Mortgage Glossary
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Acceleration clause
A provision in a mortgage that gives the lender the right to demand payment of the
entire outstanding balance if a 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.
Amortization
Method used to calculate repayment of principal and interest over a given period of time.
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)
The total yearly cost of a mortgage stated as a percentage of the loan amount;
includes such items as the base interest rate; private mortgage insurance and loan
origination fees (points).
Appraisal
A written report establishing the market value of the property. Appraisals must be
performed by state licensed and/or certified appraisers according to Uniform Appraisal
Standards.
Appreciation
An increase in the value of a property due to changes in market conditions or
other causes.
ARM
Common acronym for Adjustable Rate Mortgage. ARMs offer lower initial interest rates and
payments with potential adjustments occurring at periodic intervals over the life of the
loan, subject to criteria and limitations set forth in the promissory note.
Assessed value
The valuation placed upon property by a public tax assessor for the purposes of
taxation.
Assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer when a home
is sold.
Assumption
The transfer of the seller's existing mortgage to a buyer.
Binder
A preliminary agreement secured by the payment of earnest money, under which a
buyer offers to purchase real estate.
Caps
Predetermined limitations on the amount that the interest rate on an adjustable rate loan
may change at each adjustment, and over the life of the loan.
Cash reserve
A requirement of some lenders that buyers have sufficient cash remaining after
closing to make the first two monthly mortgage payments.
Clear title
A title that is free of liens or legal questions as to ownership of property.
Closing
In real estate, the final procedure in which documents are executed and/or
recorded and the sale (or loan) is completed. Also called "settlement".
Closing costs
Expenses (over and above the price of property) incurred by buyers and sellers in
transferring ownership of a property. Also called "settlement costs".
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 home-owner holds title to an individual
dwelling unit, an undivided interest in common areas of a mult-unit project and sometimes
the exclusive use of certain limited common areas.
Conforming
Loans with terms, balances and conditions set forth by the main secondary market conduits,
FNMA & FHLMC. Current SFD limit is $240,000.00.
Contingency
Commonly, the dependence upon a stated event which must occur before a contract
is legally binding.
Conventional mortgage
Any mortgage that is not insured or guaranteed by the federal government.
Conversion option
A prearranged opportunity to modify the original terms of the repayment agreement within
certain limitations.
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
Most commonly in real estate, assurances set forth (expressed) in a deed by the
grantor or implied by law.
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.
Deed
The legal document conveying title to a property.
Deed of Trust
The document used in some states instead of a mortgage; title is conveyed to a
trustee by the borrower (trustor), in favor of the lender (beneficiary) and conveyed upon
payment in full.
Default
The failure to make mortgage payments 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
Money given by the buyer with an offer to purchase. Shows good faith. Also called
Earnest money.
Depreciation
A decline in the value of a property; the opposite of "appreciation".
Discount
(part of "points") A cost charged by investors when purchasing loans with lower
yields, i.e: higher discount points paid by borrowers at closing result in lower note
rates and vice versa.
Down payment
Cash portion paid by a buyer from his/her own funds as opposed to that portion of
the purchase price which is financed 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.
Earnest money
A deposit made by the potential home buyer to show that he or she is serious
about buying the house.
Easement
A right of way giving persons other than the owner access to or over a property.
Equal Credit Opportunity Act (ECOA)
A federal law that prohibits lenders from denying mortgages on the basis of the
borrower's race, color, religion, national origin, age, sex, marital status, or receipt of
income from public assistance programs.
Equity
A homeowner's financial interest in a property. Equity is the difference between
the fair market value of a property and the amount still owed on the mortgage.
Equity loan
A loan based on the borrower's equity in his or her home.
Escrow account
An account established with the lender at the time of closing, and paid into monthly by
borrowers along with their principal and interest payments for the payment of real estate
taxes, hazard insurance, PMI and flood insurance.
Escrow agent/Escrow closing
An independent third party (title company) who acts as an agent for the borrower and the
lender carrying out the instructions of each and disbursing documentation and funds to the
proper parties at closing.
Fair Credit Reporting
Act
A consumer protection law that regulates the disclosure of consumer/credit
reports by consumer/credit reporting agencies and establishes procedures for correcting
mistakes on one's credit record.
FHA mortgage
A mortgage that is insured by the Federal Housing Administration. Also referred
to as a "government" mortgage.
First mortgage
A mortgage that has first claim in the event of default.
Fixed-rate mortgage
A mortgage in which the interest rate does not change during the entire term of
the mortgage.
Flood insurance
Flood insurance is required on all properties located in Special Flood Hazard Zones. Flood
certifications will indicate whether the property lies within an area so designated. Flood
insurance, if required, will be escrowed for and paid on the borrowers behalf by the
lender as part of servicing the loan.
Forbearance
The lender's postponement of foreclosure to give the borrower time to catch up on
overdue payments.
Foreclosure
The legal process by which a mortgaged property may be sold when a mortgage is in
default.
Graduated payment
mortgage
A mortgage that starts with low monthly payments that increase at a predetermined
rate. The initial monthly payments are set at an amount lower than that required for full
amortization of the debt.
Hazard insurance
Insurance to protect the homeowner and the lender against physical damage to the property
from fire, wind, vandalism, or other hazard. Evidence of existing policies along with a
paid receipt for the first year's premium are required. Standard requirements generally
call for coverage providing benefits in an amount equal to the principal balance of the
mortgage or the maximum insurable value of the property, whichever is less.
Homeowner's insurance
An insurance policy that combines personal liability coverage and hazard
insurance coverage for a dwelling and its contents.
Homeowner's warranty (HOW)
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 sale.
Index
A moving financial reference rate upon which interest rate changes are based. Indices used
on Adjustable Rate Mortgages are not controlled by the lender, and their movement
generally reflects that of prevailing mortgage rates. Common indices include one, three,
and five year government Treasury Securities.
Interest
The fee charged for borrowing money.
Interest rate adjustment period
The point(s) in time at which the interest rate on an ARM loan automatically adjusts.
Interest rate adjustment periods may range from six months to as long as ten years as
stated in the terms of the note.
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 the mortgage. See also Lifetime cap.
Joint tenancy
A form of co-ownership giving each tenant equal interest and equal rights in the
property, including the right of survivorship.
Jumbo or Non-Conforming
Loans which exceed the FNMA/FHLMC guidelines.
Late charge
The penalty a borrower must pay when a payment is made after the due date.
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 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 lower) of the property.
Lock
Lender's guarantee that the mortgage terms quoted will remain in effect for a specific
number of days (during loan processing) despite market changes.
Margin
The amount, expressed as a percentage, which is added to the index value to determine the
fully indexed, or "accrual rate" of the loan. ARM loans will seek this rate at
each adjustment, subject to the limitations of the caps.
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 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 note
A legal document obligating a borrower to repay a loan at 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.
Notice of default
A formal written notice to a borrower that a default has occurred and that legal
action may be taken.
Origination fee
(part of "points") The fee charged by the lender to originate and process a
mortgage loan request. Typically one percent of the loan amount.
Owner financing
A property purchase transaction in which the property seller provides all or part
of the financing.
Payment cap
A provision of some ARMs limiting the amount by which the 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. For calculating qualifying ratios, total monthly
housing expense will include these items as well as Private Mortgage Insurance and
Condominium Assessments if applicable.
Point(s)
An amount equal to one percent of the principal amount of the loan.
Pre-payment penalty
A fee that may be charged to a borrower who pays off the loan before it is due.
Pre-qualification
The process of determining how much money a prospective home buyer 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 protects lenders against loss
if a borrower defaults. 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 is sold.
Qualifying ratios
Guidelines applied by the lenders to determine how large a loan to grant a home
buyer.
Real Estate Sales professional
A person licensed to negotiate and transact the sale of real estate on behalf of
the property owner and/or buyer.
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.
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 sheet
The computations of costs payable at closing that determine the seller's net
proceeds and the buyer's net payment.
Survey
Plot or improvement map showing the legal boundaries of the property. The map must be
based on an instrument survey made, dated and certified by a licensed civil engineer or
registered surveyor.
Temporary buydown
An option offered by many lenders which offsets lower payments over the first one or two
years of the loan by establishing a subsidy account with buyer, seller or investor funds.
Tenancy by entirety
A type of joint ownership of property that provides rights of survivorship and is
available only to a husband and wife.
Tenancy in common
A type of joint ownership in a property without legal right of survivorship.
Term
Number of years over which the loan is scheduled to be repaid.
Title
A legal document evidencing a person's right to, or ownership of, a property.
Title company
A company that specializes in examining and insuring titles to real estate.
Title insurance
Insurance to protect the lender (Lender's Policy) and owner (equity policy) against loss
arising from disputes over ownership of the 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 own owner to another.
Truth-in-Lending
A federal law that requires lenders to fully disclose in writing, the terms and
conditions of a mortgage, including the APR and other charges.
Underwriting
The process of evaluating a loan application to determine the risk involved for
the lender. It involves an analysis of the borrower's creditworthiness and the quality of
the property itself.
VA loan
A loan that is guaranteed by the Department of Veteran's Affairs. Also referred
to as a "government" mortgage.
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