Mortgage Glossary

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Acceleration (back to glossary): 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) (back to glossary): 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 (back to glossary): 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 (back to glossary): 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.) (back to glossary): Is an 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 homebuyers to compare different types of mortgages based on the annual cost for each loan.
Appraisal (back to glossary): An estimate of the value of property, made by a qualified professional called an "appraiser".
Assessment (back to glossary): A local tax levied against a property for a specific purpose, such as a sewer or streetlights.
Assumption (back to glossary): 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 (payment) mortgage (back to glossary): 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 (back to glossary): A mortgage covering at least two pieces of real estate as security for the same mortgage.
Borrower (Mortgagor) (back to glossary): One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full
Broker (back to glossary): 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 (back to glossary): When the lender and/or the homebuilder subsidizes 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 (back to glossary): 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) (back to glossary): 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 (payment) (back to glossary): Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
Certificate of Eligibility (back to glossary): 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) (back to glossary): An appraisal issued by the Veterans Administration showing the property's current market value
Certificate of veteran status (back to glossary): 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 (back to glossary): 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 is usually about 3 to 6 percent of the mortgage amount.
Commitment (back to glossary): 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 (back to glossary): 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: (back to glossary): 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 (back to glossary): A mortgage not insured by FHA or guaranteed by the VA.
Credit Report (back to glossary): A report documenting the credit history and current status of a borrower's credit standing.
Debt-to-Income Ratio (back to glossary): 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 (back to glossary): In many states, this document is used in place of a mortgage to secure the payment of a note.
Default (back to glossary): Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Deferred interest (back to glossary): 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 (back to glossary): Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA) (back to glossary): An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans.
Discount Point (back to glossary): see point
Down Payment (back to glossary): Money paid to make up the difference between the purchase price and the mortgage amount.
Due-on-Sale-Clause (back to glossary): 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 (back to glossary): Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Entitlement (back to glossary): 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) (back to glossary): 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 (back to glossary): 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 (back to glossary): An account held by the lender into which the homebuyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.
Fannie Mae (back to glossary): see Federal National Mortgage Association.
Farmers Home Administration (FmHA) (back to glossary): Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Bank Board (FHLBB) (back to glossary): 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 Corporation (FHLMC) also called "Freddie Mac" (back to glossary): A quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers
Federal Housing Administration (FHA) (back to glossary): 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 (FNMA) also know as "Fannie Mae" (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
FNMA (back to glossary): 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 (back to glossary): 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 (back to glossary): see Federal Home Loan Mortgage Corporation
Ginnie Mae (back to glossary): see GNMA.
GNMA (back to glossary): Government National Mortgage Association
Graduated Payment Mortgage (GPM) (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): A construction loam made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Investor (back to glossary): A money source for a lender.
Jumbo Loan (back to glossary): 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 (back to glossary): A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan-to-Value Ratio (back to glossary): The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Margin (back to glossary): The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Market Value (back to glossary): 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) (back to glossary): It is insurance from FHA to the lender against incurring a loss on account of the borrower's default.
Mortgage Insurance (back to glossary): Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.
Mortgagee (back to glossary): The lender
Mortgagor (back to glossary): The borrower or homeowner
Negative Amortization (back to glossary): 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 homebuyer ends up owing more than the original amount of the loan.
Net Effective Income (back to glossary): The borrower's gross income minus federal income tax.
Non Assumption Clause (back to glossary): 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) (back to glossary): The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board
Origination Fee (back to glossary): 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 (back to glossary): A long term mortgage, usually ten years or more. Also called an "end loan."
PITI (back to glossary): Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
Pledged account Mortgage (PAM): (back to glossary): 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) (back to glossary): 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 (back to glossary): A legal document authorizing one person to act on behalf of another.
Prepaid Expenses (back to glossary): 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 (back to glossary): A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Prepayment Penalty (back to glossary): 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 (back to glossary): 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 (back to glossary): The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI) (back to glossary): 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 (back to glossary): A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Recision (back to glossary): 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 (back to glossary): Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Refinance (back to glossary): Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Renegotiable Rate Mortgage (back to glossary): A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.
RESPA (back to glossary): 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 (RAM) (back to glossary): A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
Second Mortgage (back to glossary): A mortgage made subsequent to another mortgage and subordinate to the first one.
Secondary Mortgage Market (back to glossary): 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.
Servicing (back to glossary): 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 (back to glossary): see closing/closing costs
Shared Appreciation Mortgage (SAM) (back to glossary): 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 (back to glossary): Interest which is computed only on the principle balance.
Survey (back to glossary): 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 (back to glossary): Equity created by a purchaser performing work on a property being purchased.
Title (back to glossary): A document that gives evidence of an individual's ownership of property.
Title Insurance (back to glossary): A policy, usually issued by a title insurance company, which insures a homebuyer 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 (back to glossary): An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Truth-In-Lending (back to glossary): 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 (back to glossary): 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 (back to glossary): 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 (back to glossary): Interest charged in excess of the legal rate established by law.
VA Loan (back to glossary): 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 (back to glossary): 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 (VRM) (back to glossary): see adjustable rate mortgage
Verification of Deposit (VOD) (back to glossary): A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE) (back to glossary): A document signed by the borrower's employer verifying his/her position and salary.
Warehouse Fee (back to glossary): 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 (back to glossary): 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.