Glossary of Mortgage
Lending Terms
While the information contained herein
is intended to be useful and timely, it should in no way
be viewed as a replacement for professional advice a consumer
should seek. For the final word on mortgage products and
lending practices, talk with our mortgage lender, a lawyer,
or other mortgage finance professional.
ACCELERATION CLAUSE - allows the lender
to speed up the rate at which your loan comes due or even
to demand immediate payment of the entire outstanding balance
of the loan should you default on your loan.
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
renegotiable 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 payments calculated to pay off the debt at the
end of a fixed period, including accrued interest on the
outstanding balance.
ANNUAL PERCENTAGE RATE (APR) - 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 points and other credit costs. This APR allows homebuyers
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.
"
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 costs and new,
possibly 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.
BROKER - an individual in the business
of assisting in arranging, funding or negotiating contracts
for a client but 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
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.
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.
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 costs of closing
usually are about 3 percent to 6 percent of the mortgage
amount.
COMMITMENT- 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 for financing the cost of construction. The lender
advances funds to the builder at periodic intervals as the
work progresses.
CONVENTIONAL LOAN - a mortgage not insured
by FHA or guaranteed by the VA or Farmers Home Administration
(FMHA).
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 net effective income (FHA/VA loans) or gross monthly
income (conventional loans). 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 - 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-downpayment mortgages to eligible veterans.
DISCOUNT POINT - see points.
DOWNPAYMENT - money paid to make up the
difference between the purchase price and the mortgage amount.
Downpayments usually are 10 percent to 20 percent of the
sales price on conventional loans, and no money down up
to 5 percent on FHA and VA loans.
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.
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.
ESCROW - refers to a neutral third party
who carries out the instructions of both the buyer and seller
to handle all the paperwork of settlement or "closing."
Escrow may also refer to an account held by the lender into
which the homebuyer pays money for tax or insurance payments.
FANNIE MAE - see Federal National Mortgage
Association.
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) -
a regulatory and supervisory agency for federally chartered
savings institutions.
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) - also called "Freddie Mac," is a quasi-governmental
agency that purchases conventional mortgages 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 known 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, they are
generous enough to handle moderate-priced homes almost anywhere
in the country.
FHA MORTGAGE INSURANCE - requires a small
fee (up to 3.8 percent of the loan amount) paid at closing
or a portion of this fee added to each monthly payment of
an FHA loan to insure the loan with FHA. On a 9.5 percent
$75,000 30-year fixed-rate FHA loan, this fee would amount
to either $2,850 at closing or an extra $31 a month for
the life of the loan. In addition, FHA mortgage insurance
requires an annual fee of 0.5 percent of the current loan
amount, paid in monthly installments. The lower the downpayment,
the more years the fee must be paid.
FIXED-RATE MORTGAGE - a mortgage on which
the interest rate is set for the term of the loan.
FORECLOSURE - a legal procedure in which
property securing debt is sold by the lender to pay the
defaulting borrower's debt.
FREDDIE MAC - see Federal Home Loan Mortgage
Corporation.
GINNIE MAE - see Government National Mortgage
Association. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)
- also known as "Ginnie Mae," provides sources
of funds for residential mortgages, insured or guaranteed
by FHA or VA.
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.
GROSS MONTHLY INCOME - the total amount
the borrower earns per month, before any expenses are deducted.
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 net effective income
(FHA/VA loans) or gross monthly income (conventional loans).
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 cost-of-funds incurred by savings and
loans), which is then used to adjust the interest rate on
an adjustable mortgage up or down.
INVESTOR - a money source for a lender.
JUMBO LOAN - a loan which is larger 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.
MORTGAGE INSURANCE - money paid to insure
the mortgage when the downpayment 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 homebuyer ends up owing more than the original
amount of the loan.
NET EFFECTIVE INCOME - the borrower's
gross income minus federal income tax.
NONASSUMPIION CLAUSE - a statement in
a mortgage contract forbidding the assumption of the mortgage
with out the prior approval of the lender.
ORIGINATION FEE - the fee charged by the
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.
PITI - principal, interest, taxes and
insurance. Also called monthly housing expense.
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.
PREPAIDS - 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 36 states
and the District of Columbia.
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 downpayment,
lenders will allow a smaller downpayment - as low as 5 percent
in some cases. With the smaller downpayment loans, however,
borrowers are usually required to carry private mortgage
insurance. Private mortgage insurance will require an initial
premium payment of 1.0 percent to 5.0 percent of your mortgage
amount and may require an additional monthly fee depending
on your loan's structure. On a $75,000 house with a 10 percent
downpayment, this would mean either an initial premium payment
of $2,025 to $3,375, or an initial premium of $675 to $1,130
combined with a monthly payment of $25 to $30.
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.
RENEGOTIABLE RATE MORTGAGE (RRM) - 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 costs
once after application and once prior to or at settlement.
The law requires lenders to furnish the information after
application only.
REVERSE ANNUlTY 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 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 properly.
May also apply to mortgages where the borrower shares the
monthly principal and interest payments with another party
in exchange for a part of the appreciation.
SURVEY - a measurement of land, prepared
by a registered land surveyor, showing the location of the
land with reference to known points, its dimensions, and
the location and dimensions of any buildings.
TERM MORTGAGE - see balloon payment mortgage.
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 homebuyer
against errors in the title search. The cost of the policy
is usually based on the value of the property, and is often
borne by the purchaser and/or seller.
TITLE SEARCH - an examination of municipal
records to determine the legal ownership of property which
is usually performed by a title company.
TRUTH-IN-LENDING - a federal law requiring
disclosure of the Annual Percentage Rate to homebuyers shortly
after they apply for the loan.
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. "
UNDERWRlTING - the decision whether to
make a loan to a potential homebuyer based on credit, employment,
assets, and other factors and the matching of this risk
to an appropriate rate and term or loan amount.
VA LOAN - a long-term, low- or no downpayment
loan guaranteed by the Department of Veterans Affairs. Restricted
to individuals qualified by military service or other entitlements.
VA MORTGAGE FlNDING FEE - a premium of
up to 1 7/8 percent (depending on the size of the downpayment)
paid on a VA-backed loan. On a $75,000 30-year fixed-rate
mortgage with no downpayment, this would amount to $1,406
either paid at closing or added to the amount financed.
VARIABLE RATE MORTGAGE (VRM) - see adjustable
rate mortgage.
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.
WRAPAROUND - 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. |
