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Mortgage Servicing Glossary

Mortgage Servicing Glossary

Review our terms to get familiar with the words and phrases you’re likely to encounter in the world of mortgage servicing.

ARM (adjustable-rate mortgage): Mortgage loan with an interest rate that can change during the life of the loan (based on an industry-standard rate index). If the rate index changes, your regular payment amount may increase or decrease. However, your change in payment usually has an upper limit, or “cap.” Also called a variable-rate mortgage.

Amortization: Gradual reduction in the principal amount owed on a debt. During the early years of your loan, most of each payment goes to pay interest charges. But as time passes, that changes. During the final years of your loan, most of your payment goes to pay the loan’s principal.

Amortization schedule: Schedule (or “table”) that breaks down your monthly payments by principal and interest. You can use this schedule to see the amounts of principal and interest you have to repay over the life of your loan.

Appraisal: Independent assessment of a property’s value. For single-family homes, the main factor is the recent sale of similar nearby properties (called “comparables” or “comps”). Under some conditions, a lender may decide against an on-site, manual appraisal and will instead use an automated appraisal system such as a broker price opinion (BPO) or an automated valuation model (AVM). A full physical appraisal is the norm for a first mortgage loan that is secured with property.

APR (annual percentage rate): Annual cost of borrowing money. Like an interest rate, the APR is expressed as a percentage of a property’s purchase price (that is, the principal amount). But unlike an interest rate, the APR includes other charges and fees that reflect the total loan cost—including interest payments, private mortgage insurance premiums, closing costs, discount points paid, and loan-origination fees. The Federal Truth in Lending Act (TILA) requires every loan agreement to disclose the APR. Because all lenders must follow the same rules to calculate the APR, you can use the APR to help compare the overall cost of similar loans.

Bankruptcy: Legal process in which an entity (person or company) that can’t repay their outstanding debts (the debtor) can be freed from having to repay some or all of what they owe. Bankruptcy usually starts as a legal petition by an attorney on behalf of the entity that is past due on bills and has no way to repay. The process is then approved and imposed by a court order. The court reviews all of the debtor's assets (money and possessions), which may be sold to repay part of the outstanding debt to those to whom it is owed (the creditors).

Cash for keys: Foreclosure alternative where your lender pays you to vacate your home in a timely and orderly way; the money is intended to help pay for your relocation costs. Lenders very much want to avoid the hassle and expense of foreclosure, so they will sometimes pay a financially distressed homeowner to move out on an agreed-upon date and leave the home in good repair and “broom-swept” clean.

Credit bureau: Business that gathers, records, updates, and stores financial records of people who have been granted credit. The credit bureau then provides consumer credit reports to lenders and other authorized users for a fee. The three major U.S. credit bureaus are Equifax, Experian, and TransUnion. By federal law, you’re entitled to receive one free report each year from each of the three agencies. You can get free copies of your reports every year from the top three credit-reporting bureaus by visiting Annualcreditreport.com or by calling (toll-free) 877-322-8228.

Curtailment. Extra payment made to reduce a loan’s unpaid principal balance. Also called “prepayment.”

DIL (deed in lieu of foreclosure, or “deed-in-lieu”): Foreclosure alternative in which the homeowner voluntarily transfers ownership of mortgaged property to the lender. In turn, the lender releases the homeowner from the mortgage. The lender also does not report a foreclosure to the credit bureaus.

Default: Failure to make mortgage payments on time. Ongoing default can lead to late fees, a drop in your credit score, and ultimately, foreclosure and eviction.

Deferment: Repayment plan that permits mortgage payments that were set aside during forbearance to be paid at the end of the loan term. A deferment is not automatic; you must arrange it in advance with your loan servicer. Whether deferment is an option for you and how many payments can be deferred depends a variety of factors that your loan servicer will discuss with you if the need arises.

Delinquency: Failure to make mortgage payments on time. Mortgages are usually described as 30, 60, or 90 days delinquent (past due). After a homeowner is 90 days delinquent, the loan is considered seriously delinquent.

Down payment: Substantial up-front payment (usually in cash) that a homeowner makes out-of-pocket in the early stages of buying property. The down payment is a percentage (often between 3% and 20%) of the purchase price of the property. The buyer typically takes out a mortgage loan to pay the remaining amount owed to the seller.

Due date: Date by which we need to receive your mortgage payment, as shown on your regular account statement. If your payment arrives at our office 15 or fewer days after your due date (the “grace period”), your payment is considered “late,” but we will not charge you a late fee. It’s very important that we receive your payment no later than the due date.

Escrow: Part of your regular mortgage payment; it’s money we hold in reserve (or “in escrow”) for you. We deposit those funds into an escrow account in your name, and we use that money to pay your homeowner’s insurance, property taxes, and similar expenses when those bills come due. Sometimes called an “impound account.”

Escrow analysis: Analysis of your escrow account that we perform at least annually (or more often due to specific events, such as a loan modification). The analysis compares the amount of money in your account with the funds paid out to cover property tax and homeowner insurance bills. The analysis also projects the funds your account will need to cover what we will probably payout for you over the next year.

Escrow cushion: Additional amount of money (beyond the amount needed to cover actual expenses) that we require you to pay into your escrow account as part of your regular mortgage payment. The cushion’s purpose is to help ensure that your escrow account always has enough money in it to pay your taxes, insurance, and other related bills. The cushion is also called a “reserve”.

Escrow disbursement: Withdrawal of money we make from your escrow account to pay your property taxes, homeowner’s insurance, and other similar expenses (for which we have saved up money on your behalf).

Escrow shortage: Occurs when an escrow analysis reveals that the amount of money set aside in your escrow account is less than the projected target balance. Escrow shortages most often occur when property taxes or insurance premiums go up. When this happens, you may need to make up the shortage by increasing your regular mortgage payment. Or you can make a separate, lump-sum payment into your escrow account.

Escrow surplus: Occurs when our escrow analysis reveals that the amount of funds set aside in an escrow account is greater than the projected target balance. Escrow surpluses most commonly occur when property taxes or insurance premiums go down. Depending on the amount of the surplus (and several other factors), we may send you an escrow-surplus refund check; or we may apply the surplus toward a future escrow balance. Also called an “overage.”

Eviction: Legal action a lender takes to remove occupants from a foreclosed home if they refuse to leave after they have lost the legal right to live there. How long occupants are allowed to stay in a house after a foreclosure sale varies from state to state.

FCRA (Fair Credit Reporting Act): Law passed by Congress to give borrowers certain rights when dealing with credit bureaus. All credit bureaus are required to provide accurate credit histories to authorized businesses for use in evaluating applications for insurance, employment, credit cards, and loans.

Fannie Mae (Federal National Mortgage Association, or FNMA): Federally chartered enterprise (also known as a GSE, or government-sponsored enterprise) that is owned by private stockholders. Fannie Mae buys residential mortgages from lenders (such as banks and mortgage companies), pools them into mortgage-backed securities (MBSs), and sells those securities to investors. By buying mortgages and guaranteeing the timely payment of principal and interest to investors (called “underwriting”), Fannie Mae assumes the bulk of the credit risk in mortgage lending and provides funds that banks and other lenders can loan to homebuyers.

FHA (Federal Housing Administration): Agency of the U.S. government that promotes homeownership opportunities (part of HUD, the U. S. Department of Housing and Urban Development). The FHA provides mortgage insurance to lenders to cover the losses that occur when homeowners default on their mortgage payments. This kind of government backing (or, underwriting) removes much of the risk from mortgage lending and encourages lenders to extend FHA-backed, low-down-payment loans to low-income, moderate-income, and first-time homebuyers who may not qualify for a conventional mortgage.

FHA mortgage: Mortgage loan insured by the FHA. You may be able to qualify for an FHA loan if you don’t have enough money to make the down payment that’s needed for a conventional mortgage.

FHFA (Federal Housing Finance Agency). Federal regulatory agency of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—which is a group of 11 regional U.S. banks that provide mortgage and community-development funds for American banks to lend.

FICO: Abbreviation of Fair Isaac Corporation, the leading company that develops credit-scoring models. Your FICO “score” is a credit rating that’s based on monitoring how you use credit. About 90% of all lenders and credit-card companies use your FICO score to determine how likely you are to pay your bills. Your score is determined using information provided by the three major credit bureaus; it’s a number between 300 and 850. The higher your FICO score, the less of a credit risk you are to a lender.

First mortgage: Initial or primary mortgage loan on a piece of property. If you refinance your first mortgage, the refinanced loan still maintains the “first mortgage” position—which means that the primary mortgage lender has the first lien on the property (or, first right to make a legal claim) if you ever stop making your payments.

Fixed-rate mortgage: Mortgage loan that has the same interest rate for the entire term of the loan.

Flood insurance: Insurance policy that protects property against losses that are directly caused by flooding. Properties in high-risk flood areas with mortgages from government-backed lenders are required by law to have flood insurance. Although flood insurance is not federally mandated if your property is not located in a high-risk area, your lender may still require you to buy it.

Forbearance: Temporary pause in a homeowner’s mortgage payments (typically for a year or less). Forbearance is intended to give the homeowner time to deal with whatever financial hardship may prevent them from making mortgage payments—such as being laid off from work and having to find a new job. During the forbearance period, we suspend or reduce principal payments, but interest continues to accrue (add up). After the forbearance period is over, the paused payments are due and payable.

Foreclosure: Legal action by a lender to take control of a property when a homeowner fails to pay their mortgage payments. Lenders can also foreclose on a property if a homeowner does not pay their property taxes or homeowners association (HOA) dues. The lender then takes control of the property, sells it, and uses the funds from the sale to repay as much of the homeowner’s debt as possible. The money the lender gets from the foreclosure sale may not be enough to fully repay the loan, and the homeowner may continue to owe the lender the difference. Because lenders make money only when homeowners repay their loans, foreclosure is a last resort that a lender takes only after every option to help the homeowner get current in their payments has been exhausted.

Form 1098 (Mortgage Interest Statement): Government-mandated tax form that lenders use to report your annual interest payments. If you paid $600 or more in interest, mortgage insurance premiums, or points during a given tax year, we’ll send you a Form 1098—which you’ll need to file your annual tax return.

Ginnie Mae (Government National Mortgage Association): U.S. government-owned corporation within HUD. Its mission is to help provide affordable home loans for underserved consumers. Ginnie Mae provides credit guarantees for mortgage-backed securities that are made up of loans insured by the FHA, the VA, and the Rural Housing Service of the USDA.

Grace period: Period of time after your payment due date, but before we charge a late fee. Make sure to always pay your mortgage on time—that is, by the due date shown on your billing statement. If we don’t receive your payment by close of business on the due date, your payment is technically late. But we will not charge you a late fee until your payment is more than 15 days past due.

HELOC (home equity line of credit): Line-of-credit loan secured by a homeowner’s property. The typical HELOC has a 30-year term, which includes a 10-year draw period followed by a 20-year repayment period. HELOCs are often used for home improvements, debt consolidation, college tuition, or other large expenses. In most cases, you can withdraw funds (up to your available credit limit) during the draw period (the first 10 years of the loan’s term) using checks, debit cards, or online money transfers.

Homeowner’s insurance (also called “hazard” or “liability” insurance): Insurance policy required by your lender to protect your home against losses due to fire, hurricane, tornado, or other catastrophic damage (except flooding). Most homeowner’s insurance policies also protect against losses due to theft, vandalism, and personal liability if someone is injured while on your property.

HUD (U.S. Department of Housing and Urban Development): Cabinet-level department in the U.S. federal government; its purpose is to develop, implement, and enforce policies related to housing and community development. HUD oversees the FHA, Ginnie Mae, Fannie Mae, Freddie Mac, and many other government programs.

Initial interest rate: Interest rate on an adjustable-rate mortgage (ARM) when the loan is new. The initial interest rate applies to the loan for a set period of time (anywhere from 6 months to 10 years). After the initial time period passes, the interest rate changes periodically according to an industry-standard rate index. The new interest rate may be higher or lower than the initial rate; when it adjusts, your mortgage payment will change accordingly.

Interest rate: Fee that lenders charge you for the privilege of borrowing money, expressed as a percentage of the amount of money you’re borrowing. You pay a portion of that fee for the life of the loan as part of your regular mortgage payment.

Late fee: Penalty you must pay us if we receive your mortgage payment after the grace period. Depending on your specific mortgage agreement, your late fee could be as much as four to five percent of the past-due amount. Example: If your monthly principal and interest payment is $1,500, a five-percent late fee would be $75.

Lien: Legal contract between you and your mortgage lender; one of the documents you sign when you close on a mortgage loan. The lien is filed at the local county recorder’s office, confirming that the lender is the actual owner of your property until you pay off your mortgage. The lien also gives your lender the right to take your property back if you stop making your mortgage payments. In addition, the lien prohibits you from selling or transferring your property to anyone else until you repay the loan in full—or until another party legally takes over the responsibility to pay back your loan. If you have a mortgage, your lender (the “lienholder”) has a lien on your property.

LPI (lender-placed insurance; also called “force-placed insurance”): Homeowner’s insurance that we buy on behalf of your lender to cover your home if the policy you purchased is canceled, has lapsed, or has insufficient coverage—and you have not bought a replacement policy. LPI policies typically cover only the amount due to the lender; they don’t usually cover personal property or liability. We add the cost of LPI to your regular mortgage payment, but we’ll remove LPI when you provide written proof that you’ve purchased a valid policy of your own.

LTV (loan-to-value) ratio: Comparison of a loan’s outstanding principal balance to the actual current property value. The ratio between your loan’s unpaid principal amount (or your credit limit if you have a HELOC) and your property’s appraised value—expressed as a percentage. Example: if you have a $160,000 mortgage on a home with an appraised value of $200,000, your home’s LTV ratio is 80% ($160,000 divided by $200,000 = .08 or 80%).

Loan modification (or “mod”): Loss-mitigation program in which the lender or loan servicer changes the original terms of a mortgage to help a delinquent homeowner resume making regular payments. Loan mods can help struggling homeowners get current again, and they’re a cheaper and less time-consuming alternative to foreclosure. A modification may extend the loan’s term, reduce its interest rate, or reduce the unpaid principal amount (or some combination of those three options). Also called a “workout.”

Loan officer: Lender sales representative. Loan officers find active homebuyers, help them complete their loan applications, help them qualify for and choose a mortgage product, and oversee the entire loan-origination process. May also be called a “loan representative,” “loan rep,” or “account executive.”

Loan origination: Process of obtaining a mortgage loan. It begins with you getting pre-approved by a lender—where the lender determines how expensive of a home you can afford. The process concludes at closing, where you and all of the parties involved in the mortgage transaction sign the necessary documents and you take ownership of your new home.

Loan origination fee: Fee you pay your lender at loan closing to cover the administrative costs of making your mortgage loan; it varies depending on the lender and the loan type. A fee of one to two percent of the total mortgage principal is common.

Loan transfer (or “servicing transfer”): When your lender or loan servicer transfers the management of your loan to another lender or servicing company. All the transfer means for you is that a new company will take your payments, pay your insurance and tax bills, and answer any questions you may have about your mortgage account. A transfer does not change your mortgage agreement; your principal, interest rate, payment, and payment schedule stay the same. The only change is the company you send payments to. Note: A transfer can take place at any time during the life of your loan. Also, transfers are arranged by your lender or loan-servicing company; you cannot opt out or select another loan servicer.

Loss mitigation: Process of a loan servicer working closely with a seriously delinquent homeowner to find a way for the homeowner to avoid foreclosure. The term is a reference to the loan servicer's duty to the mortgage owner to mitigate (or, reduce) the losses that result from a homeowner defaulting on their mortgage. Loss mitigation tries to protect both mortgage owners and homeowners from the expense and hassle of foreclosure. Some loss-mitigation options (including loan modification, forbearance, and repayment) can enable homeowners to stay in their homes. Other options (such as short sale or deed-in-lieu), require homeowners to surrender their property to the lender and move out.

Mortgage: Property loan that a homeowner agrees to pay back over time, normally by making regular payments over 10 to 30 years. The mortgage agreement is a legal contract that gives the lender claim of ownership on the property until the homeowner repays the borrowed funds. (Also called a “deed of trust” or a “security deed.”)

Mortgage servicer (or “loan servicer”): Organization that collects mortgage payments from homeowners and pays out those funds to investors, tax agencies, and insurance companies. A loan servicer may be either a department of the lender or an outsourced, third-party vendor. Mortgage servicers help homeowners in default avoid foreclosure (a process called “loss mitigation”). Servicers also manage the foreclosure process after every loss-mitigation option is exhausted. Finally, servicers manage the process of maintaining and selling foreclosed properties.

Mortgage type: There are three primary U. S. mortgage programs: Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and conventional mortgage loans. VA loans are made only to qualifying veterans and surviving spouses, while FHA loans are available to any qualified homeowner. Both VA and FHA loans are underwritten by the U.S. federal government. Conventional loans are available to all qualified homeowners and are not underwritten by the federal government.

Past due: Payment that is not made by the due date shown on the billing statement. Also called “late, “overdue” or “delinquent.”

Payoff: Paying the outstanding balance of a loan in full. Can also refer to the amount of money needed to pay the outstanding loan balance in full.

Points: Banking term for “percent” or “percentage points.” An amount you pay the lender, typically at closing, to reduce (or “buy down”) the interest rate of your loan. One point means one percent of the total loan amount. For example, two points on a $200,000 mortgage loan equals $4,000. Sometimes called “discount” or “mortgage” points.

Prepayment: Amount that a homeowner pays ahead of schedule to reduce the loan’s principal balance before that principal amount is actually due.

Prepayment penalty: Penalty fee charged by some lenders if a homeowner pays off their mortgage loan before the specified term. The penalty is due and payable at loan payoff, in addition to the principal balance. If the lender charges a prepayment penalty, it is normally limited to the early years of a loan.

Principal: Amount of money you borrow and pay to the seller to buy property. After the mortgage transaction closes, the principal is the amount of money you borrowed but have not paid back to the lender. This does not include the interest you pay the lender for the privilege of borrowing the principal amount.

Principal balance: Amount you owe on a mortgage loan at any given time. It’s the original loan amount minus all of the principal payments you’ve made since the loan closed.

P&I (principal and interest): Portion of the principal and interest you pay as part your monthly payment. P&I is a subset of PITI (principal, interest, taxes, and insurance). The principal is the amount of money borrowed; interest is the charge you pay the lender for the privilege of borrowing the money. Principal and interest make up most of your mortgage payment—but your payment can also include funds for property taxes, homeowners insurance, private mortgage insurance and any other regular, periodic costs related to your property.

PITI (principal, interest, taxes, and insurance): Four parts of a regular mortgage payment. Principal and interest payments go directly to the lender to repay the loan. For most homeowners, we deposit the portion that covers taxes and insurance (both homeowner’s insurance and private mortgage insurance, if applicable) into your escrow account to accumulate over time; then we pay those bills for you when they come due.

PMI (private mortgage insurance): Insurance policy you pay for that protects your mortgage lender from financial loss if you stop making your mortgage payments. Depending on your credit score, your down payment, and several other factors, your lender may have required you to have PMI coverage on your mortgage. Your PMI premium is included in your regular mortgage payment.

Property preservation: Work done by a mortgage servicer to repair and maintain foreclosed (REO) properties, including securing, winterizing, and making whatever repairs and improvements are needed to make the property saleable.

Recast (or, “reamortization”): Type of loan modification in which you pay a lump sum toward the principal but do not change the loan’s interest rate or term. The lender then recalculates (or, “reamortizes”) your loan using your original term and interest rate, but factoring in the new, lower principal balance. The result is a lower monthly payment. Example: A recast may work well for someone who receives a large inheritance and wants to use that money to reduce their mortgage expenses.

REO (real estate owned) property: Property owned by a lender, investor, or mortgage servicer as a result of acquiring it through a deed-in-lieu transaction or because the property did not sell during a foreclosure sale or a short sale.

Refinance: Paying off one loan by obtaining another. Refinancing usually results in better loan terms (such as a lower interest rate) and a lower mortgage payment. In a refinance (or, “refi”), you pay off your existing loan with the proceeds from the new loan, normally using the same property as collateral.

RESPA (Real Estate Settlement Procedures Act): U.S. consumer-protection law that requires lenders to disclose settlement costs to home-buyers and -sellers before the sale. The law also prohibits certain kinds of fees and set rules for escrow accounts. In addition, RESPA requires lenders to notify homeowners if the lender transfers the servicing of a loan to another company.

Short sale: Common foreclosure alternative, where the homeowner in default agrees to sell their property for less than the loan’s unpaid principal balance. All proceeds from the sale go to the lender, and the lender either forgives the difference or goes to court to get a deficiency judgment—which requires the homeowner to pay what remains of the loan’s unpaid principal balance.

SPOC (single point of contact): Knowledgeable person (or team) in a company who                                                                                                                                                                                                                                                                                                                                                                                  serves as the point of contact for all communications with a distressed homeowner. The SPOC’s purpose is to avoid miscommunication and serve as an easily accessible contact for homeowners who are going through loss mitigation, loan modification, or foreclosure. The SPOC helps homeowners understand their available loss-mitigation options and what they need to do to be considered for those options, coordinates the sending and receiving of all necessary documents, and ensures that the homeowner stays fully informed and updated about their status.

Term: Number of years it takes to pay off a loan. Lenders use the loan term to determine your payment amount, your repayment schedule, and the total amount of interest you’ll have to pay over the life of your mortgage loan.

USDA (U.S. Department of Agriculture): Federal government department made up of many agencies. The USDA develops and carries out laws related to farming, forestry, rural economic development, and food. Example: The Rural Housing Service (RHS) is a USDA agency that manages a wide spectrum of government programs designed to provide homeownership opportunities to low- and moderate-income Americans in rural communities.

VA (U. S. Department of Veterans Affairs): Cabinet-level department of the federal government. Provides a broad range of services to U.S. military veterans, including healthcare, disability compensation, vocational rehab, educational aid, mortgage loans, life insurance, and burial benefits.

Workout: Informal term for a loan modification.

 

Information sources: U.S. Department of Housing and Urban Development (HUD), Investopia.com, Nolo.com, and others.