Mortgage Glossary

A

Acceleration clause: a provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance when the first monthly payment is missed.

Adjustable-rate mortgage (ARM): a mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.

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).

Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)

Amortization schedule: a timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the balance remaining.

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.

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.

Appraisal: a professional opinion of the market value of a property.

Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.

Appreciation: an increase in the value of a property due to changes in market conditions or other causes.

ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes 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.

Assessed value: the valuation placed upon property by a public tax assessor for purposes of taxation.

Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.

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.

Assumption: the transfer of the seller’s existing mortgage to the buyer.

B

Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.

Bankruptcy: a federal law Whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.

Binder: a preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Borrower: 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.

C

Cap: a provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.

Cash reserve: a requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.

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.

Clear title: a title that is free of liens or legal questions as to ownership of property.

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.

Closing costs: expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called “settlement costs.”

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.

Commitment letter: a formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.

Condominium: a form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas.

Contingency: a condition that must be met before

Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Conventional mortgage: any mortgage that is not insured or guaranteed by the federal government.

Convertible ARM: an adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Cooperative: a type of multiple ownership in which the residents of a multi-unit housing complex own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Covenant: a clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.

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.

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 report: a report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

D

Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed: the legal document conveying title to a property.

Deed-in-lieu: to avoid foreclosure (“in lieu” of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn’t allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.

Deed of trust: the document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

Default: the failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage.

Delinquency: a loan in which a payment is overdue but not yet in default.

Deposit: see Earnest money.

Depreciation: a decline in the value of property; the opposite of “appreciation.”

Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.

Down payment: the part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

Due-on-sale clause: a provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

E

Easement: a right of way giving persons other than the owner access to or over a property.

Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase

Equity: an owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.

Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

F

Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.

FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

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.

Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.

G

Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.

Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

H

Hazard insurance: insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

HELP: Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price.

Home inspection: an examination of the structure and mechanical systems to determine a home’s safety; makes the potential homebuyer aware of any repairs that may be needed.

Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner’s insurance; ,overage extends over a specific time period and does not cover the home’s structure.

Homeowner’s insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage.

Homeowner’s warranty: a type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.

Housing counseling agency: provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.

HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD1 Statement: also known as the “settlement sheet,” it itemizes all closing costs; must be given to the borrower at or before closing.

HVAC: Heating, Ventilation and Air Conditioning; a home’s heating and cooling system.

I

Interest: the fee charged for borrowing money.

Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Interest rate cap: a provision of an ARM limiting how much interest rates may increase or decrease per adjustment period or over the life of a mortgage. See also Lifetime cap.

Index: a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.

Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar’s value.

Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

J

Joint tenancy: a form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.

L

Late charge: the penalty a borrower must pay when a payment is made after the due date.

Lock-in: a written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

Lease-Purchase Mortgage Loan: an alternative Fannie Mae financing option that allows low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy. Each month’s rent payments consists of PITI payments on the first mortgage, plus an extra amount that is earmarked for deposit to a savings account in which money for a down payment will accumulate.

Lien: a legal claim against a property that must be paid off when the property is sold.

Lifetime cap: a provision of an ARM that limits the highest rate that can occur over the life of the loan.

Loan: money borrowed that is usually repaid with interest.

Loan commitment: see Commitment letter.

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 servicing: the collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Loan-to-value percentage (LTV): the relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property.

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.

Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan

M

Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Mortgage: a legal document that pledges a property to the lender as security for payment of a debt.

Mortgage banker: a company that originates mortgages exclusively for resale in the secondary market.

Mortgage broker: an individual or company that for a fee acts as an intermediary between borrowers and lenders.

Mortgage 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 insurance premium (MIP): the fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage margin: the set percentage the lender adds to the index value to determine the interest rate of an ARM.

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 note: a legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time-, the mortgage note is secured by a mortgage.

Mortgage interest rate: the rate of interest in effect for the monthly payment due.

Mortgagee: the lender in a mortgage agreement.

Mortgagor: the borrower in a mortgage agreement.

N

Negative amortization: a gradual increase in the mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the unpaid principal balance to create “negative” amortization.

Notice of default: a formal written notice to a borrower that a default has occurred and that legal action may be taken.

O

Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee: a fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount.

Owner financing: a property purchase transaction in which the property seller provides all or part of the financing.

Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.

P

Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.

Payment cap: a provision of some ARMs limiting the amount by which a borrower’s payments may increase regardless of any interest rate increase; may result in negative amortization. See Adjustable-rate mortgage.

PITI: Principal, Interest, Taxes, and Insurance – the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

Planned unit developments (PUDs): a planned unit development is a project or subdivision that consists of common property that is owned and maintained by an owners’ association for the benefit and use of the individual PUD unit owners.

PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Points: a one-time charge by the lender to increase the yield of the loan; a point is I percent of the amount of the mortgage.

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.

Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.

Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.

Prepayment penalty: a fee that may be charged to a borrower who pays off a loan before it is due.
Prequalification: the process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.

Principal: the amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private mortgage insurance (PMI): insurance provided by non-government insurers that protect lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent.

Purchase and sale agreement: a written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Q

Qualifying ratios: guidelines applied by the lenders to determine how large a loan to grant a homebuyer.

R

Radon: a radioactive gas found in some homes that in sufficient concentrations can cause health problems.

Rate lock: see Lock-in.

Real estate sales professional: a person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA): a consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Refinancing: the process of paying off one loan with the proceeds from a new loan using the same property as security.

Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages – like the FHA’s 203(k) – allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

Rent with option to buy: see Lease-Purchase Mortgage Loan.

RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

S

Second mortgage: a mortgage that has a lien position subordinate to the first mortgage.

Secondary mortgage market: the buying and selling of existing mortgages.

Seller-take-back: an agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement: another name for closing.

Settlement sheet: the computation of costs payable at closing that determines the seller’s net proceeds and the buyer’s net payment.

Special Forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

Survey: a drawing or map showing the precise legal boundaries a property, the location of improvements, easements, rights of way encroachments, and other physical features.

Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.

Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

Sweat equity: using labor to build or improve a property as part of the down payment

T

Tenancy by entirety: a type of joint ownership of property that provides right of survivorship and is available only to a husband and wife.

Tenancy in common: a type of joint ownership in a property without right of survivorship.

Title: a legal document evidencing a person’s right to or ownership of a property.

Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don’t require a property lien.

Title Company: a company that specializes in examining and insuring titles to real estate.

Title insurance: insurance to protect the lender lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of property.

Title search: a check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax: state or local tax payable when title passes from one owner to another.

Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.

U

Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.

V

VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.

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