Home | Contact Us | Mortgage Market Update
MEAD
Glossary of Mortgage Terms and Definitions
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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) A mortgage in which the interest rate and payment changes periodically over the life of the loan based on changes in a specified index. Most ARM mortgages have an initial fixed period of one to ten years, followed by an adjustment period whereby the rate/payment can adjust either every 6 months or every 12 months (depending on the mortgage). The changes are usually subject to a cap. Adjustment Period On an adjustable rate mortgage, the adjustment period the time between changes in the interest rate and/or monthly payment. For Home Equity Lines of Credit (HELOCs) and Pay Option ARMs, the adjustment period is typically monthly. For most other ARM mortgages, the initial fixed period (of one to ten years), is followed by an adjustment period whereby the rate/payment can adjust either every 6 months or every 12 months (depending on the mortgage). Amortization The payment 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 30 years). Initially, most of the payment goes to interest but over time more and more of the payment goes towards principal until it is all paid off. Annual Percentage Rate (APR) The APR is an interest rate reflecting the cost of a mortgage, expressed as a yearly rate. This rate is likely to be higher than the actual note rate of the mortgage, because it includes the interest, points, mortgage insurance, and other various fees associated with the loan. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan. The rate is also adjusted for the time value of money, meaning that dollars paid by the borrower early on carry a heavier weight than dollars paid years later. An important note, the APR is calculated on the assumption that the loan completes its full term, and is therefore potentially deceptive for borrowers who have an adjustable rate mortgage (ARM) or intend to sell early. Application Fee Fees that some lenders charge upon application. It goes towards initial processing expenses like the property appraisal and credit report. Appraisal A report that estimates the property’s fair market value based on an analysis of the sales of comparable homes in the same area. An appraisal is required by your lender and must be made by a qualified 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 Mortgage A mortgage that typically offers a low fixed rate for an period of time (usually less than 10) years, and then requires that the balance be paid in full (a balloon payment) or refinanced by the borrower. The loan is typically amortized as if it would be paid over a thirty year period to keep monthly payments managable. 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 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 (interest) The limit on an adjustable rate mortgage that the interest rate can be increased or decreased during each adjustment period (usually 6 or 12 months). Some ARMs also have a lifetime cap. 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 Certificate of Eligibility). 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 Costs that the borrower must pay at the time of closing, in addition to the down payment. There are two categories of closing costs, "non-recurring closing costs" and "pre-paid items." Non-recurring closing costs are any items which are paid just once such as origination fees, discount points, attorney’s fees, credit report, title insurance and survey. "Pre-paids" are costs which recur during your loan, like property taxes and homeowners insurance. Your lender will estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which must be issued to you within three days of receiving a home loan application. 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 paper work or compliance with stated conditions. Conforming Loan A mortgage loan which conforms to all of the guidelines and is therefore eligible for purchase by the two major federal agencies that buy mortgages which are Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). 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. Credit scoring An unbiased way of deciding who should receive credit. Weights or scores are associated with your personal credit attributes, such as your income, debt and the time spent at your current address. These scores are added to give a total credit score. The total credit score is a prediction of how likely a person with that score is to default on their loan. 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 (VA) An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans. Discount Points (or Points) The Amounts paid to the lender (based on percentage of the loan amount) to buy down the interest rate. Each point charged represents one percent of the loan amount; for example, one point on a $100,000 mortgage is $1,000. 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 (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 (FNMA): Federal National Mortgage Association 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. Fannie Mae also sets standards for underwriting mortgages. 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) The former name for the regulatory and supervisory agency for federally chartered savings institutions. Agency is now called the Office of Thrift Supervision Federal Housing Administration (FHA) An agency of the U.S. Department of Housing and Urban Development (HUD), FHA insures mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages. 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. 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. 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 (FHLMC): Federal Home Loan Mortgage Corporation A common Nickname for Federal Home Loan Mortgage Corporation (FHLMC). They are a federally chartered corporation that purchases residential mortgages, and then sells and insures securities based on the mortgages to investors. Freddie Mac also sets standards for underwriting mortgages. Ginnie Mae (GNMA): Government National Mortgage Association A government-owned corporation within the Department of Housing and Urban Development (HUD). Ginnie Mae provides guarantees on mortgage backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing . Ginnie Mae securities are the only MBS that are guaranteed by the United States government. Ginnie Mae was created by the United States Federal Government through a 1968 partition of the Federal National Mortgage Association (Fannie Mae). Good Faith Estimate A written estimate provided by the lender of the closing costs a borrower is likely to pay at settlement. This estimate must be provided to all loan applicants within three business days after a loan application is received. 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 Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, and certain other natural causes. Mortgage lenders often require the borrower to carry an amount of hazard insurance on the property that is at least equal to the amount of the loan amount. 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 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, 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 loan 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 $417,000 as of 1/1/2007) than the limits set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). 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 (LTV) The loan amount divided by the value of the property expressed as a percentage. Value is defined as the lower of sales price or appraised value of the property. Generally, the lower the LTV the more favorable the terms of the programs offered by lenders. Lock or Lock In A designated period of time during which a borrower and a lender have agreed to a specific interest rate. Most locks are from 30 to 45 days. Mortgage rates that are not "locked in" are subject to changing market conditions. 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-Backed Security (MBS) A security backed by a group of mortgages issued by the Federal Home Loan Mortgage Corporation (FNMA) and the Federal National Mortgage Association (FHLMC). Investors of mortgage backed securities receive payments derived from the interest and principal of the underlying mortgages. Mortgage Insurance (MIP or PMI) Insurance purchased by the buyer that covers the lender against losses incurred as a result of a default on a home loan. This is generally required on all loans that have a loan-to-value higher than 80%. Also, FHA loans and some first-time buyer programs still require mortgage insurance regardless of the LTV. When you have accumulated 20% of your home’s value as equity, you can ask your lender to waive the PMI. Mortgagee The lender. Mortgagor The borrower or homeowner. Negative Amortization (NegAm) A gradual increase in mortgage principal that occurs when the monthly payment is less than the interest due. This shortfall is then added to the outstanding balance to create "negative" amortization. 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 (or Origination Points) The fee charged by a lender to process a loan. It is usually expressed as a percentage of the loan amount. Permanent Loan A long term mortgage, usually ten years or more. Also called an "end loan." PITI Stands for principal, interest, taxes and insurance which are the four components of your monthly mortgage payment. The payments of principal and interest go directly towards repaying the loan while the taxes and insurance (homeowner’s and PMI) goes into an escrow account to be paid on your behalf when they are due. 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 A fee charged by a mortgage lender to a borrower who wants to pay off part or all of a mortgage loan in advance of an agreed upon schedule. The charge is generally expressed as a percent of the loan balance at the time of prepayment, or it can be a specified number of months interest (typically 6 months). It is not allowed for FHA or VA loans. 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. Realtor A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors. Rescission 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 Mortgage A loan that enables elderly homeowners, to use their home’s equity without selling their home or moving from it. A lending institution makes a check out to the homeowners each month. This payment is really a loan against the value of a home. Because the payment is a loan, it’s tax-free when the homeowners receive it. 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. 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/protects 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 borne by both the buyer (to insure the lender) and the seller (to insure the buyer). 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 process of analyzing a loan application to determine the amount of risk for the lender making the loan. Underwriting involves evaluating the borrower’s creditworthiness and the property itself and then selecting the appropriate loan term and interest rate. USURY Interest charged in excess of the legal rate established by law. VA Loan A loan backed by the U.S. Department of Veterans Affairs (VA). VA loans are made to honorably discharged veterans or their un-remarried widows or widowers. These loans require low or no down payment and offer low interest rates. 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 In an adjustable rate mortgage (ARM), the interest rate changes periodically in relation to an index. For example, the interest rate might be linked to the cost of US Treasury Bills and be updated monthly, quarterly, semi-annually, or annually. 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 (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.
Copyright © 2007 Mead/Taylor Financial Group