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Glossary of Mortgage Terms
A B Balloon Mortgage A loan with a fixed interest rate and monthly payment that becomes due in full, typically after 5 to 7 years. Balloon Note A written promise to pay a balloon mortgage's full balance when it due. Balloon Payment The final lump-sum payment to pay off a balloon mortgage's balance. Bankruptcy When you hand over your assets to a federal court because you can't pay your debts, and are no longer held responsible for paying off your creditors Before-tax income Your income earnings before federal and local taxes are taken out. Also called gross income or pre-tax, is used to calculate your tax bracket and other items that you have to report on your annual income tax forms. You can find your before-tax income on your paycheck. Blanket mortgage A loan covering more than one piece of property. Land developers commonly use blanket mortgages when they buy a plot of land and divide it into many separate lots. They spread the mortgage across the entire property rather than over each individual lot. Borrower A person (also known as mortgagor) who receives funds in the form of a loan with an obligation to repay principal with interest. Buydown Money advanced by an individual (builder, seller, etc.) to reduce the monthly payments for a home mortgage either during the entire term or for an initial period of years. • Back to Top • C Call option C A provision in the mortgage that gives the mortgagee the right to call the mortgage due and payable at the end of a specified period for whatever reason. Cap A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease. Capital Improvement Any structure or component erected as a permanent improvement to real property that adds to its value and useful life. Cash to Close Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction. Cash-Out Refinance A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose. Certificate of Eligibility A document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) mortgage. Certificate of Reasonable Value (CRV) A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage. Certificate of Title (see Title) A statement provided by an abstract company, title company, or attorney stating that the title to real estate is legally held by the current owner. Chain of Title The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent. Change Frequency The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM). Clear Title A title that is free of liens or legal questions as to ownership of the property. Closing The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction. Closing Costs Money paid by the borrower in connection with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey, and pre-paid items such as tax and insurance escrow payments. Closing Statement A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance. Cloud on Title Any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by a quitclaim deed, release, or court action. CO-Borrower Additional borrower(s) whose income contributes to qualifying for a loan and whose name(s) appears on documents with equal legal obligations. Collateral Property pledged as security for a debt, such as the real estate pledged as security for a mortgage. Commitment (Loan) A binding pledge made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the compliance of the borrower to stated conditions. Commitment Fee (Loan) Any fee paid by a potential borrower to a lender for the lender's promise to lend money at a specified rate and within a given time period. Commitment Letter A formal offer by a lender stating the terms under which it agrees to loan money to a home buyer. Community Home Improvement Mortgage Loan An alternative financing option that allows low- and moderate-income home buyers to obtain 95 percent financing for the purchase and improvement of a home in need of modest repairs. The repair work can account for as much as 30 percent of the appraised value. Conforming Loan Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally purchase first mortgages up to loan amounts mandated by Congressional directive. Construction Loan A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses. Consumer Reporting Agency (or Bureau) An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository as well as from other sources. Contingency A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector. Contract An oral or written agreement to do or not to do a certain thing. Conventional Mortgage A mortgage not obtained under a government insured program (such as FHA or VA). Convertible ARM An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions. Cooperative (Co-Op) A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit. Corporate Relocation Arrangements under which an employer moves an employee to another area as part of the employer's normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity. Cost of Funds Index (COFI) An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco. Covenant A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure. Credit An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date. Credit History A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner. Credit Report A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness. Credit Repository An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. • Back to Top • D Deed of Trust An instrument used in many states in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full. Default The failure to perform an obligation as agreed in a contract. Delinquency A loan payment that is overdue but within the period allowed before actual default is declared. DeMinimus PUD A PUD in which the common property has less than a 2% influence upon the value of the premises. The 2% rule of thumb is calculated by dividing the dollar amount of amenities by the total number of units. Also see PUD. Deposit A sum of money given to bind a sale of real estate. Also known as earnest money. Depreciation A loss of value in real property brought about by age, physical deterioration, functional or economic obsolescence. Discount Point Amount payable to the lender institution by the borrower or seller to increase the lender's effective yield. One point is equal to one percent on the loan amount. Discounted Loan When the note rate on a loan is less than the market rate, the lender requires additional points to raise the yield on the loan to the market rate. Down Payment The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. Due-on-Sale Provision A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage. • Back to Top • E Earnest Money A portion of the down payment delivered with a purchase offer by the purchaser of real estate to the seller or an escrow agency by the purchaser of real estate with a purchase offer as evidence of good faith. Also known as a deposit. Easement A right of way giving persons other than the owner access to or over a property. Effective Age An appraiser's estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age. Effective Gross Income Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable. Encumbrance Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions. Endorser A person who signs ownership interest over to another party. Contrast with co-maker. Equal Credit Opportunity Act (ECOA) A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act. Equity The ownership interest; i.e. portion of a property's value over and above the liens against it. Equity is the amount of money you'd have if you sold your home today and paid off your mortgage — it includes your down payment, all the payments you've made against the loan's principal and any appreciation in your home's value. Escrow A procedure whereby a disinterested third party handles legal documents and funds on behalf of a seller and buyer. Escrow account A neutral account that holds a sum of money, usually until a specific transaction is completed. Lenders often set up a type of escrow account, called an impound account, for you to prepay certain recurring costs: your first 6 months of property taxes, your first 2 months of hazard insurance and your first 2 months of mortgage insurance, if required. Escrow Analysis The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due. Escrow Collections Funds collected by the servicer and set aside in an escrow account to pay the borrower's property taxes, mortgage insurance, and hazard insurance. Escrow Disbursements The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. Escrow Payment The portion of a mortgagor's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as "impounds" or "reserves" in some states. Estate A term that describes a person's ownership of a property. In general, each type of estate specifies your claim on a property, how long the claim will last and the rights that go along with the claim. The two major types of estates are (1) freehold estates, which refer to property owners and (2) leasehold estates, which are for tenants. Eviction The lawful expulsion of an occupant from real property. Examination of Title The report on the title of a property from the public records or an abstract of the title. • Back to Top • F Fair Credit Reporting Act (FCRA) A federal law which requires a lender who is rejecting a loan request because of adverse credit information to inform the borrower of the source of such information. This law also requires consumer reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information. Federal Home Loan Mortgage Corporation — FHLMC (FREDDIE MAC) A quasi-governmental agency that purchases conventional mortgages in the secondary mortgage market from insured depository institutions and HUD-approved mortgage bankers. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal, and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages. Popularly know as Freddie Mac. Federal National Mortgage Association — FNMA (FANNIE MAE) A taxpaying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages. First Mortgage A real estate loan that has priority over any subsequently recorded mortgages. Fixed Interest Rate An interest rate which does not change during the loan term. Foreclosure A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower's debt. • Back to Top • G Gift A sum of money given to a home buyer as a present. Gift Letter A written explanation signed by the individual giving the gift stating, "This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time." Good Faith Estimate An estimate of the total costs to get a loan when buying or refinancing a home. After you apply for a loan, a lender or broker is required by law to give you a Good Faith Estimate within 3 days. The costs will include lender and broker fees, loan-related fees, and third-party fees, such as the title insurance and appraisal. Most of these fees must be paid on the closing date, the day when the sale or purchase of a home is completed. Gross Monthly Income Total monthly income earned before tax and other deductions. Guarantee Mortgage A loan guaranteed by someone other than the lender or borrower • Back to Top • H Hazard Insurance A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards (i.e. fire). High-Ratio Loan Mortgage loans in excess of 80 percent of the loan amount divided by the lower of the sales price or appraised value. Home Equity Loan A loan that allows home owners to borrow against the equity in their property. Home equity loans have a fixed interest rate and payment for usually 10 to 15 years. Since these loans are riskier than mortgages for lenders, the interest rates are higher. Homeowners' Association Dues The fees imposed by a condominium or homeowners' association for maintenance of common areas. HUD-1 A document that gives a breakdown of the costs that the buyer and seller pay at closing. The lender, broker, escrow agent or attorney can prepare the HUD-1, which is also called a closing statement and settlement statement. • Back to Top • I Insured Loans A loan insured by HUD-FHA or a private mortgage insurance company. Interest Consideration in the form of money paid for the use of money. Also a right, share or title in property. Interest Rate The percentage of an amount of money which is paid for its use for a specified time. Interest Rate Cap The limit on how much the interest rate on an adjustable rate mortgage (ARM) can go up or down. Investment Property Real estate owned with the intent of supplementing income and not intended for owner occupancy. • Back to Top • J Judgment Lien A court decision that allows certain creditors to place a claim on a property. Jumbo loan Any loan that allows you to borrow more than an amount set by the Federal National Mortgage Association • Back to Top • K • Back to Top • L Lease A rental agreement between a landlord and a tenant that lasts for an agreed period of time. Liability Any debt that you are responsible to (re)pay. Lien A legal claim or attachment against property as security for payment of an obligation. Loan-To-Value Ratio (LTV) The ratio between the amount of a given mortgage loan and the lower of sales price of appraised value. Lock-In Rate A lender's guarantee for a specific interest rate on a loan. Until you request a rate lock, a loan's interest rate quoted by either a lender or broker is apt to change due to market fluctuations. Once you've settled on a rate, the lender usually guarantees the rate for 15, 30, 45 or 60 days. Lock Period The amount of time that a lender will guarantee a loan's interest rate. Once you've locked in an interest on a loan, the lender will guarantee that rate for a certain period of time, usually for 30, 45 or 60 days (Normally, the longer the lock period, the more points that you have to pay up-front since the lender is taking a greater risk when they guarantee a rate for a long time). • Back to Top • M Mortgage A document that pledges your property as security for a loan's repayment. Mortgage Insurance (MI) An insurance contract that protects the lender against loss if a borrower can't repay a loan Mortgagor A formal term for the borrower in a mortgage agreement. Mutual Mortgage Insurance (MMI) A contract that protects a lender in case a borrower defaults on a FHA mortgage. If you have a loan that's insured by the Federal Housing Administration (FHA), you'll be required to give monthly payments for MMI. So, if you default on a loan, the lender has two ways to get their money back — sell your property or ask for repayment from the FHA, which will use the money collected from MMI. • Back to Top • N Negative Amortization When the amount that you owe on a loan increases despite regular monthly payments. This typically happens with an adjustable rate mortgage (ARM) that has a payment cap. This means that your monthly payment can only increase up to 7.5% from the last adjustment period. Non-Conforming Loans Any loan that allows you to borrow over a certain amount set by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Note A written promise to pay back money at a specific time. • Back to Top • O Origination Fee The amount charged for services performed by the company handling the initial application and processing of the loan. • Back to Top • P Percentage Point One percent of the loan or a measure of the interest rate. PITI (Principal, Interest, Taxes, and Insurance) The most common components of a monthly mortgage payment. Preliminary Title Report The results of a title search by a title company prior to issuing a title binder or commitment to insure clear title. Primary Residence A residence which the borrower intends to occupy as the principal residence. Principal Balance The remaining balance due on a debt, exclusive of accrued interest. Private Mortgage Insurance Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default. Processing The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer. PUD (Planned Unit Development) A planned combination of diverse land uses, such as housing, recreation, and shopping in one contained development or subdivision. A major feature of a PUD includes areas of common land for use by the housing unit owners; the association of unit owners generally owns, pays fees, and maintains the common areas. Also see DiMinimus PUD. Purchase Contract (Agreement/Offer) An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract. • Back to Top • Q Qualifying ratios Guidelines used by lenders to evaluate a home buyer's borrowing potential. • Back to Top • R Rate Lock Option An agreement guaranteeing an individual a specified interest rate on a loan provided the loan is closed within a set period of time. Real Assets Real estate or real property owned by an individual of business. Real Estate Settlement Procedures Act (RESPA) A federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances. Real Property Land and that which is affixed to it. Refinancing The repayment of a debt from the proceeds of a new loan using the same property as security. Regulation Z A federal law that requires a lender to give borrowers the annual percentage rate (APR). The APR helps borrowers compare one loan to another since it factors in not only the interest rate but also all the fees and closing costs that you need to pay. APR, though, is not always the best measure of comparison since not all the lenders include the same fees and closing costs. Regulation Z is also called the Truth-in-lending act. • Back to Top • S Satisfaction of Mortgage The recordable instrument issued by the lender verifying full payment of a mortgage debt. Second Home (Vacation Home, Weekend Home) A residence other than the borrower's primary residence which the borrower intends to occupy for a portion of each year. Must be suitable for year-round occupancy. Secondary Mortgage Market A market where existing mortgages are bought and sold. It contrasts with the primary mortgage market where mortgages are originated. Security In lending, the collateral given, deposited, or pledged to secure the payment of a debt. Settlement Services Services provided by the lender at the closing of a loan. Survey The measurement and description of land by a registered surveyor. • Back to Top • T Term The time limit within which a loan must be repaid. Title The legal evidence of ownership rights to real property. Title Insurance Policy A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee, or otherwise. Title Search An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate. Truth-in-Lending Act A Federal law requiring full disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms and financial institutions. • Back to Top • U Underwriting Analysis of risk and setting of an appropriate rate and terms for a mortgage on a given property for given borrowers. • Back to Top • V VA Loan A low-cost loan for U.S. veterans that is partially guaranteed by the Department of Veterans Affairs (VA). Verification of Deposit (VOD) A document from a bank vouching for the balance of a person's checking and savings accounts. • Back to Top • W Wraparound Mortgage A type of financing where the seller carries the buyer's loan. The contract is made between the buyer and seller with the lender's approval. • Back to Top • X • Back to Top • Y • Back to Top • Z Zero Point Option An option which allows the borrower to opt to pay a slightly higher loan interest rate in lieu of paying the loan origination points generally charged for the particular loan product. • Back to Top • |
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