Glossary of Mortgage Terms

HMC Enterprises AZ - Stephen Robin - Glossary of Mortgage Terms

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Acceleration Clause

A contract clause that gives the lender the right to declare the entire loan amount due immediately because of borrower’s default, or other reasons as stated in the contract.

Adjustable Rate Loan

A loan made by savings and loan associations similar to an adjustable rate mortgage. Also called ALM.

Adjustable Rate Mortgage (ARM)

A mortgage that permits the lender to periodically adjust the interest rate to reflect fluctuations in the cost of money.

Adjustable Period, Mortgage Payment

The interval at which a borrower’s actual mortgage payments change with an ARM.

Adjustable Period, Rate

The interval at which a borrower’s actual interest rate changes with an ARM.

Amortization

When a loan balance decreases because of periodic installments paid on the principal and interest.

Amortization Schedule

A table or chart that shows the periodic payments, interest and principal requirements, and unpaid loan balance for each period of the life of the loan.

Amortize

To calculate payments to pay off a debt by periodic installments, with payments going to principal and interest.

Amortize Loan

Loan with payments applied to principal and interest.

Annual Percentage Rate (APR)

Relationship between the cost of borrowing and the total amount financed, represented as a percentage.

Appraisal

An estimate or opinion of the value of a piece of property as of a certain date.

Assessment

Taxes levied only against properties that benefit from a public improvement.

Assumable

A loan for which an assumption may be exercised.

Assumption

When one party takes over the responsibility for the loan of another party and the terms of the loan or note remain unchanged.

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Balloon Payment

A final payment at the end of a loan term to pay off the entire remaining balance of principal and interest not covered by payments during the loan term.

Basis Points

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument, commonly used for calculating changes in interest rates.

Buydown

Additional funds in the form of points paid to a lender at the beginning of a loan to lower the interest rate and monthly payments.

Buydown, Permanent

When points are paid to the lender to reduce the interest rate and loan payments for the entire life of the loan.

Buydown, Temporary

When points are paid to the lender to reduce the interest rate and payments early in a loan, with interest rate and payments rising later.

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Cancellation

Terminating an obligation, such as when a note is cancelled after payment, or when PMI is cancelled after certain conditions are met.

Cap, Interest Rate

A limit on the amount of interest rate can increase that can occur with an adjustable rate mortgage.

Cap, Mortgage Payment

A limit on the amount of mortgage payment increase that can occur with an adjustable rate mortgage

Cap, Negative Amortization

A limit on the amount of negative amortization that can occur with an adjustable rate mortgage.

Cash Flow

Money available to an individual after subtracting all expenses.

Certificate of Eligibility

A certificate issued by the Department of Veteran’s Affairs to establish status and amount of a veteran’s eligibility to qualify for loan guarantee.

Certificate of Reasonable Value (CRV)

A document issued by the VA which states the value of the subject property based on an approved appraisal. The VA loan cannot exceed the CRV.

Closing

The final stage in a real estate transaction where ownership of real property is transferred from seller to buyer according to the terms and conditions set forth in a sales contract or escrow agreement.

Closing Costs

Expenses incurred in the transfer of real estate in addition to the purchase price.

Co-Borrower

A person who signs a note or other debt obligation with another party and thus accepts joint obligation to repay the note.

Construction Mortgage

A temporary loan used to finance the construction of a building on land.

Conventional Financing

When real estate is paid for or financed with a conventional loan.

Conventional Loan

Loan not insured or guaranteed by a government entity.

Conversion Option

A right the borrower has to convert from an adjustable rate mortgage to a fixed-rate mortgage one time during the loan term provided certain conditions are met.

Convertible

Able to be changed or converted; such as with an ARM loan where the borrower can change from a variable rate to a fixed rate.

Credit Report

A listing of a borrower’s credit history, including amount of debt, record of repayment, job information, etc.

Credit Scoring

A means by which the lender makes certain determinations regarding the creditworthiness of potential borrowers.

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Debt

Recurring monetary obligation that cannot be cancelled (e.g. monthly bills).

Deed of Trust

An instrument held by a third party as security for the payment of a note.

Default

Failure to fulfill an obligation, duty, or promise, as when a borrower fails to make payments. Mortgage, note or other document defines what constitutes default.

Deferred Interest

Accrued interest that is not paid by regularly scheduled payments; interest that is accumulated during payment periods but is not paid until a later date.

Deposit

Money offered as an indication of good faith regarding the future performance of a purchase agreement.

Disclosure Statement

A document required by law that reveals specific information. Federal law requires that lenders give buyers a disclosure statement detailing the actual costs of borrowing money from the lender.

Discount Points

An amount paid to a lender when a loan is make to make up the difference between the current market interest rate and the rate the lender gives a borrower on a note. Discount points increase a lender’s yield, allowing the lender to give a borrower a lower interest rate.

Down Payment

The amount of money a buyer pays to obtain a property in addition to the money that the buyer borrows.

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Escrow

The system in which things of value, like money or documents, are held on behalf of the parties to a transaction by a disinterested third party, or escrow agent, until specific conditions have been met.

Escrow Closing

A closing by a disinterested third party, often an escrow agent.

Escrows

Prepayable expenses the lender requires a borrower to set aside prior to closing.

Equitable Title

An interest created in property upon the execution of a valid sales contract, whereby actual title is transferred by deed at a closing.

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Fair and Accurate Credit Transaction (FACT Act)

Amendment to the federal Fair Credit Reporting Act intended primarily to help the consumers fight the growing crime of identity theft; includes provisions for fraud alerts and crime freezes.

Fair Credit Reporting Act (FCRA)

Federal law dealing with the granting of credit, access to credit information, the rights of debtors, and the responsibilities of creditors.

Federal Home Loan Mortgage Corporation (Freddie Mac)

Nonprofit, federally chartered institution (now privately owned) that functions as buyer and seller of residential mortgages.

Federal Housing Administration (FHA)

Government agency that insures mortgage loans.

Federal National Mortgage Association (Fannie Mae)

The nation’s largest, privately owned investor in residential mortgages.

First Lien Position

The spot held by the lien with highest priority when there’s ,ore than one mortgage or other debt or obligation secured by the property.

Fixed Rate Loan

Loan with a constant interest rate remaining for the duration of the loan.

Fixed Term

A period of time with a definite ending date.

Foreclosure

When a lien holder causes property to be sold. So unpaid debt secured by the lien can be satisfied from the sale proceeds.

Foreclosure, Judicial

A lawsuit filed by a lender or other creditor to foreclose on a mortgage or other lien; a court ordered sheriff’s sale of the property to repay the debt.

Foreclosure, Non-Judicial

Foreclosure by a trustee under the power of a sale clause in a deed of trust, without the involvement of a court.

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Good Faith Estimate (GFE)

The lender’s estimate of closing costs the borrower must pay for a real estate loan. The lender must give this to the borrower.

Government National Mortgage Association (Ginnie Mae)

Government–owned corporation that guarantees payment of principal and interest to investors who buy its mortgage backed securities on the secondary market.

Graduated Payment Mortgage (GPM)

Payment structure that allows the borrower to make smaller payments in the early years of the mortgage, with payments increasing on a scheduled basis at a predetermined point until that are sufficient to fully amortize the loan over the remainder of its term.

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Hard Money Mortgage

A mortgage where the borrower receives cash, (e.g cash out mortgage)

Home Equity Line of Credit (HELOC)

Available money that can be borrowed by a homeowner, secured by a second mortgage on the principal residence. Home equity lines of credit can be assessed at any time up to a predetermined borrowing limit and are often used for non-housing expenditures.

Home Equity Loan

A loan taken by a homeowner, secured by a second mortgage on the principal residence. Home equity loans are usually a one-time loan for a specific amount of money and obtained for a specific, and often non-housing, expenditure.

Housing Expense Ratio

The relationship of a borrower’s total monthly housing expense to income, expressed as a percentage.

HUD

The Department of Housing and Urban Development; government agency that deals with housing issues.

HUD Uniform Settlement Statement (HUD-1)

A settlement statement, required under RESPA, that details all costs associated with closing a loan, showing how much was paid, to what companies or parties, and for what purpose.

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Income Qualifying Standards

The criteria used to evaluate the quality and durability of a borrower’s source of income, in conjunction with an assessment of the borrower’s housing expense ratio and total debt service ratio.

Instrument

Any document that transfers title (such as a deed), creates a lien (such as a mortgage), or gives a right to payment (such as a note or contract).

Interest Rate

The rate which is charged or paid for the use of money, generally expressed as a percentage of the principal.

Interest Only Loans

A loan where scheduled payments only pay accrued interest and not any portion of the principal. A balloon payment equal to the entire principal amount of the loan is due at the end of the loan term.

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Jumbo Loans

Loans that exceed the maximum loan amount that Fannie Mae/Freddie Mac will buy, making them nonconforming. As of 2006, the limit is $417,000 on a single-family home.

Junior Mortgage

Any mortgage that has a lower lien position than another mortgage.

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Lease/Purchase

When a seller leases property to someone for a specific term, with the tenant agreeing to buy the property at a set price during or following the lease term.

Liabilities

Financial obligations or debt. Any money that is owed.

Lien

A non-possessor interest in property, giving a lienholder the right to foreclose if the owner does not pay a debt owed to the lienholder; a financial encumbrance on the owner’s title.

Loan Origination Fee

Fee charged by lender to cover the administrative costs of making a loan, usually based on a percentage of the loan amount.

Loan-to-Value (LTV)

The amount of money borrowed compared to the value or price of the property.

London InterBank Offering Rate (LIBOR)

An index used by lenders when making ARM loans; the rate (in Euros) that international banks charge each other for loans.

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Margin

The difference between the index value and the interest rate charged to the borrower with an ARM loan.

Market Value

The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale.

Mortgage

An instrument that creates a voluntary lien on real property to secure repayment of a debt. The parties to a mortgage are the mortgagor (borrower) and the mortgagee (lender).

Mortgage Backed Security (MBS)

A Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Mortgage Banker

One who originates, sells, and services mortgage loans, and usually acts as the originator and servicer of loans on behalf of large investors.

Mortgage Broker

One who, for a fee, places loans with investors, but typically does not service such loans.

Mortgage Insurance

Insurance offered by private companies (PMI) or the government through the FHA (MIP) to insure a lender against default on a loan by a borrower.

Mortgage Insurance Premium (MIP)

The fee charged for FHA mortgage insurance coverage. The initial premium can be financed, and there may be renewal premiums.

Mortgagee

A lender who accepts a mortgage as security for repayment of the loan.

Mortgagor

A person who borrows money and gives a mortgage to the lender as security.

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Nonconforming Loan

Loans that do not meet Fannie Mae/Freddie Mac standards, and thus cannot be sold to them but can be sold to other secondary markets.

Note Rate

The interest rate states in a note.

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Par

The pricing for a mortgage loan that involves neither a discount nor a premium.

PITI

A typical mortgage payment that includes Principal, Interest, Taxes, and Insurance.

Points

One percent of the loan amount. Points are charged for any reason, but are often used for buydowns. Points are used to increase the lender’s yield on a loan.

Prepayment Clause

A contract clause that gives a lender the right to charge the borrower a penalty for paying off a loan early.

Prepayment Penalties

Additional money charged by a lender for the borrower paying a loan off early.

Principal

With regard to a loan, the amount originally borrowed.

Private Mortgage Insurance (PMI)

Insurance offered by private companies to insure a lender against default on a loan by a borrower.

Promissory Note

An instrument that is evidence of a promise to pay a specific debt.

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Real Estate Settlement Procedures Act (RESPA)

Federal law dealing with real estate closings that provides specific procedures and guidelines for the disclosure of settlement costs. A law requiring lenders to furnish the settlement information only after an application is taken.

Refinance Mortgage

A mortgage that a borrower gives to a lender to redo or expand the loan on the property, usually to get a better interest rate or pay off other debts.

Reverse Mortgage

When a homeowner age 62 or over, with little or no outstanding liens, mortgages his/her home to a lender and, in return, receives a monthly check.

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Second Mortgage

A security instrument in a second lien position.

Simple Interest

Interest calculated as a percentage of the principal only.

Subprime Loans

Loans that have more risks than allowed in the conforming market.

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Title

Lawful ownership of real property.

Title Insurance

Insurance that indemnifies against losses resulting from undiscovered title defects and encumbrances.

Truth In Lending Act (TILA)

Act that requires lenders to disclose credit costs in order to promote informed use of consumer credit.

Truth In Lending Settlement (TIL)

Disclosure of the true costs associated with a residential loan, including the annual percentage rate that is required to be given to prospective borrowers within three business days of applying for a loan.

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Underwriter

Individual who evaluates a loan application to determine its risk level for a lender or investor; final decision maker on a loan application.

Usury

Charging an interest rate that exceeds legal limits.

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Verification of Deposit

A form sent by a lender directly to a bank verifying the borrower’s accounts.

Verification of Employment

A form sent by a lender directly to the borrower’s employer to verify his/her current employment.

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Warehouse Lending

When a mortgage broker uses his own funds to fund the mortgage loan and then sells the loan to the lender immediately after closing. The broker usually has a guarantee the lender will buy the loan and receives an additional fee for funding the mortgage loan.

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Yield Spread Premium (YSP)

A tool that allows a borrower to accept a slightly higher interest rate in exchange for lowering fees and closing costs; may be paid to a mortgage broker for originating such a loan.

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