Mortgage Terms
Common Mortgage Terminology & Definitions
Agreement of Purchase and Sale
Is a written contract between a seller and a buyer for the purchase and sale of a particular property. In the agreement, the buyer agrees to purchase the property for a certain price, provided that a number of terms and conditions are satisfied.
Amortization
A term used to describe the period of time over which the entire mortgage is to be paid assuming regular payments.
Annual Percentage Rate (APR)
Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Amenity
A feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, woods, water) or man-made (like a swimming pool or garden).
Application
The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal
A document that gives an estimate of a property’s fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Appraiser
A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
Assumable Mortgage
A mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
Adjustable Rate Mortgage (ARM)
A mortgage loan subject to change in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly-payment amount, however, is usually subject to a cap.
Blended Payments
Total regular payments that is a blend of principal and interest over the term of the loan. While the payment amount does not change, the principal portion increases, while the interest portion decreases.
Borrower (Mortgagor)
A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Building Code
Based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
Budget
A detailed record of all income earned and spent during a specific period of time.
Closed Mortgage
A closed mortgage is one that cannot be fully paid off, refinanced or re-negotiated before the end of the term without incurring a penalty.
Closing Costs
Closing costs, such as legal fees, property transfer tax, disbursements, and other one-time expenses associated with the purchase of a home that must be paid on the closing date.
Closing
Also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Conventional Mortgage
A mortgage where the borrower is contributing 20% or more of the value of the property as the down payment.
Canada Mortgage and Housing Corporation (CMHC)
CMHC is a federal Crown corporation that administers the National Housing Act (NHA). Among other services, they also insure mortgages for lenders that are greater than 80% of the purchase price or value of the home. The cost of that insurance is paid for by the borrower and is generally added to the mortgage amount. This type of insurance is to protect the lender, not the borrower in the event the borrower stops making payments and defaults on their mortgage loan. Do not confuse this form of insurance with home insurance or life insurance.
Closing Date
The closing (or completion) date is the date that ownership and title to the home is transferred along with the payment of funds from the buyer’s lawyer/notary to the seller’s lawyer/notary.
Commission
An amount, usually a percentage of the property sales price that is collected by a real estate professional as a fee for negotiating the transaction.
Cap
A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Certificate of Title
A document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.
Cash Reserves
A cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Condominium
A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
Credit History
History of an individual’s debt payment; lenders use this information to gauge a potential borrower’s ability to repay a loan.
Credit Bureau Score
A number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.
Deposit
This deposit money in the form of a bank draft or wire transfer (Cash, certified or personal cheques are NOT acceptable) is deposited when the buyer removes their subject conditions from the offer. This money is typically held in the buyers realtor’s brokerage trust account to ensure the buyer is committed to the transaction and will go forward with the deal on the Completion Date. If the property does not close because of the buyer’s failure to comply with the terms set out in the offer, the buyer forgoes the deposit, and it is given to the seller as compensation for the breaking of the contract (the offer).
Down Payment
The money the buyer pays up-front for the property and is not part of the mortgage loan. Down payments usually range from 5%-20% of the total purchase price of the home.
Default
A homeowner is ‘in default’ when he or she breaks the terms of a mortgage agreement, usually by not making the required mortgage payments on time or not making the mortgage payments at all.
Delinquency
Failure of a borrower to make timely mortgage payments under a loan agreement.
Debt Servicing Ratio
A comparison of gross income to housing costs and any other debt payments. Typically lenders want the monthly mortgage payment plus the housing costs to not exceed more than 39% of your monthly gross income (before tax). In addition, for the mortgage payment plus housing costs plus any other debts to not exceed 44% of your monthly gross income.
Equity
An owner’s financial interest in the property. It is calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
First Mortgage
In a first mortgage, the lender has the primary legal claim against your property, taking precedence to all other mortgages. If the property is sold or if the borrower defaults, the first mortgage is paid before any other mortgage lien on the property.
Fixed-Rate Mortgage
A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Fair Market Value
The highest price, expressed in terms of money, that a property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.
Foreclosure
A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Guarantor
Simply put, a guarantor is someone who helps another person get credit on a mortgage. Being a guarantor means you ‘guarantee’ someone else’s mortgage by promising to repay their debt if they can’t afford to. When a person signs as a guarantor, their name does not appear on the title of the home. They don’t own the house at all. All they do is simply guarantee that the mortgage payments will be made, even if the applicant defaults.
Home Inspection
An examination of the structure and mechanical systems of the property by a qualified individual to determine the home’s safety. The inspector will give the potential home buyer a true and unbiased picture of the home’s condition. This allows the potential home buyer to be aware of any repairs that may be needed if they were to buy that property.
Homeowner’s Insurance
An insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that results in someone’s injury or property damage. This is different from mortgage life insurance, which pays the outstanding balance of borrower’s mortgage in full if they die.
Home Equity Line of Credit
Simply put, a home equity line of credit (HELOC) is a line of credit that uses the client’s home as collateral. Generally, up to 80% of the appraised value of the property is allowed to be borrowed with this product.
Interest Adjustment
The amount of interest due between the date the borrower’s mortgage starts and the date the first mortgage payment is calculated from. Sometimes there is a gap between the closing date of the borrower’s home purchase and the first payment date of their mortgage.
Interest-Only Mortgage
A mortgage on which only the monthly interest cost is paid each month. The full principal remains outstanding. The payment is lower than an amortized mortgage since the borrower is not paying any principal.
Interest
A fee charged for the use of money; The time value of money.
Interest Rate
The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR).
Insurance
Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
Rent to Own
Assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
Land Transfer Tax (Property Transfer Tax)
A tax that is levied on any property that changes hands.
Legal Fees and Disbursements
Some of the legal cost associated with the sale or purchase of a property. It is in your best interest to engage the services of a real estate lawyer.
Lump Sum Payment
An extra payment that you make to reduce the amount of your mortgage. These extra payments go directly towards paying down the principal. This is the same as pre-paying, which you cannot do if you have a closed mortgage.
Lien
A legal claim against a mortgaged property which must be paid when the property is sold.
Loan
Money borrowed that is usually repaid with interest.
Loan Fraud
Purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan-to-Value (LTV) Ratio
A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in
Since interest rates can change frequently, many lenders offer an interest rate lock-in that allows clients in a variable rate to lock in to a fixed rate. Beware, when dealing with branch banks, often they will not guarantee their best rates when you lock in, so you have to negotiate again for the best rate. Many mortgage brokerage lenders do not have posted rates so you are guaranteed their lowest rates whenever you lock in.
Mortgage
A lien on the property that secures the promise to repay a loan. Once that loan is paid-off, the lender provides a discharge for that mortgage.
Mortgagee/Mortgagor
Mortgagee is the lender while the mortgagor is the borrower.
Mortgage Banker
A company that originates loans and resells them to secondary mortgage lenders.
Mortgage Broker
A company or individual that is licensed by a provincial authority. Mortgage brokers have access to a large network of mortgage lenders in Canada, helping you get the most suitable mortgage for your financial situation. This may include negotiating with the lender for the best possible deal.
Mortgage Default Insurance
A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.
Mortgage Life Insurance
This form of insurance pays the outstanding balance of your mortgage in full if you die. This is different from home or property insurance, which insures your home and its contents.
Mortgage Modification
A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Mortgage Term
The length of time the interest rate is guaranteed for a mortgage. Mortgage terms normally rate from six months to five years or more, after which you can repay the balance of the principal owning or re-negotiate the mortgage at current rates.
Multiple Listing Service (MLS)
A database provided by The Canadian Real Estate Association and the National Association of REALTORS® that lists all properties in an area for sale or lease, excluding properties that are being sold directly by their owners without the aid of a real-estate agent.
Offer to Purchase/Conditional Offer
Indication by a potential buyer of a willingness to purchase a home at a specific price. This is generally put forth in a written contract outlining the terms in which the potential buyer agrees to buy the property. There may be conditions attached to the offer, for example, offer being subject to arranging the mortgage or selling a home.
Open Mortgage
A mortgage in which the borrower can pay off, renew or refinance at any time without any prepayment charges. The Interest rate for an open mortgage are generally higher than for a closed mortgage because of the added pre-payment flexibility.
Origination
The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
P.I.T.
Principal, interest, and property tax due on a mortgage payment. Payments of principal and interest go directly towards repaying the loan while the portion that covers taxes goes to the city for payment of property taxes.
Portable Mortgage
The borrower can transfer the terms, conditions, and interest rate of their existing mortgage to a new property without paying any penalties.
Pre-Approve
Lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. By getting pre-approved for a mortgage, the potential borrower can shop for a home knowing their budget.
Prepayment Penalty
A prepayment penalty is a fee that your mortgage lender may charge if you:
- pay more than the allowed additional amount toward your mortgage
- break your mortgage contract
- transfer your mortgage to another lender before the end of your term
- pay back your entire mortgage before the end of your term, including when you sell your home
Although there is no law as to how a lender can charge you the penalty, a usual charge is the greater of the Interest Rate Differential (IRD) or 3 months interest.
Pre-Paid Property Tax and Utility Adjustment
The amount of money the buyer will owe to the seller of the property if the seller has already pre-paid any property taxes or utility bills. This amount is to be reimburse to the seller and it will be calculated based on the closing date.
Property Survey
A legal description of your property and its location and dimensions. An up-to-date survey is usually required by your mortgage lender. If not available from the vendor, your lawyer can obtain the property survey for a fee.
Prepayment
Payment of the mortgage loan before the scheduled due date. Depending on your mortgage agreement, you may be subject to a prepayment penalty. Typically lenders will allow anywhere from 5-20% pre-payment privileges without penalty.
Prime
The lowest rate a financial institution charges its best customers.
Principal
The original amount of a loan, before interest or additional fees.
Pre-Qualify
A lender informally determines the maximum amount an individual is eligible to borrow.
Pre-Foreclosure Sale
Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
Premium
An amount paid on a regular schedule by a policy holder that maintains insurance coverage.
Refinancing
Paying off one loan by obtaining another with different terms. The term of the new mortgage must be equal to or greater than the term remaining on your current mortgage. Refinancing is generally done for a number of reasons such as getting better loan terms (like lower interest rates), debt consolidation, to reduce or alter risk (e.g. changing from a variable-rate to a fixed-rate loan), to free up cash, to reduce mortgage payments.
Renewal/Renewing
When the original mortgage term ends, you have the option of renewing it with the current lender or paying off all of the outstanding balance.
When renewing your mortgage, the lenders often only offer the posted rates. You have to push a little harder for them to give you a break. They know that most homeowners don’t want to shop around, so, they offer you a higher rate and hope that you will take it.
Real Estate Agent
An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
Realtor
A real estate agent or broker who is a member of the Canadian Real Estate Association.
Second Mortgage
A debt registered against a property that is secured by a second charge on the property.
Surveyors Certificate
A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Title Insurance
An insurance policy that protects the insured (either an owner or a lender) against certain losses associated with title defects or related problems with the insured property.
Title Search
A check of public records that shows the recognized owner(s) on title for that property as well as any charges, liens, and interests in the property.
Underwriting
The process of analyzing a loan application to determine the amount of risk involved of providing a mortgage to a prospective borrower on a certain piece of property. It includes a review of the potential borrower’s credit history, past and present income, net worth, current monthly budget; including payments for other outstanding monthly installment debt, and the assessment of the property.
Variable Rate Mortgage
A mortgage for which the interest rate fluctuates based on changes in the prime rate.
Vendor Take Back Mortgage
A mortgage provided by the vendor (seller) to the buyer of the property.
The information and services offered on this Site are provided with the understanding that neither Dominion Lending Centres Inc., nor its suppliers or users are engaged in rendering legal or other professional services or advice. Although I strive for accuracy, timeliness and completeness, information quoted is not guaranteed and may change at any time and the information you obtain at this site is not, nor is it intended to be, legal advice. If you require specific advice regarding your own situation please contact me for consultation.