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GLOSSARY OF TERMS
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A
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B
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C
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D
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E
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F
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G
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H
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I
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J
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L
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M
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N
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O
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P
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R
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S
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T
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U
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V
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W
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A Acceleration Clause:
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 pre-selected 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 A.P.R.:
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 costs. 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.
B
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
us ally charge a fee or receive a commission for their services.
Buy-down:
The action to pay additional discount points (buy down subsidy) to the
lender in exchange for a lower interest rate. The reduced rate may apply
for all or a portion of the loan term. This subsidy amount may be paid
by the buyer, lender, seller or a combination of parties.
C
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 Determination of Eligibility.
Certificate
of Reasonable Value (CRV):
A certification for 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) or 6 years in the
reserves. 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.
Co Borrower
(co signer, co mortgagor):
One who signs a mortgage contract with another party or parties and
is hereby jointly obligated to repay the loan. Generally a co borrower
provides some assistance in meeting the requirements of the loan, and
receives a share of interest in the encumbered property.
Commitment:
An 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.
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 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.
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.
Credit Report:
A report documenting the credit history and current status of a borrower's
credit standing.
D
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 loans) or gross monthly income (conventional
loans). 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. Down payments can range from 3 percent to 20 percent
or more of the sales price on conventional loans.
Due-On-Interest:
A clause inserted in a mortgage that allows the lender to call the loan
due and payable at its option upon the transfer of the property also
known as paragraph "17" in FNMA/ FHLMC Mortgage.
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.
E
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 value an owner has in real estate over and above the obligation
against the property.
Escrow:
Funds that are set aside and held in trust, usually for payment of taxes
and insurance on real property. Also earnest deposits held pending loan
closing.
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.
F
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):
A regulatory and supervisory agency for federally chartered savings
institutions.
Federal Home Loan Mortgage Corporation (FHLMC) also called "Freddie
Mac": 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 (HUD). 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 private corporation, federally chartered to provide financial products
and services that increase the availability and affordability of housing
for low-, moderate-, and middle-income Americans. The largest corporation
in America, Fannie Mae has $287 billion in assets and an additional
$544 billion in Mortgage-Backed Securities outstanding. Next to the
U.S. Treasury, it is often the second largest borrower in the capital
markets. Fannie Mae is traded on the New York Stock Exchange (FNM) and
has approximately 190,000 shareholders.
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),
they are generous enough to handle moderately-priced homes almost anywhere
in the country.
FHA Mortgage Insurance Premium (MIP):
An amount equal to 2.25 percent of the loan amount paid at closing or
financed into the loan amount. In addition, FHA mortgage insurance requires
an annual fee of 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 saving 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.
Foreclosure:
A legal procedure in which property securing debt is sold by the lender
to pay the defaulting borrower's debt.
Freddie Mac:
see Federal Home Loan Mortgage Corporation
G
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 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.
H
Hazard
Insurance (Homeowners 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.
I
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 (T-Bills), 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.
Investor:
A money source for a lender (FNMA, FHLMC, GNMA).
Interim Financing:
A construction loan made during completion of a building or a project.
A permanent loan usually replaces this loan after completion.
J
Jumbo Loan:
A loan which is larger (more than $207,000) 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.
L
Lien:
A claim upon a piece of property for the payment or satisfaction
of a debt or obligation.
LNOV (Lenders Notification Of Reasonable Value):
A certification for an appraisal issued by the Lender in place of a
CRV showing the property's current market value.
Loan-to-Value Ratio:
The relationship between the amount of the mortgage loan and the appraised
value of the property expressed as a percentage.
M
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:
A monthly premium paid by the homeowner in addition to the Up Front
MIP that is generally financed. The monthly mortgage insurance is equal
to the mortgage amount multiplied by .005 divided by 12. ($100,000 x
.005 / 12 = $41.67 per month)
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
N
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.
O
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.
P
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 36 states and
the District of Columbia.
Primary Mortgage Market:
Lenders making mortgage loans directly to borrower's such as savings
and loan association, 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 3 percent in some cases.
With the smaller down payment loans, however, borrowers are required
to carry private mortgage insurance which is generally paid monthly,
and obtained by the lender through a Private Mortgage Insurance Company
(GE, MGIC, United Guarantee, Amerin, PMI, etc).
R
Realtor®:
A real estate broker or an associate holding active membership
in a local real estate board affiliated with the National Association
of Realtors.
Recision:
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.
Negotiable Rate Mortgage (RBM):
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."
S
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.
term mortgage see balloon payment mortgage.
T
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 us ally a function of the value of the property, and is often borne
by the purchaser and/or seller.
Title Search:
An examination of municipal records to determine the legal ownership
of property. Usually is performed by an attorney or title company.
Truth-In-Lending:
A federal law requiring disclosure of the Annual Percentage Rate and
other loan terms to home buyers within 72 hours of loan application
per 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 7or 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 7or 10 years. also called "Super Seven"
or "Premier" mortgage.
U
Underwriting:
The decision whether to make a loan to a potential home buyer based
on income, assets, credit, collateral 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.
V
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 3 % (depending on the size of the down payment, and
previous use of benefits) paid on a VA-backed loan. An eligible veteran
who is using his eligibility for the first time will pay a 2% funding
fee which can be 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. This document
is generally not needed if recent bank statements are available.
Verification of Employment (VOE):
A document signed by the borrower's employer verifying his/her position
and salary. This document is generally not needed if recent pay stubs
are available.
W
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.
WE
DON'T WORK FOR THE LENDER, WE WORK FOR YOU!
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