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Mortgage Glossary
- Acceleration
The right of the mortgage (lender) to
demand the immediate repayment of the mortgage loan balance upon
the default of the mortgager (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 pre selected index. Also
sometimes known as the renegotiable rate mortgage, the variable
mortgage or the Canadian roll over 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.
Comes from the French word, "mort", literally to kill the loan
owing.
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 points 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". There are
different types of qualified appraisers. The highest qualification
is considered to be the MAI.
Assessment
A local tax levied the County usually
against a property for a specific purpose, such as a sewer or
street lights. Also can mean the assessed value of the property.
Similar, but not the same as an "appraisal" see above.
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. Most mortgages today are unassumable as
Lenders have found that assumed loans tend to have a far higher
rate of default.
FHA loans closed before 12/15/89 and
VA loans closed before 3/1/88 are freely assumable with no
qualifying.
Note that the original borrower is
still just as liable for the loan as the new home buyer unless the
previous borrower gets a release from the Lender. This is called
"novation".
Balloon payment
A balloon mortgage is one where a lump
sum, the balance of the loan principal, becomes payable at the end
of the term. A mortgage can be interest only with the whole
principal due at the end of the term or it may be calculated to
amortize over a longer period, say 30 years, but with the
outstanding principal balance payable at the end of, say, 10
years.
Blanket
Mortgage
A mortgage covering at least two
pieces of real estate as security for the same mortgage. This
provides greater security for the Lender. It may be possible to
get a "partial" release so the Borrower can sell one of the
properties provided a suitable principal reduction is made.
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. The mortgage is not actually the loan, it just
creates the security interest in the property. It is the
promissory note that spells out the repayment terms and
interest.
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.
Caps
(interest)
A limit on the amount the interest
rate on an adjustable rate mortgage may change per year and/or the
life of the loan. For example a 4/1 cap would mean a maximum
interest increase of 4% over the life of the loan and no more than
1% each year.
Caps
(payments)
Consumer safeguards which limit the
amount monthly payments on an adjustable rate mortgage may change.
Mortgage may change per year and/or the life of the loan.
Closing
The meeting between the buyer, seller
and lender or their agents where the property and funds legally
changes hands. Also called settlement. Closing costs usually
include an origination fee, discount points, appraisal fee, title
search and insurance, survey, taxes, deed recording, credit report
charge and other costs assessed at settlement. The cost of closing
usually are about three to six percent of the mortgage amount.
Commitment and agreement, often in writing, between a lender and a
borrower to loan money at a future date subject to the completion
of paperwork or compliance with stated conditions.
Credit Report
A report documenting the credit
history and current status of a borrower's credit standing. Credit
is rated for mortgage purposes from A, excellent, down to D, very
poor. To obtain a conforming loan that can be resold to Fannie
Mae, the Borrower usually needs A grade credit.
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. Construction loan (interim loan) - A
loan to provide the funds necessary to pay for the construction of
buildings or homes. These are usually designed to provide periodic
disbursements to the builder as it 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.
Construction
Loan
A short term interim loan for
financing the cost of construction. The lender advance funds to
the builder at periodic intervals as the work progresses.
Conventional
Loan
A mortgage not insured by FHA or
guaranteed by the VA.
Cross Default
Language often in a second mortgage
that states that a failure to pay or a default on the first
mortgage is a default on the second mortgage.
Also that if the
borrower has more than one mortgage with the same lender, then a
default on just one of the mortgages puts ALL the other mortgages
into default.
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 net effective income
(FHA/VA) or gross monthly income (conventional). 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. It
involves a third party, the trustee, who holds the deed to the
property.
Default
Failure to meet legal obligations in a
contract, specifically, failure to make the monthly payments on a
mortgage. This can also mean failure to pay property taxes,
maintain insurance on the property or even to maintain the
interior and exterior of the property.
Deferred
Interest
see Negative Amortization
Delinquency
Failure to make payments on time. This
can lead to foreclosure. See default.
Discount Point
see Point
Down Payment
Money paid to make up the difference
between the purchase price and the mortgage amount. Down payments
usually are 10 to 20 percent of the sales price on a conventional
loan. VA loans have no downpayment but are only available to
Veterans who have not used up their VA entitlement. FHA loans are
often as low as 3% downpayment.
When the down payment is less than 20%
the Lender will usually require PMI (Private Mortgage Insurance)
on a conventional loan, or MIP (Mortgage Insurance Premium) on an
FHA loan.
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 when making an
offer to a seller as part of the purchase price to bind a
transaction or assure payment. It should be held in escrow by the
real estate company, a title company or an attorney. This is
usually returnable if the contract does not go through for valid
reasons. It may not be returnable if the buyer just changes his
mind.
Escrow
Refers to a neutral third party who
carries out the instruction of both the buyer and seller to handle
all the paperwork of settlement or closing. Escrow may also refer
to an account held by the lender into which the home buyer pays
money for tax or insurance payments.
Equal Credit Opportunity Act
(ECOA)
A federal law that requires lenders
and other creditors to make credit equally available without
discrimination based on race, color, religion, national origin,
sex, marital status, handicap status or receipt income from public
assistance programs.
Equity
The difference between the fair market
value and current indebtedness, also referred to as the owner's
interest.
FHLMC
The federal Home Loan Mortgage
Corporation provides a secondary market for saving and loans by
purchasing their conventional loans. Also known as "Freddie
Mac."
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. FHMA
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.
Fannie Mae
see Federal National Mortgage
Association.
Federal Home Loan Bank Board
(FHLBB)
A regulatory and supervisory agency
for federally chartered savings institutions.
Federal Home Loan Mortgage Corporation
(FHLMC)
also referred to as "Freddie Mac", is
a quasi-government agency that purchases conventional mortgages
from insured depository institutions and HUD approved mortgage
bankers.
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.
Freddie Mac
see Federal Home Loan Mortgage
Corporation
Ginnie Mae
see Government National Mortgage
Association
Government National Mortgage
Association (GNMA)
also known as "Ginnie Mae", provides
sources of funds for residential mortgage, insured or guaranteed
by FHA or VA.
Graduated Payment Mortgage
(GPM)
A type of flexible-payment where the
payments increase for a specified period of time and then level
off. This type of mortgage may have 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.
Hard Money
Lender
Equity lenders who base their funding
decisions on the unencumbered property value and its salability.
They do not calculate debt ratio and usually do not take into
account the borrower's credit and income. The combined
loan-to-value ratio is usually less than 65%. Funding can be very
fast. Sometime in 2 days or less.
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 and/or her net effective income (FHA / VA loans) or gross
monthly income (conventional loans). Also see Debt-to-Income
Ratio.
Impound
That portion of a borrower's monthly
payment 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. The rate
must be one that is outside the influence of the lender.
Investor
A money source for a lender.
Interim
Financing
A construction loan made during
completion of a building or a project. A permanent loan usually
replaces this loan after completion.
Jumbo Loan
A loan which is larger (more than
$322,700) than the limits set by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Because jumbo loans can not be funded by these two agencies, they
usually carry a higher interest rate.
Lien
A claim upon a piece of property for
the payment of a debt or obligation.
Loan-to-Value
Ratio
The relationship between the amount of
the mortgage loan and 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
MIP is the one-half percent borrowers
pay each month on FHA insured mortgage loans. It is insurance from
FHA to the lender against incurring a loss due to the borrower's
default. On September 1, 1983 the MIP was changed to a one time
charge to the borrowers.
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 home owner.
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 principal 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 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.
Negotiable Rate
Mortgage
A loan in which the interest rate is
adjusted periodically. see Adjustable Rate Mortgage.
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.
PITI
Principal, Interest, Taxes and
Insurance. Also called monthly housing expense.
Points (Loan Discount
Points)
Prepaid interest assessed at closing
by the lender. Each point is equal to one percent of the loan
amount.
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 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. This
can enable the mortgage to be paid off much more quickly, with a
major savings in total interest costs.
Prepayment
Penalty
Money charged for an early repayment
of debt. Prepayment penalties are allowed in some form in 36
states and the District of Columbia.
Prepayment Risk
This is the risk to the Lender that
the loan will be paid off before the end of the term. It is
considered to be a risk becuase loans are often refinanced when
interest rates drop. This means the Lender gets their capital back
but have to lend it out at a lower rate.
Primary Mortgage
Market
Lenders making mortgage loans directly
to borrower's such as savings and loan association, commercial
banks and mortgage companies. These lenders usually sell their
mortgages into the secondary mortgage markets such as FNMA of
GNMA, etc. The original lender will usually still service the
loan, that is, send the payment coupons or statements to the
Borrower.
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 five percent in some cases). With the smaller down
payment loans, however, borrower's are usually required to carry
private mortgage insurance. Private mortgage insurance will
require an initial premium payment of one to five percent of your
mortgage amount and may require an additional monthly fee
depending on your loan's structure.
Quit Claim Deed
Type of deed that transfers all the
rights that grantor (giver) may have, which might be none.
Example, you could legally give someone a quit claim deed of your
rights in the Brooklyn Bridge. That does not mean that the person
you give the deed to now owns the Brooklyn
Bridge.
Realtor ?
A real estate broker or an associate
holding active membership in a local real estate board affiliated
with the National Association of Realtors.
Recession
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. This means
the money for refinance is not disbursed till after the 3 days are
up. The only exception would be an emergency.
Recording Fees
Money paid to the lender for recording
a home sale with the local authorities, thereby making it part of
the public records. The record is given a official records book
and page number making it easy to find.
Refinance
Obtaining a new mortgage loan on a
property already owned. Often to replace existing loans on the
property.
RESPA
Short for the Real Estate Settlement
Procedures Act. RESPA is a federal law that allows consumers to
review information 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 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.
Seasoned
Mortgage
A mortgage that payments have been
made on. The longer the seasoning and payment history of the
mortgage, the greater the likelihood it will be paid in the
future.
Second Mortgage
A mortgage made subsequent to another
mortgage and subordinate to the first one. If the borrower does
not make payments on the first mortgage, they can foreclose it and
wipe out the interest of the second mortgage holder.
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
Simple Interest
Interest which is computed only on the
principal balance.
Survey
A measure of land, 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.
Sweat Equity
Equity created by a purchasers work on
a property 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 or lender against
errors in the title search. The cost of the policy is usually a
function of the value of property, and is often borne by the
purchaser and /or seller.
Title Search
An examination of municipal records to
determine the legal ownership of the 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 a the loan.
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.
Variable Rate
Mortgage
see Adjustable Rate Mortgage
Verification of Deposit
(VOD)
A document signed by the borrower's
financial institution verifying the status and balance of his or
her financial accounts.
Verification of Employment
(VOE)
A document signed by the borrower's
employer verifying his or her position and
salary. |
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