Glossary
Acceleration
The right of the mortgage (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 pre
selected 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".
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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 (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 (Mortgagor)
One who applies for and receives
a loan in the form of a mortgage with the
intention of repaying the loan in full.
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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)
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)
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
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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 2 percent to
5 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 paper work 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.
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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 (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.
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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
see Federal National Mortgage Association.
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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 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 (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 (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."
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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.
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 (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.
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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 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
$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.
Mortgage
The lender.
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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 (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.
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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 (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.
Recession
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.
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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 (RAM)
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 mortgage when the mortgage loan 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 (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.
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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 (VRM)
See adjustable rate mortgage.
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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.
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