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Glossary
7/23 and 5/25 Mortgages - Mortgages with a one time rate adjustment after
seven years and five years respectively.
3/1, 5/1, 7/1 and 10/1 ARMs - Adjustable-rate mortgages in which rate is
fixed for three-year, five-year, seven-year and 10-year periods, respectively,
but may adjust annually after that.
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
is adjusted periodically based on a pre-selected 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 - 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.) - APR is a measurement of the full cost
of a loan including interest and loan fees expressed as a yearly percentage rate.
Because all lenders apply the same rules in calculating the annual percentage
rate, it provides consumers with a good basis for comparing the cost of loans.
Appraisal - An estimate of the value of property, made by a qualified professional
called an "appraiser".
Assessment - Local tax levied against a property for a specific purpose,
such as a sewer or street lights.
Assumption - 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 loan which is amortized for a longer period than the
term of the loan. Usually this refers to a thirty-year amortization and a five
year term. At the end of the term of the loan, the remaining outstanding principal
on the loan is due. This final payment is known as a balloon payment.
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 but who does not loan the money himself.
Brokers usually charge a fee or receive a commission for their services.
Buy-down - Lender and/or the home builder 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 - 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 form 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 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
percent to 6 percent of the mortgage amount.
COFI - Adjustable-rate mortgage with rate that adjusts based on a cost-of-funds
index, often the 11th District Cost of Funds.
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 or she 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.
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
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 an entitlement (i.e. 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.
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"
- 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."
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) - 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.
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 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.
Indexed rate - The sum of the published index plus the margin. For example
if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often,
lenders charge less than the indexed rate the first year of an adjustable-rate
mortgage.
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 $252,700 as of 1/1/2000)
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.
Lock - Lender's guarantee that the mortgage rate quoted will be good for
a specific number of days from day of application.
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) - 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.
Mortgagee - The lender.
Mortgagor - The borrower or homeowner.
Negative Amortization - Occurs when 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
One-year Adjustable - Mortgage whose annual rate changes yearly. The rate
is usually based on movements of a published index plus a specified margin, chosen
by the lender.
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.
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, such as savings and loan associations,
commercial banks, and mortgage companies, who make mortgage loans directly to
borrowers. These lenders sometimes sell their mortgages to 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
3 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 your 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.
Recission - 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 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 collateral for and repayment of the loan.
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 - 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.
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 known 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
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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