Mortgage Glossary

A

Acceleration Clause - A provision in a contract that gives the lender the right to demand repayment of the balance of the loan, in the event that the borrower violates one or more clauses in the note.

Accrued Interest - Interest that is earned but not paid, added to the amount owed on the loan.

Adjustable Rate Mortgage (ARM) - 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 the payment amount is usually subject to a cap (maximum amount of the interest rate change).

Amortization - Repayment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule (amortization schedule) that will allow the borrower to own the property at the end of a specific time period.

Application - The first step in the official loan approval process The application form records important information about the borrower necessary to the underwriting process. There may be an application fee.

Appraisal - A written estimate of the current market value of a property, prepared by a qualified appraiser.

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

Approval Letter - A letter prepared by the lender stating that the borrower has met the qualification requirements for the loan. The approval letter may be conditional on further verification of information.

APR or Annual Percentage Rate - 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.

ARM - See Adjustable Rate Mortgage.

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.

 

B

Balance - The amount of the original loan remaining to be paid.

Balloon - The loan balance remaining at the time the loan contract calls for a full repayment.

Balloon Mortgage - A mortgage which is payable in full after a period of time that is shorter than the term, 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.

Bimonthly Mortgage - A mortgage on which the borrower pays half the monthly payment on the 1st of the month and the other half of the payment on the 15th of the month.

Biweekly Mortgage - A mortgage on which the borrower pays half the monthly payment every 2 weeks. This results in 26 payments per year (rather than 24, as in bimonthly), and the loan is paid off before term.

Bridge Loan - A short-term loan that can "bridge" the period between buying and selling of homes. The borrower must have a contract to sell the home in order to qualify for a bridge loan.

Buy-Down - The payment of points in exchange for a lower interest rate. See Points.

Buy-Up - The borrower pays a higher interest rate in exchange for money back from the lender, reducing up-front costs.

 

C

Cap - A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Cash-Out Refinance - The borrower refinances for an amount greater that the balance of the loan, to take "cash out" of the transaction.

Closing - Also known as settlement, this is the time at which the property is legally transferred from the seller to the buyer. At this time, the borrower takes on the loan obligation, pays closing costs and receives title to the property from the seller.

Closing Costs - Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing. These costs can vary and are spelled out to the borrower after submitting a loan application.

COFI or Cost of Funds Index - An interest rate index used to determine interest rate adjustments on an adjustable rate mortgage.

Condominium - A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas shared by all owners.

Contract for Deed - A contract in which a property title is transferred but only after buyer makes a certain number of payments. Also called contract sale.

Conventional Mortgage - A private sector loan, not guaranteed or insured by the U.S. government (FHA or VA).

Cooperative or Co-op - Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.

COSI or Cost of Savings Index - Used to determine interest rate adjustments on an adjustable rate mortgage.

Co-Signing a Note - Signing a note and thereby assuming responsibility for the mortgage loan, if that borrower is unable to pay.

Credit Report - A record that lists all past and present debts and the timeliness of their repayment. The report documents an individual's credit history.

Credit 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.

Cumulative Interest - The sum of all interest payments to date or over the life of the loan.

 

D

Debt-to-Income Ratio - A comparison of gross income to housing and non-housing expenses. For FHA loans, the monthly mortgage payment should be no more than 29% of the monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Default - The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Delinquency - Failure of a borrower to make a mortgage payment. A mortgage payment that is more than 30 days late.

Demand Clause - A lender can demand repayment of the loan at any time and for any reason. This clause is written in the mortgage note.

Down Payment - The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.

Due-on-Sale Clause - A provision of a loan contract that state that if the property is sold, the balance of the loan must be repaid.

 

E

Earnest Money - Money put down by a potential buyer to show seriousness about purchasing the home. It becomes part of the down payment if the offer is accepted and returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

Effective rate -

Energy Efficient Mortgage or EEM - 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 - The difference between the value of the home and the balance of outstanding mortgage loans on the home.

Escrow - Money (or valuable items) are placed with a third party for safekeeping, pending the performance of the contract or promise.

 

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 - Nickname for the 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 or Federal Housing Administration - Federal administration established to advance homeownership opportunities for all Americans by providing mortgage insurance to lenders to cover most losses that 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. Interest rate and other terms are fixed.

Flexible Payment ARM - An adjustable rate mortgage on which the interest rate is adjusted monthly. There is a low initial minimum payment that rises by 7.5% a year for 5 years but carries a risk of larger payment increases. Also called an "Option ARM."

Float - The rate and points vary with the changes in market conditions, can be risky.

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

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

 

G

Ginnie Mae - Nickname for the 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 be lent to eligible borrowers.

Good Faith Estimate - An estimate of all closing fees, including pre-paid and escrow items as well as lender charges. The estimate must be given to the borrower within three days after submission of a loan application.

Graduated Payment Mortgage or GPM - A mortgage on which the payment increases by a constant percent for a specified time. It then levels out over the remainder of the term and is fully amortized.

 

H

HELP or Homebuyer Education Learning Program - An educational program from the FHA that counsels people about the home buying process.

Home Equity Loan - Also called a "second mortgage," this is a loan that uses the equity in a home as collateral. It is often used as a way of consolidating other debt. Interest on a home equity loan is deductible.

Homebuyer Protection Plan - A plan that is supposed to protect FHA homebuyers against property defects.

HUD or 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 by addressing housing needs, improving and developing American communities and enforcing fair housing laws.

HUD1 Statement - Also known as the "settlement sheet," the statement itemizes all closing costs and must be given to the borrower at or before closing.

HVAC - Heating, Ventilation and Air Conditioning.

 

I

Index - A measurement used by lenders to determine changes to the interest rage charged on an adjustable rate mortgage.

Insured Conventional Mortgage - A mortgage insured by a private lender where, in exchange for a higher interest rate, the mortgage insurance premium is paid by the lender.

Interest - A fee charged for the use of money.

Interest Accrual Period - The period over which the interest due is calculated.

Interest Cost- A time-adjusted measure of cost to the borrower for the mortgage.

Interest-Only Mortgage - A mortgage where the monthly mortgage payment consists of interest only and during the interest-only payment period, the loan balance remains unchanged.

Interest Rate - The rate charged to the borrower each period for the loan of money.

Interest Rate Ceiling - The highest interest rate possible under an adjustable rate mortgage contract. Sometimes called a "cap."

Interest Rate Floor - The lowest rate possible under an adjustable rate mortgage contract.

 

J

Joint Tenancy - Joint ownership by two or more persons with right of survivorship; all own equal interest and have equal rights to the property. Compare with Tenancy in Common.

Jumbo Mortgage - A mortgage amount larger than maximum allowed by Fannie Mae and Freddie Mac ($333,700 in 2004). "Jumbo" is also a term used to refer to a loan larger than $500,000.

 

L

Lease Purchase or Lease-to-Own - Assists low to moderate income homebuyers by allowing them to lease a home with an option to buy. The rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

LIBOR or London InterBank Offered Rate - an index used in determining the interest rate on an ARM.

Lien - A legal claim against property that must be satisfied when the property is sold.

Loan-to-Value Ratio or LTV Ratio - A percentage calculated by dividing the amount borrowed by the price (or appraised value) of a home to be purchased. The higher the LTV, the less cash a borrower is required to pay as a down payment.

Lock-In - Since interest rates fluctuate, lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed by a certain date.

Low Documentation or "Low Doc" Loan - Income and asset information is still required, but it isn't fully verified as in a full documentation loan.

 

M

Manufactured Housing - A house built in a factory, move to and then installed at a site.

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

MIP - See Mortgage Insurance Premium.

Mortgage - A lien on the property that secures the promise to repay a loan.

Mortgagee - The lending institution.

Mortgagor - The borrower(s) taking out a mortgage.

Mortgage Banker - A company that originates loans and resells them to secondary mortgage lender like Fannie Mae or Freddie Mac.

Mortgage Broker - An independent contractor who originates and processes loans for a number of lenders (wholesalers).

Mortgage Insurance - Insurance against loss provided to a lender in the event of borrower's default. The borrower typically pays the premiums. Mortgage insurance is required primarily when the down payment is less than 20% of the purchase price.

Mortgage Insurance Premium or MIP - A monthly payment (usually part of the mortgage payment) paid by a borrower for mortgage insurance.

 

N

"No Doc" or No Documentation Loan - Loans that waive one or more elements of documentation normally required.

Note - A legal contract that produces evidence of a debt and a promise to repay the loan.

 

O

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

Option ARM - See Flexible Payment ARM.

Origination - The process of preparing, submitting and evaluating a loan application. The process generally includes a credit check, verification of employment and an appraisal of the property to be purchased.

Origination Fee - The charge for originating a loan. The fee is usually calculated in the form of points and paid at closing.

 

P

Payment Adjustment Interval - The period between payment changes on an ARM. (This may or may not be the same as the interest rate adjustment period.)

Payment Decrease Cap - The maximum percentage decrease in the payment on an ARM at a payment adjustment date.

Payment Increase Cap - The maximum percentage increase in the payment on an ARM at a payment adjustment date. A 7.5% cap is fairly common.

Per Diem Interest - Interest from the day of closing to the first day of the following month.

Pick a Payment ARM - See Flexible Payment ARM.

PITI or Principal, Interest, Taxes and Insurance - The four elements of a monthly mortgage payment. Payments of principal and interest go directly toward repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage insurance, if applicable) goes into an escrow account to cover the fees when they are due.

PMI or 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 the purchase price.

Points - A point is one percent of the amount of the mortgage loan. Points are paid in order to lower an interest rate on a mortgage. The more points paid, the lower the interest rate. On FHA and VA loans, only the seller may pay points.

Pre-Approval - A lender commits to lend to a potential borrower in advance. A commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-Foreclosure Sale - A sale that allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Premium - An amount paid on a regular schedule by a policyholder who maintains insurance coverage.

Prepayment - Payment of the mortgage loan before the scheduled due date (may be subject to a prepayment penalty).

Pre-Qualification - A lender informally determines the maximum amount an individual is eligible to borrow.

Principal - The portion of the monthly payment that is used to reduce the loan balance.

 

R

Real Estate Agent - An individual who is licensed to negotiate and arrange real estate sales (real estate salesperson), and works for a real estate broker.

Realtor® - A real estate agent or broker who is a member of the National Association of Realtors&174; and its local and state associations.

Refinancing - Paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms (lower interest rate).

Rehabilitation Mortgage - A mortgage that covers the costs of rehabilitating (repairing or improving) a property. Some rehabilitation mortgages allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

RESPA or 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.

Reverse Mortgage - A loan to an elderly home owner on which the balance rises over time and which is not repaid until the owner dies or sells the home.

Right of Rescission - When refinancing, the right of borrowers to cancel the deal with no financial penalty, within 3 days of closing.

 

S

Second Mortgage - A loan with a second priority claim against a property. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. Can also be know as a Home Equity Loan.

Secondary markets - Markets in which mortgages or mortgage-backed securities are bought and sold.

Settlement - See Closing.

Silent Second Mortgage - A second mortgage offered at subsidized terms to those who qualify.

Simple Interest Mortgage - A mortgage on which interest is calculated daily based on the balance at the time of the last 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.

Stated Income - A documentation where the lender verifies the source of the income but not the amount.

Subordination - To place in a rank of lesser importance. One mortgage can be subordinated to another.

Subordination Policy - The second mortgage lender allows for a borrower to refinance the first mortgage while leaving the second mortgage in place.

Sub-Prime Borrower - A borrower with poor credit.

Sub-Prime Lender - A lender who specializes in lending to sub-prime borrowers.

Survey - A property diagram created by a surveyor 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.

Swing loan - See Bridge Loan.

 

T

Tenancy in Common or Tenants in Common - Ownership by two or more persons who hold undivided interest, without right of survivorship. Interests need not be equal.

Title 1 - An FHA-insured loan that allows a borrower to make non-luxury improvements (renovations or repairs) to the home. Title 1 loans for less than $7,500 do not require a property lien.

TIL or Truth in Lending - The Federal law that specifies the information that must be provided to borrowers on different type of loans.

Title Insurance - Insurance that protects the lender against any claims arising from arguments about ownership of the property. Title insurance is also available for homebuyers.

 

U

Underwriting - The process of analyzing a loan application to determine the amount of risk involved in making the loan. Underwriting includes a review of the potential borrower's credit history and a judgment of the property value.

 

V

VA - The 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.

 

W

Wrap-Around Mortgage - A mortgage on a property that already has a mortgage, where the new lender assumes the payment obligation on the old mortgage.

 

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