
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Mortgage Default Insurance

Insurance that protects the lender should the borrower decide to default on the mortgage loan. This is what allows a borrower to purchase a home with less than 20% down payment.
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Mortgage Life Insurance

A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
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Mortgagor

The borrower or homeowner.
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Negative Amortization

Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.
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Negative Cash Flow

When operating expenses on a rental property are greater than the rental income.
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Net Operating Income (NOI)

- Income produced by a property after deducting all operating expenses (not including mortgage payments) from the gross rental income produced by the property. Cash flow is determined by subtracting mortgage payments from the NOI.
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One-year adjustable

Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.
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Open Mortgage

This allows the borrower to make additional payments of any amount, or pay off the entire mortgage at any time without penalty.
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Positive Cash Flow

When the rental income from an investment property is greater than the operating expenses of that property.
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PITI

Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
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Power of Attorney

A legal document authorizing one person to act on behalf of another.
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Pre-Approval

The process of determining how much money you will be eligible to borrow before you apply for a loan.
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Prepayment

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
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Prepayment Penalty

Money charged for an early repayment of debt. Prepayment penalties are allowed in some form.
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Prime Rate

The rate charged by banks to their best customers. The prime rate is also used as a reference point for many loans.
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Principal

The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
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Principal Balance

The outstanding balance of principal on a mortgage not including interest or any other charges.
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Principal, Interest, Taxes, and Insurance (PITI)

The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
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Private Mortgage

Any mortgage held by a private individual as opposed to an institution such as a bank.
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Projected Income

Estimated income from an investment or rental property.
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Rate Lock

A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
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Refinance

Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
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Reverse Annuity Mortgage (RAM)

A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as collateral for and repayment of the loan.
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Revolving Liability

A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services.
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Satisfaction of Mortgage

The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
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Second Mortgage

A mortgage made subsequent to another mortgage and subordinate to the first one.
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Secondary Mortgage Market

The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.
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Security

The property that will be pledged as collateral for a loan.
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Seller Take Back

An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage also known as a vendor take back
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Simple Interest

Interest which is computed only on the principle balance.
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Standard Payment Calculation

The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
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Step-Rate Mortgage

A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
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Survey

A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
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Sweat Equity

Equity created by a purchaser performing work on a property being purchased.
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Term

The actual length of time for which the money is borrowed. The most common mortgage term in Canada is 5 years, but can also be 6 months, 1, 2, 3, 4, 5, 6, 7 or 10 years. Not to be confused with Amortization.
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Third-party Origination

When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
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Title

A document that gives evidence of an individual's ownership of property.
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Title Insurance

A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.
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Title Search

An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
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TDSR (Total Debt Service Ratio)

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
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TDS (Total Debt Service Ratio)

The monthly charges for principal, interest, taxes and heat divided by the total of monthly gross household income and current monthly debt amount (ie - credit card minimum payments, car and loan payments, etc.). This can also be figured out on an annual basis. The maximum TDS ratio for clients with credit scores under 680 is 42% and 44% for those with credit scores above 680. . The TDS ratio is used in conjunction with the GDS ratio (Gross Debt Service Ratio) to qualify applicants for mortgages in Canada based on their income.
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Total Debt Service Ratio (TDS)

The monthly charges for principal, interest, taxes and heat divided by the total of monthly gross household income and current monthly debt amount (ie - credit card minimum payments, car and loan payments, etc.). This can also be figured out on an annual basis. The maximum TDS ratio for clients with credit scores under 680 is 42% and 44% for those with credit scores above 680. . The TDS ratio is used in conjunction with the GDS ratio (Gross Debt Service Ratio) to qualify applicants for mortgages in Canada based on their income.
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Underwriting

The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
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Variable Rate Mortgage (VRM)

see adjustable rate mortgage
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Vendor Take back (VTB) (VOD)

A mortgage that is taken by the seller of a property from the purchaser as partial payment of the purchase price. A vendor take back mortgage is typically registered as a second mortgage. Also known as a Seller Take Back.
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Verification of Deposit (VOD)

A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
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Verification of Employment (VOE)

A document signed by the borrower's employer verifying his/her position and salary.
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Warehouse Fee

Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.
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Zoning

The regulation of land for specific purpose as determined by the municipality.
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