Glossary of mortgage
terms
Terms of Use:
Mortgage Terms
Acceleration
The right of the mortgagee (lender) to demand the immediate
repayment of the mortgage loan balance upon the default
of the mortgagor (borrower), or by using the right vested
in the Due-on-Sale Clause.
Adjustable rate mortgage (ARM)
Is a mortgage in which the interest rate is adjusted
periodically based on a preselected index. Also sometimes
known as the re-negotiable rate mortgage, the variable
rate mortgage or the Canadian rollover mortgage.
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.
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.
Annual percentage rate (APR)
Is a interest rate reflecting the cost of a mortgage
as a yearly rate. This rate is likely to be higher than
the stated note rate or advertised rate on the mortgage,
because it takes into account point and other credit
cost. The APR allows home buyers to compare different
types of mortgages based on the annual cost for each
loan.
Appraisal
An estimate of the value of property, made by a qualified
professional called an "appraiser".
Assessment
A local tax levied against a property for a specific
purpose, such as a sewer or street lights.
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.
Balloon (payment) mortgage
Usually a short-term fixed-rate loan which involves
small payments for a certain period of time and one
large payment for the remaining amount of the principal
at a time specified in the contract.
Blanket Mortgage
A mortgage covering at least two pieces of real estate
as security for the same mortgage.
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.
Broker
An individual in the business of assisting in arranging
funding or negotiating contracts for a client buy who
does not loan the money himself. Brokers usually charge
a fee or receive a commission for their services.
Buy-down
When the lender and/or the home builder subsidized the
mortgage by lowering the interest rate during the first
few years of the loan. While the payments are initially
low, they will increase when the subsidy expires.
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).
Caps (interest)
Consumer safeguards which limit the amount the interest
rate on an adjustable rate mortgage may change per year
and/or the life of the loan.
Caps (payment)
Consumer safeguards which limit the amount monthly payments
on an adjustable rate mortgage may change.
Certificate of Eligibility
The document given to qualified veterans which entitles
them to VA guaranteed loans for homes, business, and
mobile homes. Certificates of eligibility may be obtained
by sending DD-214 (Separation Paper) to the local VA
office with VA form 1880 (request for Certificate of
Eligibility).
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing
the property's current market value
Certificate of veteran status
The document given to veterans or reservists who have
served 90 days of continuous active duty (including
training time) It may be obtained by sending DD 214
to the local VA office with form 26-8261a (request for
certificate of veteran status). This document enables
veterans to obtain lower down payments on certain FHA
insured loans.
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 3 percent to 6 percent of the mortgage amount.
Commitment
A promise by a lender to make a loan on specific terms
or conditions to a borrower or builder. A promise by
an investor to purchase mortgages from a lender with
specific terms or conditions. An agreement, often in
writing, between a lender and a borrower to loan money
at a future date subject to the completion of paper
work or compliance with stated conditions.
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
progresses.
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.
Conventional loan
A mortgage not insured by FHA or guaranteed by the VA.
Credit Report
A report documenting the credit history and current
status of a borrower's credit standing.
Debt-to-Income 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.
Deed of trust
In many states, this document is used in place of a
mortgage to secure the payment of a note.
Default
Failure to meet legal obligations in a contract, specifically,
failure to make the monthly payments on a mortgage.
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.
Delinquency
Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA)
An independent agency of the federal government which
guarantees long-term, low-or no-down payment mortgages
to eligible veterans.
Discount Point
See point.
Down Payment
Money paid to make up the difference between the purchase
price and the mortgage amount.
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.
Earnest Money
Money given by a buyer to a seller as part of the purchase
price to bind a transaction or assure payment.
Entitlement
The VA home loan benefit is called entitlement. Entitlement
for a VA guaranteed home loan. This is also known as
eligibility.
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.
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.
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.
Fannie Mae
see Federal National Mortgage Association.
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers
who are unable to obtain loans elsewhere.
Federal Home Loan Bank Board (FHLBB)
The former name for the regulatory and supervisory agency
for federally chartered savings institutions. Agency
is now called the Office of Thrift Supervision
Federal Home Loan Mortgage Corporation (FHLMC) also
called "Freddie Mac"
Is a quasi-governmental agency that purchases conventional
mortgage from insured depository institutions and HUD-approved
mortgage bankers.
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development.
Its main activity is the insuring of residential mortgage
loans made by private lenders. FHA also sets standards
for underwriting mortgages.
Federal National Mortgage Association (FNMA) also
know as "Fannie Mae"
A taxpaying corporation created by Congress that purchases
and sells conventional residential mortgages as well
as those insured by FHA or guaranteed by VA. This institution,
which provides funds for one in seven mortgages, makes
mortgage money more available and more affordable.
FHA loan
A loan insured by the Federal Housing Administration
open to all qualified home purchasers. While there are
limits to the size of FHA loans ($155,250 as of 1/1/96),
they are generous enough to handle moderately-priced
homes almost anywhere in the country.
FHA mortgage insurance
Requires a fee (up to 2.25 percent of the loan amount)
paid at closing to insure the loan with FHA. In addition,
FHA mortgage insurance requires an annual fee of up
to 0.5 percent of the current loan amount, paid in monthly
installments. The lower the down payment, the more years
the fee must be paid.
FHLMC
The Federal Home Loan Mortgage Corporation provides
a secondary market for savings and loans by purchasing
their conventional loans. Also known as "Freddie
Mac."
Firm Commitment
A promise by FHA to insure a mortgage loan for a specified
property and borrower. A promise from a lender to make
a mortgage loan.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these
mortgages throughout the term of the mortgage for the
original borrower.
FNMA
The Federal National Mortgage Association is a secondary
mortgage institution which is the largest single holder
of home mortgages in the United States. FNMA buys VA,
FHA, and conventional mortgages from primary lenders.
Also known as "Fannie Mae."
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.
Freddie Mac
See Federal Home Loan Mortgage Corporation.
Ginnie Mae
See Government National Mortgage Association.
Government National Mortgage Association (GNMA)
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments
increase for a specified period of time and then level
off. This type of mortgage has negative amortization
built into it.
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.
Hazard Insurance
A form of insurance in which the insurance company protects
the insured from specified losses, such as fire, windstorm
and the like.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results
when a borrower's housing expenses are divided by his/her
gross monthly income. See debt-to-income ratio.
Impound
That portion of a borrower's monthly payments held by
the lender or servicer to pay for taxes, hazard insurance,
mortgage insurance, lease payments, and other items
as they become due. Also known as reserves.
Index
A published interest rate against which lenders measure
the difference between the current interest rate on
an adjustable rate mortgage and that earned by other
investments (such as one- three-, and five-year U.S.
Treasury security yields, the monthly average interest
rate on loans closed by savings and loan institutions,
and the monthly average costs-of-funds incurred by savings
and loans), which is then used to adjust the interest
rate on an adjustable mortgage up or down.
Interim Financing
A construction loan made during completion of a building
or a project. A permanent loan usually replaces this
loan after completion.
Investor
A money source for a lender.
Jumbo Loan
A loan which is larger (more than $214,600 as of 1/1/97)
than the limits set by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Because jumbo loans cannot be funded by these two agencies,
they usually carry a higher interest rate.
Lien
A claim upon a piece of property for the payment or
satisfaction of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount of the mortgage
loan and the appraised value of the property expressed
as a percentage.
Margin
The amount a lender adds to the index on an adjustable
rate mortgage to establish the adjusted interest rate.
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.
MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against incurring
a loss on account of the borrower's default.
Mortgage Insurance
Money paid to insure the mortgage when the down payment
is less than 20 percent. See private mortgage insurance,
FHA mortgage insurance.
Mortgagee
The lender.
Mortgagor
The borrower or homeowner.
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.
Net Effective Income
The borrower's gross income minus federal income tax.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption
of the mortgage without the prior approval of the lender.
Note: The signed obligation to pay a debt, as a mortgage
note.
Office of Thrift Supervision (OTS)
The regulatory and supervisory agency for federally
chartered savings institutions. Formally known as Federal
Home Loan Bank Board.
Origination Fee
The fee charged by a lender to prepare loan documents,
make credit checks, inspect and sometimes appraise a
property; usually computed as a percentage of the face
value of the loan.
Permanent Loan
A long term mortgage, usually ten years or more. Also
called an "end loan."
PITI
Principal, Interest, Taxes and Insurance. Also called
monthly housing expense.
Pledged account Mortgage (PAM):
Money is placed in a pledged savings account and this
fund plus earned interest is gradually used to reduce
mortgage payments.
Points (loan discount points)
Prepaid interest assessed at closing by the lender.
Each point is equal to 1 percent of the loan amount
(e.g., two points on a $100,000 mortgage would cost
$2,000).
Power of Attorney
A legal document authorizing one person to act on behalf
of another.
Prepaid Expenses
Necessary to create an escrow account or to adjust the
seller's existing escrow account. Can include taxes,
hazard insurance, private mortgage insurance and special
assessments.
Prepayment
A privilege in a mortgage permitting the borrower to
make payments in advance of their due date.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment
penalties are allowed in some form (but not necessarily
imposed) in many states.
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's
such as savings and loan associations, commercial banks,
and mortgage companies. These lenders sometimes sell
their mortgages into the secondary mortgage markets
such as to FNMA or GNMA, etc.
Principal
The amount of debt, not counting interest, left on a
loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down
payment, lenders will allow a smaller down payment -
as low as 5 percent in some cases. With the smaller
down payment loans, however, borrowers are usually required
to carry private mortgage insurance. Private mortgage
insurance will usually require an initial premium payment
and may require an additional monthly fee depending
on you loan's structure.
Realtor
A real estate broker or an associate holding active
membership in a local real estate board affiliated with
the National Association of Realtors.
Rescission
The cancellation of a contract. With respect to mortgage
refinancing, the law that gives the homeowner three
days to cancel a contract in some cases once it is signed
if the transaction uses equity in the home as security.
Recording Fees
Money paid to the lender for recording a home sale with
the local authorities, thereby making it part of the
public records.
Refinance
Obtaining a new mortgage loan on a property already
owned. Often to replace existing loans on the property.
Re-negotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically.
See adjustable rate mortgage.
RESPA
Short for the Real Estate Settlement Procedures Act.
RESPA is a federal law that allows consumers to review
information on known or estimated settlement cost once
after application and once prior to or at a settlement.
The law requires lenders to furnish the information
after application only.
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 Satisfaction of Mortgage: The document
issued by the mortgagee when the mortgage loan is paid
in full. Also called a "release of mortgage."
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate
to the first one.
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. Security.
Servicing
All the steps and operations a lender performs to keep
a loan in good standing, such as collection of payments,
payment of taxes, insurance, property inspections and
the like.
Settlement/Settlement Costs
See closing/closing costs.
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market
interest rate in return for which the lender (or another
investor such as a family member or other partner) receives
a portion of the future appreciation in the value of
the property. May also apply to mortgage where the borrowers
shares the monthly principal and interest payments with
another party in exchange for part of the appreciation.
Simple Interest
Interest which is computed only on the principle balance.
Survey
A measurement of land, prepared by a registered land
surveyor, showing the location of the land with reference
to know points, its dimensions, and the location and
dimensions of any buildings.
Sweat Equity
Equity created by a purchaser performing work on a property
being purchased.
Title
A document that gives evidence of an individual's ownership
of property.
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.
Title Search
An examination of municipal records to determine the
legal ownership of property. Usually is performed by
a title company.
Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage
Rate to home buyers shortly after they apply for the
loan. Also known as Regulation Z.
Two-step Mortgage
A mortgage in which the borrower receives a below-market
interest rate for a specified number of years (most
often seven or 10), and then receives a new interest
rate adjusted (within certain limits) to market conditions
at that time. The lender sometimes has the option to
call the loan due with 30 days notice at the end of
seven or 10 years. Also called "Super Seven"
or "Premier" mortgage.
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.
USURY
Interest charged in excess of the legal rate established
by law.
VA Loan
A long-term, low-or no-down payment loan guaranteed
by the Department of Veterans Affairs. Restricted to
individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 1-7/8 percent (depending on the size
of the down payment) paid on a VA-backed loan. On a
$75,000 fixed-rate mortgage with no down payment, this
would amount to $1,406 either paid at closing or added
to the amount financed.
Variable Rate Mortgage (VRM)
See adjustable rate mortgage.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution
verifying the status and balance of his/her financial
accounts.
Verification of Employment (VOE)
A document signed by the borrower's employer verifying
his/her position and salary.
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.
Wraparound mortgage
Results when an existing assumable loan is combined
with a new loan, resulting in an interest rate somewhere
between the old rate and the current market rate. The
payments are made to a second lender or the previous
homeowner, who then forwards the payments to the first
lender after taking the additional amount off the top.
| 
