Glossary

A-Credit
A consumer with a high credit score. These borrowers are deserving of the lowest prices that lenders offer. Most lenders require a Credit Score above 720.

Affordability
A consumer's capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house. This relates directly to the amount a lender will be willing to lend.

Agreement of Sale
A contract signed by both parties (buyer and seller) stating the price and conditions under which a property will be sold.

Alternative Documentation
Alternative documentation is an option offered by some lenders that applies to borrowers of a specific profile (self-employed, recent arrivals etc). It is designed to simplify the loan process in the event that the borrowers do not have access to the ‘standard documentation’.

Amortization
The scheduled payment minus the interest equals the amortization. It refers to the portion of the capital that is re-paid with each scheduled payment.

Amortization schedule
A table showing how the mortgage payment is divided between interest and capital. The table will also show the loan balance.

Application
A request for a loan containing the description of the property and all of the relevant information about the borrower.

Appraisal
A written declaration of the subject property's current market value. These must be prepared by a liecensed appraiser.

Appraiser
A licensed professional whose expertise is the evaluation of real estate property. The appraiser is selected and paid by the lender.

Approval
Acceptance of the borrower's loan request. Approval means that the borrow meets all of the conditions required by the lender, and the loan will be issued.

Assumption
Occurs when the buyer agrees to assume responsibility for the existing mortgage of the property. Some properties are sold with this as a condition. In some cases buyers prefer this if the existing mortgage has a low interest rate.

Assumable mortgage
A mortgage contract that allows a buyer to assume responsibility of the ‘sellers’ mortgage. See Assumption.

Automated underwriting
A computer-driven evaluation process that simply computes the ratios. This is done for pre-approvals only. It is a fast way to receive a pre-approval and is helpful if a buyer wants to begin viewing properties immediately.

Automated underwriting system
A software system designed to underwrite pre-approvals.

Balance
The amount of the original mortgage loan that remains unpaid.

Bimonthly mortgage
A mortgage payment schedule where the buyer chooses to pay on the 1st and 15th of every month.

Biweekly mortgage (accelerated)
A mortgage payment schedule whereby the buyer pays every second week. This can be ‘accelerated’ if the buyer decides to make the 26 payments using the total calculated from the ‘Bimonthly’ payment schedule. Essentially the buyer can make 2 extra payments a year thus reducing the balance much quicker.

Bridge loan
A short-term loan that ‘bridges’ the period between the purchase and sale of a home. If a buyer purchases a home a few days before their home is sold, a bank can opt to offer a bridge loan.

Buy-down
A permanent buy-down is the payment of points in exchange for a lower interest rate. It usually comes from the company of an employee.

Buy-up
Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs.

Closing
The actual process of transferring ownership from the seller to the buyer. This occurs at the notary and involves the disbursement of funds and the contract signing by both parties.

Closing date
The date on which the aforementioned ‘closing’ occurs.

Co-Borrowers
When more than one person signs for the loan and are equally responsible for its repayment.

Collateral
Assets committed as security for a loan.

Construction financing
The Method of financing when the client wants to have their house built, as opposed to buying an existing home.

Conventional mortgage
A home mortgage that is not insured by CMHC or Genworth.

Credit report
A report containing detailed information regarding the client’s credit-worthiness, credit history and credit score. These reports are issued by the credit bureau.

Credit score
A numerical score based on an individual’s credit history and credit worthiness. The average score (from Equifax) is 650. Anything below 600 is considered a poor score and those clients will most likely need to consult a sub-prime lender.

Cumulative interest
The total interest paid to date, or the total amount that will be paid over the life of the loan.

Debt consolidation
Incorporating higher interest loans into your mortgage, either at the time of mortgage expiry or during a re-finance. It is an effective way to eliminate costly credit card and personal debts.

Deed in lieu of foreclosure
Deeding the property to the lender in order to avoid the foreclosure process. See Options

Delinquency
When the client is more than a month (30 days) late on a mortgage payment.

Documentation requirements
The set of documents required by the lender in order to evaluate the client’s credit worthiness. These will include proof of income, proof of assets etc. Down payment The amount of up-front cash the client is paying on the property. In today’s market a 5% down payment is required for a single family dwelling.

Equity
The difference between the value of the home and the remaining balance of the mortgage on the home.

First mortgage
A mortgage that is ranked first in the event that the borrower defaults on the loan. For example, the property is valued at $300,000 and has a first mortgage of $270,000 and a second mortgage of $40,000 (note it is both rare and un advisable to mortgage a property for more than it is worth). Upon default, the first lender can collect their full $270,000 and the second lender can collect whatever is left. Fixed rate mortgage (FRM) A mortgage where the interest rate and monthly payment remain constant throughout the full term of the loan. See Fixed Rate Mortgages.

Foreclosure
The process by which the lender takes possession of a property in the event that the borrower defaults.

Fully amortizing payment
The monthly mortgage payment that, if remained un-changed, will re-pay the full loan amount over the remaining life of the mortgage.

Gift of equity
A gift from the sellers to the buyers, almost exclusively between family members. When the seller sells the home below market value and gives the remaining balance as a gift to the buyer. Banks will usually allow this to count as a down payment provided that the seller submit a formal ‘gift letter’ explaining their intentions.

Homeowners insurance
Insurance purchased by the borrower to protect their property from theft, floods, fires and other hazards. Insurance is always required by the lender.

Home equity line of credit (HELOC)
A line of credit, secured by a property, which allows the borrower to draw up to a maximum amount, as opposed to a fixed value loan. For example, if you have a $100,000 HELOC on your home you can draw as much or as little as you want at any time. There is no need to go to the notary and you will only pay interest on the amount you have used. A standard mortgage, on the other hand, is a loan for the full $100,000 and you have a specific payment schedule and interest charge attached to the loan. Any modification will require a new notarized contract between yourself and the lender.

Housing bubble
A large increase in property prices fuelled by speculation, and consumer confidence, that prices will continue to rise.

Housing expense
The sum of the costs associated with home ownership (mortgage payment, taxes, insurance, condo fees, etc).

Housing investment
The amount of money invested in a home. This is measured by the value of the house minus the mortgage amount.

Initial rate period
The amount of time your interest rate remains constant. Fixed mortgages range from 6 months to 25 years (In Canada the standard terms are 1, 3 or a maximum of 5 years.)

Interest due
The amount of interest, expressed in dollars, that will be paid throughout the term of the mortgage. Mortgage payments are a combination of capital and interest payments. Amortization tables will show the Interest Due.

Interest-only mortgage
A mortgage whereby the monthly payments consist of interest only. This is only a temporary situation since the capital will need to be re-paid eventually. Interest payment The amount of interest paid each month. The overall amount will equal the interest due at the end of the term. See Interest Due. Interest rate The rate charged by the lender each term for the loan. A mortgage is simply a loan for a property, so a mortgage interest rate is the rate charged for that loan.

Internet mortgages
Mortgages using a ‘virtual bank’ which allows the borrower to perform many of their mortgage-related transactions online.

Investor
A client who purchases real estate as an investment and not for a dwelling.

Late fees
Fees that lenders collect when the borrower is late making their payment.

Late payment
A payment made after the due date stipulated on the mortgage contract.

Lease-to-own purchase
A transaction in which the client leases a property with an option to buy it at the end of the lease agreement. This operates under a similar premise to care leases.

Loan amount
The amount of the mortgage loan for a property. Banks will lend up to 95% of the value of a home for a single family dwelling.

Loan officer
Bank employees or mortgage brokers who counsel borrowers and handle loan applications.

Loan provider
A bank or private lender.

Lock
The option to ‘lock’ the interest rate of a variable mortgage. If the borrower suspects that interest rates will increase they can exercise the option to ‘lock’ their rate at the fixed rate of the day. Lock commitment letter A statement from the lender verifying that the interest rate and conditions of the loan have been locked.

Mandatory disclosure
The information that must, by law, be disclosed to the borrower. This is designed to protect the borrower from any conflicts of interest or frauds.

Manufactured housing
A house that is pre-fabricated in a factory. It is pieced together at the construction.

Maturity
The period of the mortgage term. When a mortgage ‘matures’ it has reached the end of the term.

Mortgage
A written document declaring the lien on a property taken by the bank for the repayment of the loan. It is commonly used to refer to the loan taken on a property.

Mortgage broker
An independent mortgage specialist who can provide his/her client loan products from multiple lenders. The broker will counsel their clients on the various products available on the market and handle the application process.

Mortgage insurance
Insurance designed to protect the lender against any loss incurred in the event that the lender defaults. There two primary insurers CMHC and Genworth Financial. The amount of insurance required is directly related to the percentage of down payment placed on the home.

Mortgage lender
The bank or private lender that provides the financing for the purchase of a property.

Mortgage modification
A change in the terms or conditions of a loan. This is usually done during the re-finance process.

Mortgage payment
The monthly payment made by the borrower. These payments are a combination of both interest and capital.

Mortgage price
The interest rate and fees paid to the lender.

Mortgage shopping
When the client tries to find the best deal on the market.

Negative amortization
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called "deferred interest." (Not applicable in Canada)

No-cost mortgage
A mortgage whereby all costs, except interest payments and insurance, are paid by the lender.

No ratio loan
A specific loan whereby the borrower’s income-to-loan ratio is not considered in the application process.

Payment period
The period in which the borrower must make their payments. Most mortgages are paid monthly but some are also paid bi-weekly or weekly.

Per diem interest
Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.

Pipeline risk
The lender's risk that between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling the loan.

Portable mortgage
A mortgage that can be transferred from one property to another.

Pre-approval
A commitment by a lender to provide a mortgage at a specific rate if the potential borrower purchases a home within the commitment period. Keep in mind, the borrower must still be approved for the loan at the time of purchase. The pre-approval is designed to provide the best rate to the buyer.

Prepayment
A payment made by the borrower in addition to the regular mortgage payment. These are also known as anticipated payments. Such payments go directly on the capital.

Prepayment penalty
A penalty paid by the borrower if they pay off the mortgage early. Penalties vary between lenders so always consult your lender prior to paying off the mortgage early.

Primary residence
The house considered to be the borrowers’ main domicile. Borrowers may also have secondary residences or investment properties.

Principal
The portion of the monthly payment that reduces the capital amount of the loan.

Processing
The act of compiling all of the necessary information pertaining to the mortgage transaction (credit report, appraisal, proof of employment, assets etc). Once the file is processed it is submitted to the underwriter for evaluation.

Qualification
The process of determining whether a prospective borrower will be approved for the loan. This is usually done during the pre-approval process. The banker or mortgage broker will be able to advise you as to whether you will qualify-be approved- for the loan. However, the final decision is ultimately made by the lender’s underwriter.

Qualification rate
The interest rate used to calculate the mortgage payment while qualifying a borrower. In the event of a variable mortgage, the qualifying rate is usually significantly higher than the actual rate. This is to ensure that the borrower will still be able to repay the mortgage in the event of a rate increase.

Qualification ratios
The debt-to-income ratios that banks use to determine the maximum amount they will lend to a borrower. The standard ratio for mortgage-only is 32%. The ratio of mortgage+ other debts (car payment, credit card debt etc) is 42%. For example, if you make $3000 per month, and have a $500 per month car payment, the bank will lend you approximately $760/month for a mortgage. $500+$760 = $1260 per month i.e 42% of $3000 per month.

Rate sheets
Tables of interest rates and discounts that banks distribute to their brokers on a daily basis.

Refinance
Paying off an old loan while simultaneously starting a new one. This is usually done to reduce interest costs, liberate capital for other projects or consolidate debts.

Required cash
The total amount of money required to close the transaction. This includes down payment, insurance costs, notary fees or any other up-front payment made by the borrower.

Reverse mortgage
A loan to an elderly home owner whereby the balance rises in time. This is not re-paid until the borrow sells the home or dies.

Second mortgage
A loan with a second rank in the event of default. See First Mortgage.

Self-employed borrower
A borrower who is self-employed must provide different documents than a salaried/employee borrower. There are special conditions and products available to self-employed borrowers.

Seller financing
Also known as ‘balance of sale’. It is when the seller provides a portion of the down payment for the buyer as a second mortgage.

Servicing
Administering the loan from the time the loan begins, until expiry. This includes receiving payments, maintaining records and providing over-all customer service.

Short sale
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure. We usually see this in US not so much in Canada.

Stated income
A document where the lender verifies the source of income but not the actual amount.

Sub-prime borrower
A borrower who can only borrow from sub-prime lenders due to poor credit. Sub-prime lenders charge more interest to offset the extra risk they are taking. Sub-prime loans are a last resort and a mortgage broker should be consulted before the borrower undertakes such a transaction.

Sub-prime lender
A lender who specializes in working with borrowers with credit issues.

Title insurance
Insurance against loss coming from problems related to the title of the home/property. This is usually required in the event of a private transaction (when no real estate agents are involved). Real estate agents usually have the necessary insurance built-in to their services so no extra title insurance will be required.

Total interest payments
The total amount of interest paid throughout the life of the loan.

Underwriting
The process of evaluating the transaction. Lenders will ‘underwrite’ a transaction to see if the risks involved are acceptable. This involves inspecting the property, reviewing the buyer’s documentation and drafting the contracts.

Underwriting requirements
The standards imposed by lenders to determine if a borrower qualifies for the loan.

35-Year Mortgage
A mortgage with a term of 35 years.