Mortgage
Terms
This section
provides information on the various mortgage terms. Know
the meaning of the terms used before meeting with a loan
rep.
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Acceleration
The
right of the mortgagee (lender) to demand the
immediate repayment of the mortgage loan balance
upon the default of the mortgagor (borrower), or by
using the right vested in the Due-on-Sale Clause.
Adjustable rate mortgage (ARM)
Is a mortgage in which the interest rate is
adjusted periodically based on a preselected index.
Also sometimes known as the re negotiable rate
mortgage, the variable rate mortgage or the Canadian
rollover mortgage.
Adjustment interval
On an adjustable rate mortgage, the time between
changes in the interest rate and/or monthly payment,
typically one, three or five years, depending on the
index.
Amortization
Means loan payment by equal periodic payment
calculated to pay off the debt at the end of a fixed
period, including accrued interest on the
outstanding balance.
Annual percentage rate (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 point
and other credit cost. the APR allows home buyers to
compare different types of mortgages based on the
annual cost for each loan.
Appraisal
An estimate of the value of property, made by a
qualified professional called an "appraiser".
Assessment
A local tax levied against a property for a
specific purpose, such as a sewer or street lights.
Assumption
The agreement between buyer and seller where the
buyer takes over the payments on an existing
mortgage from the seller. Assuming a loan can
usually save the buyer money since this is an
existing mortgage debt, unlike a new mortgage where
closing cost and new, probably higher, market-rate
interest charges will apply.
Balloon 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 Borrower (Mortgagor)
One who applies for and receives a loan in the
form of a mortgage with the intention of repaying
the loan in full
Broker
An individual in the business of assisting in
arranging funding or negotiating contracts for a
client buy who does not loan the money himself.
Brokers usually charge a fee or receive a commission
for their services.
Buy-down
When the lender and/or the home builder
subsidized the mortgage by lowering the interest
rate during the first few years of the loan. While
the payments are initially low, they will increase
when the subsidy expires.
Cash Flow
The amount of cash derived over a certain period
of time from an income-producing property. The cash
flow should be large enough to pay the expenses of
the income producing property (mortgage payment,
maintenance, utilities, etc.)
Caps 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 Caps (payment)
Consumer safeguards which limit the amount
monthly payments on an adjustable rate mortgage may
change.
Certificate of Eligibility Certificate
of Eligibility ,
The document given to qualified veterans which
entitles them to VA guaranteed loans for homes,
business, and mobile homes. certificates of
eligibility may be obtained by sending DD-214
(Separation Paper) to the local VA office with VA
form 1880 (request for Certificate of Eligibility)
Certificate of Reasonable Value
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans
Administration showing the property's current market
value
Certificate of veteran status
The document given to veterans or reservists who
have served 90 days of continuous active duty
(including training time) It may be obtained by
sending DD 214 to the local VA office with form
26-8261a (request for certificate of veteran status.
This document enables veterans to obtain lower down
payments on certain FHA insured loans).
Closing
The meeting between the buyer, seller and lender
or their agents where the property and funds legally
change hands. Also called settlement. closing costs
usually include an origination fee, discount points,
appraisal fee, title search and insurance, survey,
taxes, deed recording fee, credit report charge and
other costs assessed at settlement. The cost of
closing usually are about 3 percent to 6 percent of
the mortgage amount.
Commitment
A promise by a lender to make a loan on specific
terms or conditions to a borrower or builder. A
promise by an investor to purchase mortgages from a
lender with specific terms or conditions. an
agreement, often in writing, between a lender and a
borrower to loan money at a future date subject to
the completion of paperwork or compliance with
stated conditions.
Construction loan
A short term interim loan to pay for the
construction of buildings or homes. These are
usually designed to provide periodic disbursements
to the builder as he progresses.
Contract sale or deed:
A contract between purchaser and a seller of
real estate to convey title after certain conditions
have been met. It is a form of installment sale.
Conventional loan
A mortgage not insured by FHA or guaranteed by
the VA.
Credit Report
A report documenting the credit history and
current status of a borrower's credit standing.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which
results when a borrower's monthly payment obligation
on long-term debts is divided by his or her gross
monthly income. See housing expenses-to-income
ratio.
Deed of trust
In many states, this document is used in place
of a mortgage to secure the payment of a note.
Default
Failure to meet legal obligations in a contract,
specifically, failure to make the monthly payments
on a mortgage.
Deferred interest
When a mortgage is written with a monthly
payment that is less than required to satisfy the
note rate, the unpaid interest is deferred by adding
it to the loan balance.See negative amortization
Delinquency
Failure to make payments on time. this can lead
to foreclosure.
Department of Veterans Affairs
Department of Veterans Affairs (VA)
An independent agency of the federal government
which guarantees long-term, low-or no-down payment
mortgages to eligible veterans.
Discount Point
see point
Down Payment
Money paid to make up the difference between the
purchase price and the mortgage amount.
Due-on-Sale-Clause
A provision in a mortgage or deed of trust that
allows the lender to demand immediate payment of the
balance of the mortgage if the mortgage holder sells
the home.
Earnest Money
Money given by a buyer to a seller as part of
the purchase price to bind a transaction or assure
payment.
Entitlement
The VA home loan benefit is called entitlement.
Entitlement for a VA guaranteed home loan. This is
also known as eligibility.
Equal Credit Opportunity Act Equal
Credit Opportunity Act (ECOA)
Is a federal law that requires lenders and other
creditors to make credit equally available without
discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt
of income from public assistance programs.
Equity
The difference between the fair market value and
current indebtedness, also referred to as the
owner's interest. The value an owner has in real
estate over and above the obligation against the
property.
Escrow
An account held by the lender into which the
home buyer pays money for tax or insurance payments.
Also earnest deposits held pending loan closing.
Fannie Mae
see Federal National Mortgage Association.
Farmers Home Administration Farmers
Home Administration (FmHA)
provides financing to farmers and other
qualified borrowers who are unable to obtain loans
elsewhere.
Federal Home Loan Bank Board Federal
Home Loan Bank Board (FHLBB)
The former name for the regulatory and
supervisory agency for federally chartered savings
institutions. Agency is now called the Office of
Thrift Supervision
Federal Home Loan Mortgage CorporationFederal
Home Loan Mortgage Corporation(FHLMC) also called
"Freddie Mac",
is a quasi-governmental agency that purchases
conventional mortgage from insured depository
institutions and HUD-approved mortgage bankers
Federal Housing Administration Federal
Housing Administration (FHA)
A division of the Department of Housing and
Urban Development. Its main activity is the insuring
of residential mortgage loans made by private
lenders. FHA also sets standards for underwriting
mortgages.
Federal National Mortgage Association
Federal National Mortgage Association (FNMA) also
know as "Fannie Mae"
A tax-paying corporation created by Congress
that purchases and sells conventional residential
mortgages as well as those insured by FHA or
guaranteed by VA. This institution, which provides
funds for one in seven mortgages, makes mortgage
money more available and more affordable.
FHA loan
a loan insured by the Federal Housing
Administration open to all qualified home
purchasers. While there are limits to the size of
FHA loans ($155,250 as of 1/1/96), they are generous
enough to handle moderately-priced homes almost
anywhere in the country.
FHA mortgage insurance
Requires a fee (up to 2.25 percent of the loan
amount) paid at closing to insure the loan with FHA.
In addition, FHA mortgage insurance requires an
annual fee of up to 0.5 percent of the current loan
amount, paid in monthly installments. The lower the
down payment, the more years the fee must be paid.
FHLMC
The Federal Home Loan Mortgage Corporation
provides a secondary market for savings and loans by
purchasing their conventional loans. Also known as
"Freddie Mac."
Firm Commitment
A promise by FHA to insure a mortgage loam for a
specified property and borrower. A promise from a
lender to make a mortgage loan.
Fixed Rate Mortgage
The mortgage interest rate will remain the same
on these mortgages throughout the term of the
mortgage for the original borrower.
FNMA
The Federal National Mortgage Association is a
secondary mortgage institution which is the largest
single holder of home mortgages in the United
States. FNMA buys VA, FHA, and conventional
mortgages from primary lenders. Also known as
"Fannie Mae."
Foreclosure
A legal process by which the lender or the
seller forces a sale of a mortgaged property because
the borrower has not met the terms of the mortgage.
Also known as a repossession of property.
Freddie Mac
see Federal Home Loan Mortgage Corporation
Ginnie Mae
see Government National Mortgage Association.
Government National Mortgage Association (GNMA)
Graduated Payment Mortgage Graduated
Payment Mortgage (GPM)
A type of flexible-payment mortgage where the
payments increase for a specified period of time and
then level off. This type of mortgage has negative
amortization built into it.
Guaranty
A Promise by one party to pay a debt or perform
an obligation contracted by another if the original
party fails to pay or perform according to a
contract
Hazard Insurance
A form of insurance in which the insurance
company protects the insured from specified losses,
such as fire, windstorm and the like.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which
results when a borrower's housing expenses are
divided by his/her gross monthly income. See
debt-to-income ratio.
Impound
That portion of a borrower's monthly payments
held by the lender or service to pay for taxes,
hazard insurance, mortgage insurance, lease
payments, and other items as they become due. Also
known as reserves.
Index
A published interest rate against which lenders
measure the difference between the current interest
rate on an adjustable rate mortgage and that earned
by other investments (such as one- three-, and
five-year U.S. Treasury security yields, the monthly
average interest rate on loans closed by savings and
loan institutions, and the monthly average
costs-of-funds incurred by savings and loans), which
is then used to adjust the interest rate on an
adjustable mortgage up or down.
Interim Financing
A construction loam made during completion of a
building or a project. A permanent loan usually
replaces this loan after completion.
Investor
A money source for a lender.
Jumbo Loan
a loan which is larger (more than $214,600 as of
1/1/97) than the limits set by the Federal National
Mortgage Association and the Federal Home Loan
Mortgage Corporation. Because jumbo loans cannot be
funded by these two agencies, they usually carry a
higher interest rate.
Lien
A claim upon a piece of property for the payment
or satisfaction of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount of the
mortgage loan and the appraised value of the
property expressed as a percentage.
Margin
The amount a lender adds to the index on an
adjustable rate mortgage to establish the adjusted
interest rate.
Market Value
The highest price that a buyer would pay and the
lowest price a seller would accept on a property.
Market value may be different from the price a
property could actually be sold for at a given time.
MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against
incurring a loss on account of the borrower's
default.
Mortgage Insurance
Money paid to insure the mortgage when the down
payment is less than 20 percent. See private
mortgage insurance, FHA mortgage insurance.
Mortgagee
The lender
Mortgagor
The borrower or homeowner
Negative Amortization
Occurs when your monthly payments are not large
enough to pay all the interest due on the loan. This
unpaid interest is added to the unpaid balance of
the loan. the danger of negative amortization is
that the home buyer ends up owing more than the
original amount of the loan.
Net Effective Income
The borrower's gross income minus federal income
tax.
Non Assumption Clause
A statement in a mortgage contract forbidding
the assumption of the mortgage without the prior
approval of the lender. Note: The signed obligation
to pay a debt, as a mortgage note.
Office of Thrift Supervision (OTS)
The regulatory and supervisory agency for
federally chartered savings institutions. Formally
known as Federal Home Loan Bank Board
Origination Fee
The fee charged by a lender to prepare loan
documents, make credit checks, inspect and sometimes
appraise a property; usually computed as a
percentage of the face value of the loan.
Permanent Loan
A long term mortgage, usually ten years or more.
Also called an "end loan."
PITI
Principal, Interest, Taxes and Insurance. Also
called monthly housing expense.
Pledged account Mortgage 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 Points (loan discount points)
Prepaid interest assessed at closing by the
lender. Each point is equal to 1 percent of the loan
amount (e.g., two points on a $100,000 mortgage
would cost $2,000).
Power of Attorney
A legal document authorizing one person to act
on behalf of another.
Prepaid Expenses
Necessary to create an escrow account or to
adjust the seller's existing escrow account. Can
include taxes, hazard insurance, private mortgage
insurance and special assessments.
Prepayment
A privilege in a mortgage permitting the
borrower to make payments in advance of their due
date.
Prepayment Penalty
Money charged for an early repayment of debt.
Prepayment penalties are allowed in some form (but
not necessarily imposed) in many states.
Primary Mortgage Market
Lenders making mortgage loans directly to
borrower's such as savings and loan associations,
commercial banks, and mortgage companies. These
lenders sometimes sell their mortgages into the
secondary mortgage markets such as to FNMA or GNMA,
etc.
Principal
The amount of debt, not counting interest, left
on a loan.
Private Mortgage Insurance Private
Mortgage Insurance (PMI)
In the event that you do not have a 20 percent
down payment, lenders will allow a smaller down
payment - as low as 5 percent in some cases. With
the smaller down payment loans, however, borrowers
are usually required to carry private mortgage
insurance. Private mortgage insurance will usually
require an initial premium payment and may require
an additional monthly fee depending on you loan's
structure.
Realtor
A real estate broker or an associate holding
active membership in a local real estate board
affiliated with the National Association of
Realtors.
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.
Renegotiable Rate Mortgage
a loan in which the interest rate is adjusted
periodically. See adjustable rate mortgage.
RESPA
short for the Real Estate Settlement Procedures
Act. RESPA is a federal law that allows consumers to
review information on known or estimated settlement
cost once after application and once prior to or at
a settlement. The law requires lenders to furnish
the information after application only.
Reverse Annuity Mortgage 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 asSatisfaction of
Mortgage: The document issued by the mortgagee when
the mortgage loam is paid in full. Also called a
"release of mortgage."
Second Mortgage
A mortgage made subsequent to another mortgage
and subordinate to the first one.
Secondary Mortgage Market
The place where primary mortgage lenders sell
the mortgages they make to obtain more funds to
originate more new loans. It provides liquidity for
the lenders. security.
Servicing
all the steps and operations a lender performs
to keep a loan in good standing, such as collection
of payments, payment of taxes, insurance, property
inspections and the like.
Settlement/Settlement Costs
see closing/closing costs
Shared Appreciation Mortgage Shared
Appreciation Mortgage (SAM)
a mortgage in which a borrower receives a
below-market interest rate in return for which the
lender (or another investor such as a family member
or other partner) receives a portion of the future
appreciation in the value of the property. May also
apply to mortgage where the borrowers shares the
monthly principal and interest payments with another
party in exchange for part of the appreciation.
Simple Interest
Interest which is computed only on the principle
balance.
Survey
A measurement of land, prepared by a registered
land surveyor, showing the location of the land with
reference to know points, its dimensions, and the
location and dimensions of any buildings.
Sweat Equity
Equity created by a purchaser performing work on
a property being purchased.
Title
a document that gives evidence of an
individual's ownership of property.
Title Insurance
a policy, usually issued by a title insurance
company, which insures a home buyer against errors
in the title search. The cost of the policy is
usually a function of the value of the property, and
is often borne by the purchaser and/or seller.
Policies are also available to protect the lender's
interests.
Title Search
an examination of municipal records to determine
the legal ownership of property. Usually is
performed by a title company.
Truth-In-Lending
a federal law requiring disclosure of the Annual
Percentage Rate to home buyers shortly after they
apply for the loan. Also known as Regulation Z.
Two-Step Mortgage
a mortgage in which the borrower receives a
below-market interest rate for a specified number of
years (most often seven or 10), and then receives a
new interest rate adjusted (within certain limits)
to market conditions at that time. the lender
sometimes has the option to call the loan due with
30 days notice at the end of seven or 10 years. also
called "Super Seven" or "Premier" mortgage.
Underwriting
the decision whether to make a loan to a
potential home buyer based on credit, employment,
assets, and other factors and the matching of this
risk to an appropriate rate and term or loan amount.
USURY
Interest charged in excess of the legal rate
established by law.
VA Loan
a long-term, low-or no-down payment loan
guaranteed by the Department of Veterans Affairs.
Restricted to individuals qualified by military
service or other entitlements.
VA Mortgage Funding Fee
a premium of up to 1-7/8 percent (depending on
the size of the down payment) paid on a VA-backed
loan. On a $75,000 fixed-rate mortgage with no down
payment, this would amount to $1,406 either paid at
closing or added to the amount financed.
Variable Rate Mortgage Variable Rate
Mortgage (VRM)
see adjustable rate mortgage
Verification of Deposit Verification of
Deposit (VOD)
a document signed by the borrower's financial
institution verifying the status and balance of
his/her financial accounts.
Verification of Employment Verification
of Employment (VOE)
a document signed by the borrower's employer
verifying his/her position and salary.
Warehouse Fee
Many mortgage firms must borrow funds on a short
term basis in order to originate loans which are to
be sold later in the secondary mortgage market (or
to investors). When the prime rate of interest is
higher on short term loans than on mortgage loans,
the mortgage firm has an economic loss which is
offset by charging a warehouse fee.
Wraparound mortgage
results when an existing assumable loan is
combined with a new loan, resulting in an interest
rate somewhere between the old rate and the current
market rate. The payments are made to a second
lender or the previous homeowner, who then forwards
the payments to the first lender after taking the
additional amount off the top.
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